T-Mobile Is Already a Leader in Home Internet Service. Does That Make It a Buy?

T-Mobile US (TMUS -0.76%) ended 2021 with 546,000 home broadband subscribers after adding 224,000 in the fourth quarter. Management called the net additions industry-leading, besting cable giants comcast (CMCSA -1.80%) and Charter Communications (CHTR -2.47%).

T-Mobile has strong ambitions for its home internet service. It expects to reach 7 million to 8 million subscribers by 2025. Doing so will require it to expand its lead as a market share winner and overcome a few other hurdles.

Image source: Getty Images.

Where T-Mobile’s home internet stands today

T-Mobile offers its fixed-wireless access (FWA) home internet service to households in areas where it currently has excess network capacity. Importantly, T-Mobile is modeling increased network usage from its regular mobile customers over time as more shift to 5G and consume more data. Taking that into account, T-Mobile will only allow so many households to sign up before it puts new signups on a waitlist, waiting to build out more capacity or for old customers to churn off.

There are currently 30 million households eligible for T-Mobile’s FWA service. T-Mobile cannot serve all 30 million with its wireless network while maintaining capacity for its core mobile customers. Every market will have different capacity restrictions.

Most interesting is T-Mobile is seeing strong adoption among urban and suburban customers, who generally have more choices for internet service than rural markets. That means it’s actually stealing customers away from the cable giants. That’s reflected in the declining net additions at Charter and Comcast.

Charter and Comcast both saw strong subscriber additions amid the pandemic as they helped keep customers connected amid the health and economic crises. When compared to 2019, both cable companies saw subscriber net adds decline in 2021. The impact of T-Mobile could be even bigger in 2022 as the company increases its network depth and adds capacity in urban and suburban markets.

Can T-Mobile reach its long-term goal?

The consumer adoption in urban and suburban markets is giving T-Mobile’s management confidence it can reach its goal of 7 million to 8 million subscribers. It’s still working to build out its 5G network in rural markets, as it currently only covers about two-thirds of the population. T-Mobile should have an easier time winning customers in those markets because there’s less competition for home internet service.

But T-Mobile could run into long-term issues because it can only serve so many households in a given area. “As the denominator of targetable homes shrinks, the requisite market share to achieve targets will begin to spiral higher,” MoffettNathanson analyst Craig Moffett said in a note in December. “Growth will get awfully hard to come by after a time.”

Moffett is particularly concerned about the amount of data FWA customers will use on the network. He estimates the average household will consume 40 times the amount of data as a wireless customer. So, adding 7 million to 8 million subscribers is like adding 300 million phones to the network.

On its recent fourth-quarter earnings call, management said the average FWA subscriber uses 300 gigabytes to 400 gigabytes per month of data. In T-Mobile’s modeling, it has the average wireless subscriber using about 80 gigabytes per month over time. Presently, the average home internet connection uses about 10 times that of a wireless connection. And T-Mobile’s management says it can target those median users and it doesn’t have to work with customers using terabytes of data every month.

Building its reach

T-Mobile’s ability to offer the service to more homes should improve quickly over the next four years as it expands the 5G network nationwide and increases the spectrum depth in existing 5G markets, utilizing its troves of 2.5 GHz spectrum.

Home internet service allows T-Mobile to monetize excess capacity and bring in new customers. Management said 40% of home internet customers are new to T-Mobile. As such, T-Mobile will be able to efficiently build out its network and use its spectrum assets to generate significant cash flow for shareholders. Management’s outlook for 30% free cash flow growth in 2022 (after nearly doubling in 2021) may be too conservative, and it could sustain a high growth rate for years to come.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Comcast and T-Mobile US. The Motley Fool has a disclosure policy.

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