August greetings from Kansas City, Cedar Rapids, and the Outer Banks of North Carolina, where the extended Patterson family begins our summer break (pictured). The sandy beaches of Corolla, Duck, Kitty Hawk and Cape Hatteras never get old, and we appear to be avoiding late summer foul weather storms which frequent these shores.
This week’s Brief continues our earnings and strategic positioning analysis for each of the Telco Top Five. This week, we examine the following question “As the traditional wireless telecom market slows, which frontier should T-Mobile conquer?” We explore several directions that the company should explore.
The Fortnight That Was
Could the Fab Five hold on to their strong late July gains? So far, the answer to that question appears to be “yes.” While down from the $1.5 trillion year-to-date increase for 2026 achieved last week, the group is right about where it was two weeks ago after the 2Q earnings dust had settled.
Microsoft has been an important contributor to those gains. Since July 1, they have been responsible for $900+ billion of the total $1.78 trillion snapback (Their earnings package is here). What encouraged investors is encapsulated in this slide from their earnings presentation:
The company went out of their way on the earnings call to emphasize the short-term nature of their capital spending. Purchases were directly tied to customer contracts, not long-term infrastructure spending. They spent $41 billion on capex in the quarter but generated $55+ billion in free cash flow from operations. And their Microsoft Cloud revenue grew 27% in the quarter at 65% gross margins. All while the company continues to have a pristine balance sheet with $37 billion more in cash and marketable securities than total debt.
As with any mania, there will be losers in the AI infrastructure game: those who pursue the quickest gains leveraging other people’s money. But there are real step functions occurring in computing, storage, memory, and related areas that need to be applauded. How those gains translate to mobile devices over limited spectrum capacity worries us and that is why we think the next investment cycle is the extension of computing/ processing to mobile. More on that in upcoming Briefs.
The big news over the last two weeks in broadband was the California Public Utilities Commission’s (CPUC) approval of Charter’s merger with Cox Communications. In exchange, Charter agreed to the following (from the CPUC news release here):
- New affordable broadband offerings for low-income Californians, including multiple California LifeLine service tiers and standalone broadband plans available for five years.
- A $30 million investment in digital inclusion initiatives, including broadband adoption, digital literacy training, community outreach, and device access for underserved communities.
- At least $275 million to upgrade the company’s California network, completing symmetrical one-gigabit service capability across legacy California service areas within three years.
- Five years of free broadband and Wi-Fi service for 50 eligible community anchor institutions, including schools, libraries, and community centers.
- Expanded outreach and enrollment assistance to help eligible households access affordable broadband services.
- $5 million in Community Development Financial Institutions to expand access to capital for underserved California small businesses.
- Expanded workforce development through the VetConnect program and strengthened supplier diversity commitments.
The company also agreed to automatic customer credits for outages lasting more than two hours and agreed to honor legacy Cox “price for life” agreements. The major concession is the retention of the low-tier plans for LifeLine customers for the next five years (although we continue to ask if $30/ mo. for fixed wireless service is quickly becoming the new entry price for all broadband providers). This is a huge step forward for Charter, and we look forward to monitoring their synergy achievements.
Another major M&A development this week was the acquisition of a controlling interest in MobileX by Charlie Ergen’s SPAC (Wall Street Journal article outlining a few terms of the transaction are here). We believe Charlie got a very god deal for both a great product/technology and management team. More on MobileX offerings here.
2Q Earnings Review – Point of Diminishing Returns?
In the last full Brief (here), we discussed Verizon’s stock price (and underlying performance) momentum and why we think it’s not a passing fad. This week, we will analyze T-Mobile’s recent earnings performance and analyst reaction.
Our thesis on T-Mobile has not changed. They are a well-run company that has provided investors with exceptional returns over the last decade. If current trends hold, they will own the network trophy across all the major independent testing organizations (RootMetrics metro scores here), and their Key Performance Metrics (KPIs) are close to if not at best levels.
Here is the TMUS comparison chart versus the S&P 500 Index and Verizon (dividends not included):
Excluding dividends, there is a 38% spread between the returns for Verizon and T-Mobile and a nearly 50% spread between the S&P and T-Mobile over the last 12 months. Apart from Charter (which we think will continue to rebound as they demonstrate Cox merger synergies), T-Mobile has had a rough year producing returns for investors. Why is Magenta suddenly out of favor?
We don’t think it’s due to earnings (or any meaningful KPI) deterioration. Here are a few of the important KPIs from the last earnings call:
Account growth is positive for the fifth straight month (not shown above is ARPA which is now $152.91, an historically strong metric for T-Mobile considering their recent acquisitions of US Cellular and FTTH provider Metronet). Postpaid account churn, while up on a year-over-year basis, is continuing to decrease as the US Cellular merger integration continues to progress. Nothing on the earnings call suggests that the Metronet or Lumos JVs were regrettable decisions (the opposite is true) or that pending or future FTTH M&A activity is going to diminish.
Against this backdrop, marketing and direct costs are both down sequentially, driving adjusted EBITDA and CFFO higher. Debt decreased this quarter, driving the leverage ratio to 2.3x. The company continues to see improving scale economies. Overall, there isn’t a metric that (when adjusted for one of several acquisitions the company is maneuvering) isn’t at or near historical “best.”
Even with operating strength, the market capitalization of the company is down $20 billion. Investors are losing confidence in T-Mobile’s ability to sustain their wireless leadership position. Their confidence is increasing that Verizon (with Frontier) and AT&T (with Lumen fiber) will slow T-Mobile’s momentum.
T-Mobile’s response to this value migration has varied. Some of the counterarguments have been technological (“6G will dramatically increase our capacity”) while others have been tactical (increased share repurchases). Neither of these arguments are landing with investors. Meanwhile, Verizon is borrowing a play from T-Mobile’s playbook and investing in Eaton Fiber (announcement here) which is acquiring Ripple Fiber in its first investment.
Is this a temporary phenomenon? If it isn’t, what should T-Mobile do? Here are some suggestions:
- Don’t forget the obvious. When T-Mobile was cash constrained, there were financial constraints on network coverage. The quality of T-Mobile’s balance sheet has improved, but coverage issues continue. There are areas where T-Mobile’s coverage still lags their competition – capital investment is needed that that creates a multi-year advantage.
- Maximize the value of new smartphone purchases with network improvements. When Apple releases their next wave of smartphones next month (more on that here from Bloomberg), have several reasons available that tout the advantages of using the device on T-Mobile’s network (as opposed to the lower monthly Equipment Installment Plan price).
- Plan simplification lowers churn. There has been a lot of focus on T-Mobile’s postpaid plan migrations over the last year. This is one of the hardest transitions to manage, and the company should plan for these transitions with an objective of no incremental churn. No transition should be approved until that difficult equation has been solved.
- Increase investment in T-Mobile for Business (TFB). TFB needed more leadership continuity and now has Chris Sambar at the helm. He needs a big budget to transform product offerings and sales force. The return on investment from a TFB transformation represents the second easiest way (other than fixing coverage gaps) to improve shareholder value.
- Slow/ stop buybacks and build cash for spectrum. Here is the schedule from the 2Q playbook:
T-Mobile has repurchased an incremental $15 billion in shares over the last six quarters. The rationale for this is that this is the best use of excess cash. With the issues that are described above (and the fact that no wireless company is adequately prepared for the data requirements needed for mobile devices because of AI infrastructure investments), the company should reevaluate (and likely increase) their capital investments.
Bottom line: T-Mobile is still the best company in the wireless industry, but their current myopia could be detrimental to long-term returns. They are not close to hitting the point of diminishing returns in any business line (especially TFB), and should focus on coverage, cost of service and churn.
The next Brief will focus on AT&T’s ability to strengthen both consumer and business performance across multiple products and the implications of this broad strategy on their competitors. In the meantime, if you have friends who are interested in being notified each time we publish a Brief, please have them sign up at www.sundaybrief.com.
Go Royals and Sporting KC!
Important disclosure: The opinions expressed in The Sunday Brief are those of Jim Patterson and Patterson Advisory Group, LLC, and do not reflect those of CellSite Solutions, LLC, or Fort Point Capital.
