Why can a telecommunications company trade like one of the "Magnificent 7"? T-Mobile US (TMUS.O) saw its stock price rise by 54% over the past year, and it soared 694% over the past decade. This performance outstripped Amazon (AMZN.O) in its one-year gain and exceeded Meta Platforms (META.O) in its ten-year growth, surpassing both Alphabet (GOOGL.O) and Apple (AAPL.O) in any time frame.

A common explanation does not hold: that the 2020 merger of T-Mobile and Sprint turned the industry into a lazy and highly profitable triopoly. However, facts suggest that some "errors" in antitrust regulation may have propelled T-Mobile's rise. Additionally, the telecommunications industry has been eroding the market share of cable television in recent years, causing T-Mobile's stock price to reach 23 times this year's projected earnings, which may genuinely justify this valuation. For investors, its parent company Deutsche Telekom offers a cheaper entry point for investment.

Ten years ago, Verizon (VZ.N) and AT&T (T.N) controlled 72% of the mobile communications market nationwide in the USA, while T-Mobile and Sprint split the remaining market share. There were two reasons for T-Mobile's market share growth at the time:

• It offered users more attractive pricing, but at the cost of very low free cash flow—less than $1 billion per year at the time, compared to $15 billion and $21 billion for AT&T and Verizon, respectively.
• Sprint performed poorly and continuously lost market share, making T-Mobile the biggest beneficiary.

However, T-Mobile's rapid growth led to a shortage of wireless spectrum resources, while Sprint had a large amount of unused spectrum resources. Therefore, in 2018, T-Mobile announced the acquisition of Sprint for $26.5 billion. Initially, U.S. antitrust regulators opposed this deal but eventually approved it in 2019 with a major condition: T-Mobile had to sell its prepaid mobile business Boost Mobile and some spectrum to Dish to create a new fourth competitor.

Looking back now, this deal clearly favored T-Mobile. Boost Mobile is now operated by EchoStar, and it is almost uncompetitive, as the U.S. telecom market has become a triopoly. However, according to a 2023 paper from Regulation Magazine, this is not a "comfortable triopoly"; instead, competition is intense.

This transaction greatly improved consumer welfare. Research from Clemson University and the Technology Policy Institute indicates that T-Mobile leads significantly in 5G deployment, making services faster and more stable. When considering this service enhancement factor, the actual price of wireless communication fell by 15.3% in the three years after the merger, compared to only a 9.8% drop in the three years prior to the merger.

If the merger truly weakened market competition, then all companies should benefit. However, since the merger was completed in April 2020, T-Mobile's stock price has increased by 191%, whereas AT&T has only risen by 15%, and Verizon's stock price has even dropped by 25%.

T-Mobile continues to grow strongly. In the Earnings Reports released on January 29, 2024, the company reported a record high in new postpaid users and a record low in churn rate. Unlike in the past, it no longer sacrifices profit for market share—its current free cash flow has reached 17 billion dollars per year, nearly on par with Verizon and AT&T.

T-Mobile's success is partly attributed to regulatory missteps—the government intended to facilitate a fourth competitor, but inadvertently prevented Verizon and AT&T from bidding for Sprint's spectrum. Studies show that T-Mobile's cost for this deal was only 65 cents per MHz-POP (an indicator of wireless spectrum cost), while other competitors had to pay 1.10 dollars per MHz-POP in the auction market.

Additionally, T-Mobile is accelerating its expansion into rural markets and the top 100 cities where market penetration remains low at 30%. It still lags in the business sector but is experiencing rapid growth. Moreover, home broadband service is another important growth opportunity.

Cable operators are significantly increasing high-speed internet fees to compensate for lost revenue due to declining television subscriptions. Meanwhile, telecom companies like T-Mobile, having completed their 5G network construction and with ample funds, are rapidly capturing the market.

T-Mobile is primarily entering the home broadband market in two ways:

• Fixed Wireless Access (FWA) - using cellular signals as home broadband, can leverage T-Mobile's underutilized spectrum for profitability.
• Fiberoptic Service - In the long run, it is more profitable, and T-Mobile believes the internal ROI of this business exceeds 20%.

Currently, T-Mobile is rapidly expanding its fiber coverage by establishing joint ventures with regional operators. JPMorgan predicts that by 2030, T-Mobile's market share will grow from 4% to 10%, and profits will continue to maintain double-digit growth over the next five years. This means that although T-Mobile's valuation appears high, it may be worth the price. However, investors can choose cheaper alternatives - T-Mobile's parent company Deutsche Telekom.

Over the past five years, the stock price of Deutsche Telekom has increased by 120%, and its EPS growth rate is equally impressive, thus the valuation still remains low, currently with a PE ratio of less than 16 times.

Surprisingly, among the large companies in Europe tracked by JPMorgan, only 10 are expected to achieve double-digit profit growth in the future, with Deutsche Telekom being one of them, even though its growth comes almost entirely from the US market. The average PE ratio of the remaining 9 companies is 23 times, comparable to T-Mobile. Therefore, JPMorgan expects that Deutsche Telekom's stock price still has a 30% upside in the future, while also providing a 2% dividend yield.

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