The 5G revolution has been overshadowed by the pandemic but it should not be forgotten. The rollout of 5G is going to bring a secular-level upgrade to the world that will drive changes in how we do just about everything. With that in mind, it makes sense for Wells Fargo (NYSE:WFC) to resume coverage on the telecom sector, 5G is going to be worth billions in growth.
When it comes to the telecoms, Wells Fargo has the top-three players pegged. The differentiator is in who will dominate the mid-band spectrum and it looks like that honor goes to T-Mobile US (NASDAQ:TMUS) The reason is simple, the mid-band spectrums offer the best of both worlds; speed and capacity, and that will drive user adoption and user growth. T-Mobile’s positioning is due to its merger with Sprint. The merger included language to the effect that T-Mobile would aggressively pursue 5G and mid-band/full-spectrum coverage and the company is following through on its word.
Overweight On T-Mobile
Verizon (NYSE:VZ) and AT&T (NYSE:T) have gone in a different direction from T-Mobile. Instead of focusing on a broader spectrum, the two giants are focusing on the high-end. This is providing mind-boggling download speeds but at the cost of coverage. High-band 5G has a much shorter range, requires smaller coverage cells, and is more prone to signal loss. As of the most recent counts, T-Mobile had twice as much mid-band capacity as AT&T and nearly four times as much as Verizon giving it a multi-year advantage.
In terms of growth, Wells Fargo sees T-Mobile as the only true growth story in a mature industry. Unlike AT&T and Verizon which have just about maxed out their coverage in North America, T-Mobile has not. They expect T-Mobile to take market share, grow revenue, EBITDA, and free-cash-flow much faster than the others. Wells Fargo put an Overweight rating on TMUS with a price target of $150 or upside of 15%. Shares of T-Mobile are trading at all-time high levels with bullish indications.
“the mid-band spectrum; faster-than-expected synergy realization (hitting mid-50% EBITDA margins by fiscal 2024); postpaid share gains (through a combo of "value" price offerings and improved churn); and free cash flow acceleration that gives the option to return capital to shareholders in the future,” said Wells Fargo in the letter to investors.
Equal Weight On Verizon
T-Mobile may be the early winner in the race to 5G but it is not the only one in the race. While Verizon is lagging in the mid-band spectrum it is still the nation’s 5G leader. If Verizon can score big at upcoming C-band auctions it can secure the bandwidth it needs to catch up with T-Mobile. Until then, Wells Fargo still sees a path to sustained 2% to 3% revenue growth over the coming years and that is on top of a dividend. Verizon is paying a very healthy 4.15% yield where T-Mobile pays nothing.
Shares of Verizon are trading well off the post-pandemic lows but have yet to regain the all-time highs. Price action is poised to break above resistance at the $61.50 level. When that happens a move up to $64 is likely.
Underweight High-Yield AT&T
Wells Fargo resumed AT&T with an Underweight rating and I am not surprised. AT&T stands to benefit strongly from the 5G revolution but carries some baggage in the form of Time Warner and all its non-telecom media and entertainment. The merger with Time Warner has left the balance sheet a little heavy on the debt side and then there is the pandemic to consider. The pandemic has put a real hurting on the media business and in particular movie and show productions. The company is bouncing back from the hit but it will take some time before operations there is anything resembling “normal”.
AT&T pays a very stout 7% yield but that may be more of a hindrance to the share price than a boon. The company’s commitment to the payment and its plans to deleverage may inhibit its ability to invest in growth. If this is the case AT&T could fall further behind T-Mobile and Verizon in the push to 5G. Shares of AT&T are wallowing near the March lows but may have put in a bottom. Price action is moving higher but maybe capped by resistance at the $30 level.
