Raymond James Lowers T-Mobile Rating to Outperform Following Strong Stock Rally

Analysts at Raymond James have downgraded their rating on T-Mobile shares from Strong Buy to Outperform, while increasing the price target from $208 to $221.

Despite maintaining a positive outlook for the stock, the firm does not anticipate the same rapid share price growth that it has experienced in the past.

This adjustment comes in light of T-Mobile’s substantial share price surge and an impressive fourfold increase in Free Cash Flow from 2020 to 2023. The company’s stock has significantly outperformed its competitors, with a rise of over 75% since late 2021, in contrast to a roughly 13% decline for Verizon and an 18% increase for AT&T during the same timeframe.

According to Raymond James analysts, “With the successful completion of the Sprint merger, T-Mobile stands as the fastest-growing company in the mature wireless industry. While its valuation appears justified, further expansion in multiples is likely to be limited.”

The analysts express uncertainty regarding the company’s fiber strategy and capital allocation, particularly concerning the pending deals with Lumos and Metronet, which are anticipated to close around mid-2025.

T-Mobile expects over 20% internal rates of return on its fiber joint ventures; however, there are lingering questions about how the public market will respond to these capital expenditure-driven returns.

The analysts noted, “We believe the company’s intent to keep its fiber investments capital-light and off-balance-sheet is not as strong as it was a year ago, as T-Mobile sees its brand and distribution capabilities allowing for higher penetration rates and lower acquisition and operating costs compared to the roughly 35% targets set by many fiber companies.”

This perspective implies potential benefits to T-Mobile’s fiber strategy, but it complicates the investment case.

Furthermore, T-Mobile’s financial outlook presented at Capital Markets Day did not account for $10 billion in pending transactions, including those involving Lumos, Metronet, and UScellular.

Consequently, Raymond James has slightly adjusted its C-EBITDA estimates for 2024 to 2026 downward, leaving out these deals until more clarity emerges. The firm also recommended caution regarding the possible regulatory hurdles associated with the UScellular transaction.