Shares of T-Mobile (TMUS) are down 3% on news that Verizon joins the “unlimited” party with $80 data plan. That’s a direct response the share gains the “un-carrier” T-Mobile made in 2016 with over 2.3 million postpaid net ads in the first nine months of the year. While VZ’s unlimited offering does not compare on price to TMUS‘s, it helps them make the case to potential switchers to stay put, albeit at a greater cost, with broader network coverage and better overall service (that’s their claim). The fact of the matter is, the North American wireless market is saturated, the four major carriers are in a death match to keep their existing subscribers while also raising the average revenue per user (ARPU) in the midst of an epic price war. Ultimately this will lead to further consolidation in the industry, one of the main reasons TMUS gained nearly 50% in 2016!
Competition from outside the four major carriers is coming, which TMUS CEO suggested at CES last month, per IBT:
Comcast and Charter will enter the wireless space as mobile virtual network operators (MVNO) using spectrum from Verizon… these networks will aim to be the fifth and sixth major mobile networks in the country, but likely won’t offer customers unlimited data.
“Do you really think that [Verizon], the company who won’t give unlimited is giving the cable companies economics that would allow [cable MVNOs] to give unlimited? No of course not,” Legere said at T-Mobile’s CES 2017 press conference last week.
Stating that T-Mobile will not offer any part of its network to be used by MNVO networks, Legere also predicted that Comcast and Charter will fail at building its networks and pull back from mobile efforts by CES 2018.
Legere also suggested that another big company such as Facebook, Apple, Google or Amazon will attempt to enter the mass market mobile space. He noted that Google already has its Project Fi network, which could be a point for expansion. “What do you think the implications are on the fact that all content is going to the mobile internet,” Legere said.
All that seems like bit of posturing, one of those large cable or tech companies listed above will likely look to buy vs build in an effort to be on a level playing field with the incumbents wireless carriers and to leap frog new entrants. But as recently, CEO of Deutsche Telecom (who owns 65% of TMUS) suggested that despite trying to sell the company 3x in the last 5 years, “We are not in the mood of selling the business. We are not in the mood of: ‘Oh where is the partner we need?'”. But everyone has a price and maybe the result is a reduced stake that results in a partnership with a tech or cable company.
I suspect this view may be a bit more informed tomorrow morning after the company releases fQ4 results and holds their conference call at 10am eastern. The timing of VZ’s data plan announcement was not a coincidence after Legere’s constant trolling of VZ on Twitter and Periscope (watch here).
The options market is implying about a 4.25% one day move for TMUS post results tomorrow, which is in line with the 4 qtr average post earnings one day move.
This morning’s gap lower placing the stock below the steep uptrend that has been in place since mid October, and is quickly approaching the January breakout level to new all time highs, which is really the next line of technical support:
There is little doubt there is a floor in this stock for the reasons listed above, despite the perceived risk of a price war, the company is in play in one way or another, if not an all out takeout offer.
The idea of replacing long stock (or a portion of) with bullish risk reversals could make sense given the stock’s run-up since Q3 earnings in October when the stock was in the high $40s. For instance with stock near $60, you could sell the Aug 50 put at $2 and buy the Aug 65 / 75 call spread for $2.50. That package costs 50 cents, offerings gains of up to 9.50 between $65.50 and $75, with max gain above $75. The base case is that the stock is between $50 and $65 and you would lose the 50 cents paid, and the worst case is that the stock is below $50 and you would lose as if long stock (1 contract = 100 shares).
Another idea for long holders might be to look to add yield to their holding by merely selling the Aug 50 puts at $2, if the stock is above $50 on Aug expiration then they would collect the $2, or about 3.3%, annualized that’s about 6.6% yield. That is also like placing a buy order below on the stock at an effective price of $48 so it’s only for those willing to do that.