T-Mobile US Inc. (TMUS), in Bellevue, Wash., along with its subsidiaries, provides mobile communications services in the United States, Puerto Rico, and the U.S. Virgin Islands. The company caters to approximately 102.1 million consumers in the postpaid, prepaid, and wholesale sectors with voice, message, and internet services. The company is adopting diversified growth strategies to expand its 5G network to bring fast and wireless services across the country.

However, the stock has declined 10.1% in price over the past year and 17.5% over the past three months.

Furthermore, closing the last trading session at $121.22, TMUS’ stock is trading 19.3% below its 52-week price high of $150.20 which it hit on July 16, 2021, indicating bearish sentiment. In addition, an ongoing class-action lawsuit related to a data breach could raise investor concerns surrounding the stock. Moreover, given the stock’s steep valuation and weak fundamentals, it could be a risky bet now.

Click here to checkout our 5G Industry Report for 2021

Here’s what could influence TMUS’ performance in the coming months:

Ongoing Lawsuit

This month, Labaton Sucharow LLP, a leading plaintiffs' law firm, announced that it is pursuing claims on behalf of T-Mobile consumers in California, Illinois, Massachusetts, and New York. Since 2018, TMUS has suffered multiple data breaches. On August 15, 2021, hackers allegedly obtained access to TMUS data and up to 100 million user records, including at least 30 million including consumer social security or driver's license details, were allegedly being sold on the dark web. The company has confirmed the hack and is currently looking into whether any customer data was stolen. Because investors remain concerned about the lawsuit, TMUS’ stock could take a major hit.

Inadequate Financials and Profitability

TMUS’ adjusted EBITDA declined 1.6% year-over-year to $6.91 billion for the second quarter, ended June 30, 2021. Its interest income came in at negative $2 million over this period. In addition, TMUS’ net income and EPS have declined at CAGRs of 6% and 17%, respectively, over the past three years.

Its trailing-12-months levered FCF margin is negative 4.19%. Furthermore, TMUS’ 4.93% trailing-12-months net income margin is 29.5% lower than the 7% industry average. Also, the company’s 0.41% asset turnover ratio is 9.8% lower than the 0.45% industry average.

Stretched Valuation and Poor Analyst Estimates

In terms of forward EV/Sales, TMUS is currently trading at 3.16x, which is 20.6% higher than the 2.62x industry average. In addition, its 1.88x forward Price/Sales compares with the 1.74x industry average. Furthermore, the stock’s 50.79x forward non-GAAP P/E ratio is 159.8% higher than the 19.55x industry average.

Analysts expect TMUS’ EPS to decline 6.4% in its fiscal year 2021. In addition, the company’s EPS is expected to decrease 46% in the current quarter and 41.7% in the next quarter.

Unfavorable POWR Ratings

TMUS has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. TMUS has a D grade for Growth, Value, and Sentiment. Given the stock’s bleak growth prospects, negative profit margin, and higher-than-industry valuation multiples, these grades are justified.

Also, the stock has a C grade for Stability, which indicates its  higher volatility than its peers.

Of the 21 stocks in the F-rated Telecom – Domestic industry, TMUS is ranked #17.

Beyond what I’ve stated above, we have rated TMUS for Momentum and Quality. Get all TMUS ratings here.

Bottom Line

TMUS’ weak financials and poor profitability do not justify its lofty valuation. Moreover, an ongoing lawsuit against the company is a concern. Thus, we believe TMUS is best avoided now.

How Does T-Mobile US Inc. (TMUS) Stack Up Against its Peers?

While TMUS has an overall POWR Rating of D, one  might want to consider looking at its industry peers, Ooma Inc. (OOMA), SBA Communications Corporation (SBAC), and AT&T Inc. (T), which have a B (Buy) rating.

Click here to checkout our 5G Industry Report for 2021

TMUS shares were trading at $119.32 per share on Monday afternoon, down $1.90 (-1.57%). Year-to-date, TMUS has declined -11.52%, versus a 18.39% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

More...