SaleStockClearanceT-Mobile has come up with a new plan to get you to switch your service.  They want to give you the company.

Well, I suppose that might be a little strong, but it’s the idea behind their new “Stock Up” plan.  Personally I use Google’s Project Fi service, but this idea is strange enough that I couldn’t let it pass without comment.

Basically if you refer a friend to t-mobile you and the friend get a share of t-mobile stock once they start service. Additionally, if you switch to  What’s that worth?  Well, it currently trades at $43 per share, so by the metric of refer a friend promotions, this isn’t crazy good.  The interesting part, in my view, is that it aligns the interests of the customers of T-Mobile with the owners of T-Mobile.

What is T-Mobile’s Stock worth?

Well, that’s a good question. Generally when people own telecom stocks like AT&T or Verizon they own them in order to enjoy the dividend the stocks pay.  A dividend is a share of the profits that the company pays to the owners (shareholders) of the company.  T-Mobile doesn’t pay a dividend.  The company has decided to retain earnings in order to continue to expand.  They do this so that in the future they will be able to pay more money to their owners than they would if they paid out that money today.  This makes the company kind of an odd-duck in the telecom world, and might make it hard for people who ordinarily buy telecom stock to decide, what is this thing worth?

The Efficient Market Hypothesis basically states that the company is worth whatever the last trade was, so roughly $43.  There is, however, another method of determining what a stock is worth.  This might be called the value investing approach.

In the value investing approach you start by trying to determine the worth of a business to a private buyer.  Imagine if you were to own all of T-Mobile.  It earned $733 million last year.  It also has grown from $24 billion in sales to $32 billion in the last two years.  What is that company worth to you?  (If this is a hard question, don’t worry there is a method for figuring out the answer.)  Suppose for a moment that we have an answer.  Suppose that the answer was $80 billion dollars.

So how does this tell us what a share of T-Mobile stock is worth?  Well, the company is owned entirely by the shareholders.  If you add up the value of all of their shares you should get that $80 billion number.  This means that all we have to do to determine the worth of a single share is to divide $80 billion by the number of shares outstanding.  You can look up the number of shares outstanding (822 million), as well as other important and useful information about the company on a finance portal.  Personally, I’m partial to finance.yahoo.com.  Long story short this gives us a value of about $96 per share.  Well, if that were the case this t-mobile promotion would look a lot more interesting.

Is that the case?

No.  The $80 billion figure I used was a random guess.  In order to determine what the value of the company ought to be, you really need to determine what all the money it will ever make is worth today.  If that sounds hard, that’s because it is.  Generally the way people try to determine it is to simply look at how much money the company made in the past, and then try to determine if those past profits are stable and will continue into the future.  Can we do that with T-Mobile?

How much does T-Mobile make?

If you average over the last three years, T-Mobile has made roughly 1 billion dollars.  The trouble with telecoms is that they require huge capital investments to keep the company going and customers happy.  This can sometimes mean that the official income numbers don’t really reflect reality.  A telecom could have a huge income, but if it has aging equipment it might end up spending even more doing replacement and maintenance.  This can also mean that income will be suppressed in the near future as depreciation charges will be larger.

T-Mobile looks okay on this count.  For the past 3 years they’ve spent about as much on capital expenditures as they’ve taken in depreciation charges.  This generally means that they’re treading water on the investment front.

If T-Mobile can continue to grow sales at the rate it has been over the last few years (big if), I estimate that the next 3 years will make T-Mobile about $7.5 billion (1.5 in the first, 2.5 in the second, and 3.5 in the third).  From there on I assume that T-Mobile will stop growing and continue to make about $3.5 billion per year.  Now all we need to do is add up those future earnings to get the present value of T-Mobile.

Unfortunately we can’t just add the numbers up, because $2.5 billion dollars is worth more to you today than it is 100 years from now (even without counting inflation). This is because you could invest the money if you got it today and then end up with more money 100 years from now.  This means that future payments need to be discounted by an interest rate to determine their present value.  This rate is called the discount rate.

You’ll notice that I can get just about any answer I like for the value of T-Mobile by adjusting the discount rate.  I’m going to use a discount rate of 8%.  There is a formula for doing this, but with some mathematical trickery we can reduce the problem to 1.5 / 1.08 + 2.5 / 1.08^2 + 3.5 / 1.08^3 + 43.75 / 1.08^4.  This works out to a present value of T-mobile equal to $38.5 billion dollars.  We then divide that by the number of shares outstanding (still 822 million), and figure that the value of a share of T-Mobile stock is $46.

Basically that means if everything continues to go right for T-Mobile the stock is worth, about what its worth right now.  To me that indicates that there’s a bunch of risk in T-Mobile, I wouldn’t buy their stock.

But…

Since we’re getting the stock free from their Stock Up plan, I probably wouldn’t worry about it.  I’d just sit on the share, or shares, figuring that it’s a very small portion of my net worth, and I should be invested in the companies that I spend money on.

Nuts and Bolts

In order for you to actually claim your share of T-Mobile stock you’ll need to sign up with the Loyal3 brokerage.  Here’s our review of Loyal3.