TMUS: T-Mobile vs. Verizon: Which Stock is a Better Buy?

T-Mobile US, Inc. (TMUS) and Verizon Communications Inc. (VZ) are two of the leading wireless telecommunications providers in the United States. As the world is undergoing a rapid digital transformation, the demand for advanced technology has escalated over time. Expanding the market and developing new technologies, both TMUS and VZ have been witnessing a significant rise in demand.

Both stocks have generated significant returns over the past five years. While TMUS returned 215.9% over this period, VZ has gained 27.9%. In terms of year-to-date performance, TMUS is a clear winner with a 57.6% return versus VZ’s negative return. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

TMUS and Metro by T-Mobile started offering the iPhone 12 Pro Max and iPhone 12 mini from November 6^th. Under this offer, customers can get up to $950 in discounts by exchanging their phones and adding a line.

TMUS customers can get a second LG Wing for free after 24 monthly bill credits when they pick up the first, without the need to add a line or trade in a device. The company unveiled three distinct streaming services — TVision LIVE, VIBE, and CHANNELS.

Moreover, TMUS nearly doubled the number of cities and towns that have the Un-carrier’s supercharged 5G experience using the mid-band 2.5 GHz. The Un-carrier has plans to reach 100 million people by this year.

VZ agreed to purchase certain assets of Bluegrass Cellular to expand its footprint in Kentucky. It is expected to close the deal this year or early 2021. A couple of months back, VZ entered an agreement with America Movil to acquire TracFone Wireless, Inc., the leading prepaid and value mobile provider in the United States.

Recently this month, VZ teamed up with TechUnited to help digitize some of the smaller companies like Elysian Café, SOHO Flower & Garden, and Joey No Nuts among others. VZ also started offering the all-new iPhone 12 Pro Max and iPhone 12 mini with 5G from November 6^th.

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Recent Financial Results

TMUS’ total revenues increased 74.2% year-over-year to $19.3 billion for the third quarter that ended September 2020, driven by the Sprint merger and continued customer growth. TMUS’ total service revenues increased 62.3% year-over-year to $14.1 billion. The company’s net income increased 44% year-over-year to $1.3 billion. It reported a record-high 2,035,000 total net additions over this period. TMUS has the largest 5G network covering 270 million people with more geographic coverage than VZ and AT&T (T) combined.

VZ’s year-to-date cash flow from operations increased 21.4% year-over-year to $32.5 billion. Net additions for total wireless retail to 553,000 for the third quarter that ended in September. This can be attributed to the company’s transformational technology of its 5G Ultra-Wideband and 5G nationwide.

Past and Expected Financial Performance

TMUS’ revenue and EBITDA grew at a CAGR of 14.4% and 22.8%, respectively, over the past 3 years. Also, the CAGR of the company’s total assets has been 41.5%. The market expects the company’s revenue to increase 70.3% for the quarter ending March 2021 and 15% next year. TMUS’ EPS is expected to grow 10.9% next year.

On the other hand, VZ’s revenue and EBITDA grew at a CAGR of 1.1% and 0.9%, respectively, over the past 3 years. Also, the CAGR of the company’s total assets has been 5.3%. The market expects VZ’s revenue to increase 3% for the quarter ending March 2021 and 3.7% next year. The company’s EPS is expected to grow 2.9% next year.

Thus, TMUS has an edge over VZ here.

Profitability

VZ’s trailing-12-month revenue is 2.14 times what TMUS generates. However, TMUS is more profitable with a gross margin of 60.4% versus VZ’s 59.5%.

Moreover, VZ’s ROE and ROA of 29.7% and 6.6% compare favorably with TMUS’ 6% and 3.8%, respectively.

Valuation

In terms of forward P/E, TMUS is currently trading at 49.20x, 307.6% more expensive than VZ which is currently trading at 12.07x. TMUS is also more expensive in terms of trailing-12-month P/S (2.16x versus VZ’s 1.89x). However, VZ’s forward PEG of 4.24x is 23.3% higher than VZ’s 3.44x.

In terms of trailing-12-month price/cash flow as well, TMUS’ 22.88x is 291.8% higher than VZ’s 5.84x.

Though TMUS is relatively more expensive compared to VZ, it’s worth paying this premium considering TMUS’ significantly higher earnings growth potential.

POWR Ratings

Both TMUS and VZ are rated a “Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Ratings are graded for TMUS and VZ:

TMUS has a “B” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. In the 25-stock Telecom – Domestic industry, it is ranked #3.

VZ has an “A” for Buy & Hold Grade and Peer Grade and a “B” for Trade Grade and Industry Rank. It is ranked #2 in the Telecom-Domestic industry.

The Winner

Both TMUS and VZ are good investment bets considering their market dominance and continued expansion. However, TMUS is a better buy despite trading at a higher valuation based on its higher earnings growth potential and strategic partnerships. The company has also captured the market demand providing better offers.

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TMUS shares were trading at $124.16 per share on Monday afternoon, up $0.60 (+0.49%). Year-to-date, TMUS has gained 58.33%, versus a 13.94% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...