T Mobile Overvalued Relative to Peers in 5G Race
Valuation at these levels not justified by customers, 5G buildout or growth rate
In addition to providing much faster download speeds to consumers 5G promises to revolutionize the economy by making new internet of things applications and autonomous driving possible. Currently, more than 75% of the US population is covered by some form of 5G, and this is expected to increase to almost 100% within the next few years. The big 3 mobile carriers, AT&T, Verizon, and T-Mobile have invested hundreds of billions of dollars to build out their national 5G networks. While all three companies are investing in 5G, their share price performance has differed significantly. Over the past 5 years, T-mobile’s share price has more than doubled, Verizon has been about flat, and AT&T has lost more than 40% of its value. The stock market appears to think T-Mobile will be the winner in the 5G race and that’s why they are being rewarded with a higher share price and price to earnings multiple. But is the premium valuation justified? Roughly every ten years a new generation of telecommunications technology is developed which drastically improves performance and capabilities. The first generation or 1G was developed in the 1980s and powered the first brick-shaped mobile phones. 1G only supported calling. In the 1990s, 1G was replaced by 2G which enabled texting and extremely slow internet connection. But for most practical purposes the internet connectivity was pretty useless. In the early 2000s we got 3G which powered modern smartphones such as the original Iphone. In 2009 we got 4G which offers download speeds more than 6 times greater than 3G. And finally, in 2020 many countries started rolling out 5G technology. 5G promises to offer speeds of up to 20 times greater than 4G and also has much lower latency. 5G will allow you to stream tv shows and youtube videos on your phone at much higher speeds. But the technology could be far more revolutionary than that. The fast internet speeds of 4G enabled the growth of social media companies like Facebook as well as gig economy ecosystems like Uber and Lyft. The faster speeds and lower latency of 5G could make nascent technologies such as the internet of things and self-driving cars a reality. With high speed connectivity, your car, fridge, and video game consoles could all communicate with each other to operate more efficiently. Industrial companies could use the low latency to allow engineers to operate machines using AR headsets from the other side of the world. Microsoft is beta testing a product that would allow users to play Xbox games on a mobile phone with 5G connection. And perhaps most importantly, 5G will also be a crucial enabler of autonomous vehicles. It will allow them to seamlessly communicate with centralized computer systems over the internet. Over the coming years, we could see new internet based applications that we couldn’t even imagine today, all powered on the back of 5G infrastructure. The big three cellular providers have some form of 5G covering over 200 million Americans today. But are these 5G networks good enough to live up to the hype? As it stands now, America’s 5G kind of sucks. According to data from Opensignal, the US’s current 5G speeds are only about twice the speed of 4G, a far cry from the 20x boost many industry analysts had theorized. In fact America’s 5G speeds are slower than the 4G speeds of South Korea, Canada, and the Netherlands. So why is the US 5G so bad? Part of the reason is because of the large geographical size and low population density of the US. Both South Korea and the Netherlands are geographically small and have high population densities. While Canada is large geographically, the vast majority of the population lives within a few highly populated metropolitan areas. Building a 5G network to cover the 3 million square miles of the continental United States is a much taller order. It’s important to understand that not all 5G is created equal. Broadly speaking there are three types of 5G; low band, mid band, and high band. Low band 5G has a very wide range, with each tower being able to cover many miles. Thus, it is by far the cheapest way to cover a large area. However, there is a trade-off between coverage and performance. Low-band 5G offers download speeds not really any better than 4G LTE. High band 5G offers the best performance. This is the one that gives a 20x improvement over 4G. The problem is, high band antennas only cover a very small area and cost a lot of money. With current technology, it is only economical in major cities with extremely high population densities. While the vast majority of the US population is technically covered by some form of 5G, most of it is low band 5G that isn’t even any better than 4G LTE. This is why America’s 5G speeds lag other countries. But this has been changing. All the major carriers are working on building out a mid-band 5G network. This is the sweat spot. It provides enough performance to be significantly better than 4G LTE while at the same time being economically viable for most of the country. In 2019 and 2020, Verizon focused on high band 5G in major cities. AT&T focused on building both high band and low band infrastructure. T-Mobile was the only one that started building a mid-band network in 2019. Currently, their mid-band offering which is branded as Ultra Capacity 5G covers 200 million people. By the end of 2020, both AT&T and Verizon saw that their high band strategies were unsustainable. If they wanted to stay competitive with T-Mobile they would have to build their own mid band networks. But why did they let T-Mobile build up such a lead in mid-band 5G. It all comes down to spectrum. Cell Phone signals are transmitted through electromagnetic rays of varying wavelengths. Two cell phone carriers cannot operate on the same bandwidth of spectrum as their signals would interfere with each other. The Federal Communications Commission auctions off specific bandwidths of spectrum to telecommunications companies so they can have the exclusive rights to operate on them. Before 2019, none of the major carriers had sufficient bandwidth rights to build out a nationwide mid-band 5G network. But there was one company that did have this. Sprint, which was the fourth largest cell phone carrier at the time happened to own the rights to 2.5 gigahertz spectrum which was very favorable for building midband 5G. The problem was, Sprint was heavily indebted and they lacked the scale to build a 5G network on their own. Their valuable spectrum assets were just sitting in a filing cabinet collecting dust. Because of this T-Mobile agreed to acquire Sprint in 2018 for $26 billion. Sprint’s business and brand were dying, but from T-Mobile’s perspective the $26 billion price tag was a steal just to get the spectrum rights. After the deal was announced, multiple state attorney generals sued to block the deal on antitrust grounds. After two long years of legal battles, a federal judge finally approved the merger in early 2020. At the time, both AT&T and Verizon were far bigger than T-Mobile in terms of wireless market share. Given that T-Mobile was barely able to close the deal, AT&T or Verizon almost certainly wouldn’t have been allowed to. So T-Mobile was the only bidder and they were consequently able to buy Sprint for a very cheap price. This gave them a massive head start. After the deal closed they immediately started rolling out their mid band 5G network which now covers more than 200 million Americans. Going into 2021 T-Mobile was miles ahead of AT&T and Verizon. They already had tens of millions of customers across the US using their mid-band 5G which is far superior to 4G LTE. T-mobile’s stock price was also massively outperforming their competitors. It seemed as though the stock market had already crowned them as victor of the 5G race. But Verizon and AT&T weren’t going to go down without a fight. In February of 2021 the Federal Communications Commission conducted a spectrum auction to sell bandwidth favorable for mid band 5G. Verizon spent $45 billion and AT&T spent $23 billion to acquire new spectrum. Over the past year, both companies have been firing on all cylinders to build out their own midband networks to close the gap with T-Mobile. T-Mobile got lucky in their ability to acquire Sprint. This gave them more than a year of a head start. But there’s no reason to believe that AT&T and Verizon won’t be able to catch up. They proved that they’re serious about 5G by spending a combined $70 billion on new spectrum. And they will spend tens of billions more over the coming years on 5G infrastructure. Soon, the vast majority of Americans will live in an area that has 5G coverage from at least 2 of the 3 major carriers. This chart shows the number of retail cellphone customers of the big three carriers. Currently, Verizon has the biggest market share with 90 million customers, AT&T comes in second with 80 million, and T-Mobile comes in third with 70 million. Sprint’s former customers were added to T-Mobile’s customer count to maintain comparability. The three companies report their customer metrics slightly differently, but this should be a pretty good approximation for their relative positions. All of them have grown over the past 5 years but T-Mobile has grown the fastest. This has allowed them to grow their percentage market share by 4 points, from 25% in 2016 to 29% today. So while their 5G head start has certainly benefited them, this benefit was pretty modest. The more than 100% outperformance of T-Mobile’s stock seems kind of hard to justify. They’ve only gained a few percent of market share despite having a headstart on midband 5G. Once AT&T and Verizon get their mid band networks up and running over the next year or so, T-Mobile’s ability to continue taking share should decrease drastically. Currently, T-Mobile has a forward price to earnings ratio of 37 times. This is orders of magnitude higher than the 7.6 for AT&T and 9.8 for Verizon. Based on these numbers T-Mobile appears to be extremely overvalued with any advantage they have in 5G already more than reflected in the current share price. The story with AT&T is a bit more complicated because they also own Warner Media which they plan to spin off. If you want to see a more detailed analysis of this we made a video on it. Check it out on our YouTube channel.
Everbridge Stock Asymetric Upside Potential After 45% Drop
Sudden CEO Resignation Causes Unreasonable Drop in Stock Price
Founded in 2002, Everbridge is a software company that makes a critical event management or CEM system. They make a software solution that notifies managers and employees when a critical event happens, such as a natural disaster, pandemic, or even more mundane things like a power outage. With almost immediate notification, companies can respond more quickly to resolve the issue. This reduces downtime which for big corporations can cost tens of millions of dollars per day. And with both natural and man made disasters having skyrocketed over the past decade, Everbridge has seen demand soar for their product. Since 2015, Everbridge’s revenue has increased at an astounding 35% compound annual growth rate in almost a straight line up and to the right. However, to achieve this growth they’ve invested heavily in hiring sales people to land new customers. Increasing sales and marketing expense has led to steepening losses despite the strong topline performance. But Wall Street was enamoured by the growth and bid the stock price up to a high of $166 this past November. This gave the company a $6 billion market cap which is more than 17 times project 2021 revenue. This is an extremely rich valuation even for a high flying software company. On November 9th they released third quarter earnings where they beat revenue estimates with 36% year over year growth. They also raised their full year revenue guidance. Despite this, the stock sold off over the following month losing more than a quarter of its value. With the stock price already so high going into earnings, anything less than massive beat would probably see the stock falling. They were also hurt by a broader selloff in the software sector. However, the real pain was still yet to come. After market close on Thursday December 9th they made an unexpected announcement about their CEO David Meredith. They put out a press release saying CEO David Meredith has notified the board of directors that he intends to resign as CEO. He will be replaced by the current CFO and Chief Revenue Officer on an interim basis as they search for a permanent replacement. In the same press release they also said they expect revenue to grow between 20 to 23% in 2022. This is a few percentage points lower than the 26% forecasted by analysts covering the stock. They also stated that David Meredith’s resignation had nothing to do with Everbridge’s financial condition or reported financial results. This statement was meant to quel potential fears that the CEO resigned due to accounting fraud or anything else of that nature. The guidance being a little bit below forecasts is not enough to warrant a 45% move lower in the share price. The majority of this move to the downside can probably be attributed to the abrupt and unexpected CEO resignation. Wall Street analysts who had previously been extremely bullish on Everbridge were quick to turn their backs on the company with a slew of downgrades coming that same day. For example, the investment bank Stifel downgraded their rating on the stock from buy to hold. They said the CEO departure brings about too much uncertainty for them to continue recommending their clients to buy the stock. But does this really make sense? The company lost more than $2 billion of market value on the news. Is David Meredith really so important as to be worth 45% of the company? We can look back in history to other instances when public company CEOs resigned unexpectedly. First off we can look at Steve Wynn, the founder and former CEO of the massive Casino company Wynn Resorts. In January of 2018 the Wall Street Journal published a bombshell report documenting alleged sexual miscondut from dozens of women. Steve was eventually forced to resign as CEO. Wynn Resorts stock price immediately fell by almost 20%. Despite the negative headlines, the casinos continued to operate as usual and the company’s operations were not materially impacted. Within a few months the stock price had made back substantially all of its losses. Another such example is former Intel CEO Brian Krzanich who was forced to resign in June of 2018 over an inappropriate relationship with an Intel employee. The stock price fell as much as 8% on the news, but similar to Wynn Resorts, it quickly made back those losses. In the case of Everbrdige’s CEO, we have no idea why he resigned. There are plenty of legitimate reasons to resign. It’s possible he just wants to spend more time with his family, or maybe he wants to pursue different career opportunities at other companies. And in the press release Everbridge clearly states that the resignation had nothing to do with the company’s financials. The point is, the 45% move to thee downside seems like a significant overreaction. They already have an interim CEO in place and within a few months they should find a permanent replacement. Also, David Meredith was not the founder of the firm. He was an external hire and has only held the position for about 2 years. There’s no reason to believe Everbridge’s board of directors won’t be able to find a suitable replacement within the next few months. Based on previous examples it appears that the stock market tends to over react to unexpected events such as these. The selling pressure for Everbridge was probably compounded by the fact that it was a high flying technology company. These types of stocks have fallen out of favor in recent months so investors were probably looking for any excuse to dump their shares. But despite this, it looks like the selling may have been overdone. While this video is not financial advice, I plan on buying a small position in the stock this coming Monday, so long as it’s not up a lot at the open. This is a shorter term trade for me that I plan to hold for a few weeks or months at most. I think there’s a good chance this situation could play out similarly to Wynn Resorts or Intel and we could see the stock market back a good portion of its losses once the dust settles and they announce a new CEO.