Keybanc analyst Brandon Nispel downgraded T-Mobile US Inc (NASDAQ:TMUS) from Overweight to Sector Weight.

The rerating reflects the valuation, which Nispel noted as stretched, and was unwilling to raise his price target to justify the valuation.

The analyst noted a lot to like in the business that has proven to be the market share leader in Wireless for nearly the past decade, and its FWA business has proven to be accretive.

Also Read: Synopsys Proposes Divesting Units, Including Ansys PowerArtist, For $35 Billion EU Deal Approval

However, going forward, the competitive environment seems to be shifting toward a converged offering, with T-Mobile making acquisitions in the Fiber business at significant multiples that have yet to be proven.

In addition, with T-Mobile guiding to ~5% EBITDA growth in fiscal 2025, this is still a significant deceleration from ~9% in fiscal 2024 and compares to AT&T Inc's Mobility business adjusted EBITDA guidance of 3%- 4%.

T-Mobile is trading at ~9.3 times Nispel's above consensus fiscal 2026 adjusted EBITDA estimates and ~15.1 times his fiscal 2026 price to free cash flow ratio, which compares to T-Mobile's 3-year average of ~9.3 times and ~15.5 times, respectively, and current AT&T and Verizon Communications Inc. average of ~6.3 times and ~10.1 times, respectively.

Nispel noted these multiples reflect T-Mobile's execution and premium growth profile. While the valuation could expand over the short term, the company has signaled through a reduction in the buyback that the stock is expensive and noted there are limits.

T-Mobile has guided investors to 5% adjusted EBITDA growth in fiscal 2025, a significant slowdown versus fiscal 2024 expected adjusted EBITDA growth of ~9%. Free cash flow growth is also expected to slow to ~2% by Nispel's estimates and ~4% for consensus, down from his estimate of 25% year-on-year in fiscal 2024.

T-Mobile has spoken about investments in the business, headwinds from ACP, and wholesale affecting EBITDA. In addition, cash taxes should be higher as T-Mobile becomes a full cash taxpayer, and T-Mobile has guided to higher capex, both of which will affect free cash flow.

With T-Mobile's valuation at a premium and growth expected to slow, Nispel sought better relative value. In that regard, he noted AT&T's 3% or greater adjusted EBITDA growth appears relatively attractive, given AT&T is trading at ~6.2 times his fiscal 2026 adjusted EBITDA. When looking at AT&T excluding Business Wireline, he expects AT&T's Mobility and Consumer Wireline growth to be 5.4% in fiscal 20'25, making AT&T appear relatively attractive. At current levels, Nispel noted T-Mobile as fairly valued.

Nispel projected fourth-quarter revenue of $21.41 billion and EPS of $2.36.

Price Action: TMUS stock is down 0.74% at $232.60 at last check Thursday.

Also Read:

• Ciena Q4 Earnings: Profit Misses Expectations, Margins Decline, Names New Chair