Name That Trade – $TMUS Test Drive

by Enis August 11, 2014 2:17 pm • Commentary

Since Sprint announced last week that it was withdrawing its intention to buy T-Mobile, T-Mobile CEO John Legere has been tweeting up a storm.  One tweet worth highlighting is his announced expectation that T-Mobile will overtake Sprint with more total subscribers by the end of 2014:

7/ I predict the will overtake in total customers by the end of the year! There, I said it!

The goal is well within reach, as noted by zdnet:

Estimates have Sprint with approximately 53 million customers (postpaid and prepaid) compared to T-Mobile’s 50.5 million. With a 1.5 million customer gain in the last quarter, and Sprint’s continued decline, the two may switch positions over the next two quarters.

Mr. Legere certainly has momentum on his side, as T-Mobile has grown subscribers for 5 straight quarters, bolstered by what the company calls its Un-carrier value proposition to consumers.  From the most recent quarterly report:

Un-carrier value proposition – In January 2014, we launched phase 4.0 of our Un-carrier value proposition or “Contract Freedom”, which reimburses customers’ early termination fees (“ETF”) when they switch from other carriers and trade in their eligible device. The reimbursement of ETF is recorded as a reduction of equipment sales revenues, and accordingly had an impact on both revenue and Adjusted EBITDA for the three and six months ended June 30, 2014. In April 2014, we announced that starting in May, for bills arriving in June, domestic overage charges will be abolished for all customers on our consumer plans. In June 2014, we launched phase 5.0 of our Un-carrier value proposition, or “T-Mobile Test Drive”, which allows consumers to test our network and an iPhone 5s with unlimited nationwide service for seven days at no charge. Also, in June 2014, we launched phase 6.0 of our Un-Carrier value proposition, or “Music Freedom”, which allows customers to stream music from popular music services without it counting against their data allotment. Additionally, as part of phase 6.0 of our Un-carrier value proposition, we launched Rhapsody unRadio in partnership with Rhapsody for a limited time, which allows Simple Choice customers with unlimited 4G data service to stream music at no additional cost. We are also offering Rhapsody unRadio at a discounted price for our eligible customers.

What John Legere understands as a manager is that if you spend all of your energy and resources on pleasing the customer, the business can quickly gain ground on the competition.  T-Mobile has been hyper-focused on providing a much better product and service than the alternatives in the marketplace, and customers are starting to take notice. Of course, Mr. Legere is the biggest cheerleader and advertiser of such initiatives, as exhibited by his tweet storms.  More astutely, his understanding that removing as many hassles from the customer acquisition process as possible (whether that means paying for the customer’s breach of contract with another provider, offering a one week free trial, removing overages, and simply offering lower fees) is a crucial factor in enticing consumers to think about changing the status quo.  

When you look at the numbers, all of this hard work and strategy is paying off.  Here are the subscriber growth trends by service at T-Mobile in the most recent quarter:


Screen Shot 2014-08-11 at 5.18.08 AM

Every single product offering saw net customer additions.  Customer growth has actually accelerated over the past year, and much of that is do to the Un-carrier value proposition.  T-Mobile is even outpacing its rivals in terms of battery life for the actual hardware, another perk pointed out by Mr. Legere last week in a link to this article on, which had the following takeaway:

While we don’t know for certain why T-Mobile phones last longer on a charge, there are some strong possibilities. T-Mobile’s network could be more efficient at sending and receiving data because of the bands it uses, or maybe there are far fewer customers on its LTE network, easing the strain. Another possibility is that T-Mobile tends to pre-load less bloatware on its flagship devices relative to the other carriers.

T-Mobile management is simply beating the competition in most areas of the business. While it has significant disadvantages of scale compared to Verizon and AT&T, and it does risk hurting future margins by acquiring customers through lower cost offerings, at the moment, the customer acquisition momentum is likely the most important story for the company and the stock.

On a valuation basis, TMUS is only slated to earn 0.30 per share in 2014.  TMUS is trading at about 30x 2015 estimates, and 18x 2016 estimates, but EPS growth is expected at 30-60% per year from 2015 to 2018. Obviously, that’s very speculative, but given the stellar performance by Legere and his management team, I am much more comfortable betting on good execution in the case of TMUS than in the majority of companies in the marketplace.

As a result of the failed bid, many investors who were in the stock for the acquisition sold out last week, and TMUS fell below its 200 day moving average for the first time since:

[caption id="attachment_44044" align="aligncenter" width="600"]TMUS daily chart, 200 day ma in yellow, Courtesy of Bloomberg TMUS daily chart, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

The $29 marked in green is an important technical spot to watch.  It has acted as support in the last week.  While TMUS has a lot of overhead supply up above, the bullish arguments surrounding business, management, competitors’ struggles, and the underlying value of the asset likely outweigh the negative technical situation.

The difficulty in TMUS is that options prices are very wide.  When most strikes are 30-40 cents wide across maturities, finding an options structure that makes sense when adding in the bid/offer is nearly impossible. We didn’t find any trade structure that made sense in that context.  We considered simply buying TMUS, but decided against that given the technical situation at the moment.  We are going to give the stock more time here, but have it on our radar given the overarching story.