In this podcast, Motley Fool analyst Jason Moser and host Mary Long discuss T-Mobile's latest purchase and why Elliott Management has a beef with a company that's trading at all-time highs.
Then, Motley Fool analyst Yasser el-Shimy joins for a look at Rocket Lab, the end-to-end space company.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 28, 2024.
Mary Long: A Telco company go shopping. Again, you're listening to Motley Fool Money. I'm very Mary Long, joined today by Jason Moser. Jason, thanks for being here and joining after a lovely long weekend.
Jason Moser: Happy to be here Mary. How was your long weekend?
Mary Long: It was a great. I am reaping the benefits of springtime in Colorado and was able to ski, golf, and go to a baseball game all in a single day on Saturday.
Jason Moser: Well, I didn't know that you played golf now my interests is peak. We probably haven't saved craft the shovel will need to catch up on that.
Mary Long: We can. We can save it for after. To kick-start off on the short week, we've got an acquisition and some activism going on. First story is that T-Mobile announced this morning that they're planning to acquire most of U.S. Cellular for $4.4 billion. First question that might come to mind is, what is most T-Mobile gets U.S. Cellular stores, four-and-a-half million wireless customers, 30% of its spectrum assets. U.S. Cellular gets the remaining 70% of those spectrum assets and gets to keep ownership of its towers. Jason, first off, what are spectrum assets, that feels like an important piece of this equation here, and why is it being chopped up?
Jason Moser: It is. Spectrum just in the simplest terms, immobile spectrum. It's the radio frequency that mobile companies use to communicate over the airwaves. You'll hear terms like low, mid or high band spectrum. But ultimately it's the airwaves that these mobile companies use to transmit their signals, their information.
Mary Long: You've given it an overview of the basics of this deal. Can you give us a sight of what each side would really be walking away with your help us peek under the hood a bit?
Jason Moser: It's an interesting deal. When you look at U.S. Cellular, they operate what's called a regional wireless networks. They're like Verizon or AT&T, but much more limited in the areas that they cover. The interesting part of the deal for T-Mobile is these are areas where T-Mobile's presence is weaker to nonexistence. Ultimately, this helps expand T-Mobile's network of coverage. You mentioned U.S. Cellular keeping some of the spectrum and the towers. I think that's important to note. If you look at what U.S. Cellular owns, mobile towers, you see those things everywhere, and they're ultimately would help us all connect. U.S. Cellular owns and leases cell towers to provide services. If you look at the numbers there, as of December 31, 2023, they had 7,000 cell sites in service, of which U.S. Cellular owned 4,373. Being able to keep these towers and lease that out is a nice little deal for them. T-Mobile also agreed under the deal to extend leases on 600 US cellular towers that it works with and then long term leases on about 2000 more of them. Ultimately, this solidifies that relationship in reliability. U.S. Cellular knows those towers that they have are going to keep on being used by T-Mobile and ultimately T-Mobile being one of the big providers out there. That means some reliable, some steady and reliable income for the foreseeable future. Then ultimately you mentioned that T-Mobile gets 4 million new customers from all of this, and they get the spectrum rights to carry more data for. This is the business about scale. The bigger you are, the better you are. For T-Mobile, getting more customers, more spectrum, this expands their network and makes them more competitive with the two real familiar names in this space being AT&T and Verizon.
Mary Long: You just laid out a good case for why T-Mobile wants to make this acquisition of part of U.S. Cellular. There have been whispers about this deal for a while. U.S. Cellular's parent company, telephone and Data Systems, first announced it. It was looking for strategic alternatives, looking for a buyer last August. Why do they want to ditch this regional provider?
Jason Moser: It requires a lot of upkeep, and it requires a lot of capital spending. It's an extremely competitive market when we're talking about mobile connectivity and when you consider the big players in the space, again, looking at Verizon, AT&T and T-Mobile, I mean, it's just very, very difficult to compete with those large networks when you are a small network. In this case Size really does matter. The largest network or Networks typically win. This is going to give them a chance to offload something that is going to require, I think constant capital spending in order to upkeep and even more capital spending to really expand. Even then, there really is no guarantee that they'll be able to meaningfully compete with the larger players in the space.
Mary Long: The name of the game in this is consolidation. What does continued consolidation in this space mean for investors in these companies, but also for consumers?
Jason Moser: Well, this is something we will certainly see us go through regulatory review. My suspicion is it will likely go through, the structure of the deal is not so simple as we've covered here. But ultimately, these companies are going to need to behave themselves. I think it's safe to say that mobile connectivity today is just a must. In regard to these companies, the consolidation in the space when you really whittle it down to just three main players in this space, you don't want to see anything like price-fixing or other forms of collusion. When you depend on a small number of providers for I will call them necessary services at this point, the concerns on the consumer's part, those are very understandable. That consumer just doesn't have a lot of pushback. It's not like we haven't seen price fixing and collusion before. If you look at just some examples of big players trying to use their scale to their advantage. If you go back, I think it was 2012, there was Apple with the e-book publishers writing. There were several major publishers that were found to have agreed on price-fixing for e-books, which ultimately lead to higher prices. There were finds in requirements to change business practices there. If you look back to 2006, airlines went through something very similar. Consolidation oftentimes can result in stronger companies that can provide better services. In theory, competition should bring those prices down. But we want to make sure these guys are on the up and up and not doing something that ultimately hurts consumers.
Mary Long: It's worth noting that this isn't T-Mobile's first acquisition. They recently we're just cleared to purchase Mint mobiles parent company. They acquired Sprint in 2020. So growing by buying seems to be a really key part of their strategy here. And it's also seemed to pay off. T-Mobile's handily outperformed both Verizon and AT&T over the past five years and three years and the past year, are there any risks to the strategy that you're keeping an eye on? Or does this seem to be the best way forward for T-Mobile?
Jason Moser: I think it's probably the best way forward. Anytime you make acquisitions, you just want to make sure you're buying a productive asset and paying an appropriate price for it. I think when you consider T-Mobile and Verizon and AT&T, if that's more your speed. Probably the bigger concern with these companies is just their debt loads. Are companies that require a lot of ongoing capital spending in order to maintain those networks. But you look at the debt loads on these companies. They are not insignificant. T-Mobile, long-term debt, $73 billion, Verizon long-term debt, $127 billion, AT&T's $137 billion. Those are, those are some eye-catching numbers. Now, by the same token, it's worth remembering that that's kind of the model that utilities more or less follow, right? They're very reliable because they're providing necessary services. So they're able to run those debt loads up because they know that those revenue streams are going to be fairly reliable. But you know how much they can charge those utilities. That's something that you want to keep an eye on because ultimately, you don't want to see those debt loads get so far out of hand that companies either A, can service them or B, have to raise additional capital or C, oftentimes these utilities and one of the, one of the more attractive features of investing in these types of companies is that they often times can yield very robust dividends. Sometimes when those debt loads get out of control, those dividends get cut. Sometimes very meaningfully.
Mary Long: So with those debt loads in mind, are there any red flags that stick out to you with this acquisition in particular, it's a part cash part debt deal. Do you feel good about T-Mobile's prospects moving forward with that or is that something that you're wary of?
Jason Moser: I think on the whole you have to be you have to feel pretty good about this. T-Mobile has really done a great job over the last several years executing a building out this business. This is not something that's new for them, this is part of that strategy is finding those assets that can ultimately expand this network in going back to that U.S. Cellular network in the regions that they provide. It gives T-Mobile more exposure to areas where they just don't really have any presence. So it does seem like they're paying a fair price for it. It's ultimately going to result in expanding that network, making them larger and more competitive. So that's ultimately a good thing I'd say.
Mary Long: We've teased out this talk of the big three in the wireless space, T-Mobile, Verizon, AT&T. Keep in mind everything that we've said this morning. Do any of those companies seem like attractive investments to you for their dividend payouts or for other reasons?
Jason Moser: You know, they're not really my speed. I'm just not that interested in utilities. I loved the dividends side of it. The debt loads are always they scare me a little bit. I don't own any of these three. I don't know that I have any desire to. But by the same token, for income-seeking investors, they are absolutely Steady Eddie investments and we know they're going to be around for a while to come
Mary Long: Another story we've got this morning is that Elliot made a two-and-a-half billion dollar investment in Texas Instruments. The activist hedge fund wants the company to improve its free cash flow by loosening up its capital expenditures plan. Will get to the details of that in a minute. Whenever I hear Texas Instruments, I can't help us go back to high school and think of that TI 89 calculator. But there's more going on to this company than just calculators. So how does Texas Instruments fit into the semiconductor landscape?
Jason Moser: Yeah, so you look in their 10-k, the very first sentence, it says we design and manufacture semiconductors that we sell to electronics designers and manufacturers all over the world. So it's a semiconductor company first and foremost, and analog is 75% of their business. So analog semiconductors are ultimately semiconductors that change real-world signals, sound or temperature, images or whatever, and ultimately amplifying convert them into digital data, given where we are in this tech evolution. It's a company that absolutely plays a very important role.
Mary Long: So what's Elliott's problem with Texas Instruments? Because they're a company that's trading at an all-time high right now. So what's the beef?
Jason Moser: Yeah. I think it just boils down to Texas Instruments' capital expenditure plan. They laid it out that they were really looking to adhere to a rigid and firm capital expenditure plan to build out the capability to supply in a world where semiconductors are in constant demand. Elliot feels like that rigid stance is leaving a little bit of money on the table. So they believe that if Texas Instruments could be a little bit more dynamic in how they're utilizing that capital expenditures structure. It would free up some cash flow, which ultimately is a good thing for investors.
Mary Long: Yeah, the planet Elliott's laid out, it lays out a proposal for Texas Instruments to achieve free cash flow of $9 per share by 2026. That is a huge leap from where the company is today. This year, they're expected to generate less than $2 per share and free cash flow. Do you think that that plan is actually viable?
Jason Moser: It is aspirational, no question about that. It's it is doable. I think the bigger question is, if they do resort to a more dynamic investment model there, does that impact their competitive position? Because as we know, the semiconductor space is an extremely competitive one. So hitting the numbers I think is one thing you can do that. But the bigger question is, is that the correct long-term strategy, or is that something that ultimately erodes their competitive position?
Mary Long: Do you have a take on that? Do you think that being more flexible with their capital expenditures plan would change the long-term play for this company?
Jason Moser: I tend to like being a little bit more flexible with companies in their investment strategy there. So I think for me personally, I would much rather see, you know, that old saying when the facts when the facts change, it's OK to change your mind right? In I think with a business like this, certainly, things change in it and I think that companies need to be flexible in the changing competitive landscape. So for me personally, I liked the idea. Ultimately for a company this size, particularly in this competitive market, being a little bit more flexible strikes me, is probably the better mute.
Mary Long: Yeah, we like when management does what they say they're going to do. But as you said, when facts change, it's also good to see flexibility and mindset there as well. Jason thank you so much for hanging out and chatting with me today. We should end this recording so that we can talk about golf.
Jason Moser: I love it. Thanks so much, Mary.
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Mary Long: We tend to hear a lot of the same names when we talk about space. Up next, full analyst, Yasser El-Shimy joins me for a closer look at Rocket Lab, a space company that does a lot more than launching rockets. Yasser today we're talking about Rocket Lab, which labels itself as an end-to-end space company. I know what space is, I know what a company is, but the end-to-end part, maybe for the uninitiated, can you walk us through what that means?
Jason Moser: Absolutely. Most people actually, when they think of Rocket Lab, they only think of it as a rocket launching company, but it's a lot more than that. Rocket Lab certainly started out in the business of building and launching rockets, carrying small satellites into space. We've seen that develop over, about a three-year period, starting in 2014-2017. But since then, they have expanded into the rapidly growing field of space services. What that means, in a nutshell, that they make the software, the hardware of the satellites that go into space. They do troubleshooting, they do maintenance of those satellites that are deployed in an orbit. Perhaps a surprising fact to many listeners is that this space systems segment of Rocket Lab actually takes like, the lion's share of the total revenues of the company. About 3/4 of the total revenue of Rocket Lab actually comes from space systems as opposed to just the launching part.
Mary Long: You teased out what that segment does, and focuses on. Can you give us an example of some of the different platforms, and the technology that's being offered in that segment?
Jason Moser: They have been building custom satellites for their customers through their Photon satellite platform. What Photon basically is, it's a customizable platform that can be tailored in order to meet any mission's requirements. So that mission can be for earth observation, scientific research, for communication, as I explained earlier. What they can do here is that they can effectively build the satellites themselves on behalf of their customers. So the customer would come to them and tell them, ''hey, I would like to send a mission to hover, or to orbit around the North Pole to try and measure, perhaps, infrared radiation in that area '' which actually, an example of a real mission, I'm not just making that up. Rocket Lab will be able to effectively build the satellite that perfectly meets the requirements of such a mission, effectively from A-Z.
Maybe they're going to import some scientific measuring equipment that they don't manufacture in-house. But otherwise, everything that's related to the rocket, to deploying it, and the exact spot, to the satellite itself, to how that satellite operates, both from a hardware and software perspective, all the way even into the powering of it through, perhaps, solar panels. All of that can be made in-house by Rocket Lab. You mentioned earlier that being that end-to-end space company, that's exactly what the aspiration has been for Rocket Lab, is that it's a one-stop-shop, people can go to it, can ask them to do multiple things at the same time. That obviously is a strong proposition of value to any potential customer who effectively does not want to be handling a lot of different vendors here and there, getting different components from different companies, and stitching them together and then renting a rocket at the very tail end. I think there is a lot more, let's say, potential profitability that can be made in that space systems part of the business that should hopefully so kicking in future years.
Mary Long: Anytime that I just begin to look into a space company, I'm amazed and overwhelmed by all the different projects that they seemingly have going on, and Rocket Lab is no exception. They've got a lot of different irons in the fire here. If you spend any time beginning to look into this company, I think there's going to be three names, the different projects that stick out. So I want to go over those to give people a better idea of what they are. One name that you're going to see is Electron. That's a launch vehicle that gives small satellites rides into orbit. Basically, it gets rented out to commercial and government customers. It's reusable, it's now flown, I think 47 times. Similar to that, is Neutron. This is still in development, but it's basically Electron on a larger scale. It'll be able to carry larger satellites, go further distances, and its semi-reusable. Then there's also Photon, that's another name that might stick out if you start exploring the Rocket Lab universe. As you mentioned, that's a spacecraft platform. It can be used for a scientific research, imagery, remote data collection, lunar, and deep space expeditions. I believe it's been selected to support NASA missions to the moon and to Mars. I've also caught wind that will be used for a private mission to Venus, in search of life there. Lots of different things going on, as we mentioned, which of those endeavors is most interesting to you?
Jason Moser: That's a tough one. I think, for me, they've got the Electron rocket and the Photon satellite platform down. Now what's really interesting to me, is what are they going to do with the Neutron rocket? Which we should mention is in development. It's not, has not been tested, it has not. They're still working on it. I think they're still working on that engine that they're growing, the Archimedes, I believe it's called. Now. But let's establish like why do they need a Neutron rocket to begin with? Isn't the Electron good enough? Well, the Electron does its job very well, and that job was to carry small payload into lower Earth orbit. Meaning, you have a couple of satellites, maybe one satellite you want to launch into space quickly, on a budget.
The Electron is probably your best bet. It's going to get you there. It's going to get you in the exact location that you're looking for. It's going to get you there a lot, perhaps, less costly than if you were to buy a Falcon 9 rocket from SpaceX, which would set you back $50 million or so. Electron is about $8 million, so huge difference there. Now, the problem though, is that electron could only fly up to maybe the moon. They've done that successfully. But it can venture beyond that very much. It also can only carry a payload up to 300 kilograms, which is not that much, and it's not capable of supporting a human pilot. You just basically launch the rocket into lower Earth orbit, or at most to the moon with a small payload, and that's all you do. Now the neutron, they're trying to meet a growing need for ever-larger satellites, and in fact, the deployment of what they call constellation of satellites, all at once. Now you have some customers who are interested in deploying not just one or two satellites. They want to deploy a whole constellation of satellites to achieve, for various scientific, or national security, or other purposes, or communication purposes.
They want to have that constellation deployed all at once. So they're working on the Neutron, which would be a much bigger version of what the Electron has been. It can carry up to, I believe, 13,000 kilograms of payload into lower Earth orbit, or as little as 1,500 kilograms to Mars and Venus. It's also able to support an astronaut onboard, which would be, again, great for a space exploration perspective. So it definitely increases their end-market substantially, if they're able to make that Neutron rocket work. I believe there's definitely going to be demand for it and they will be, perhaps, in more head-to-head competition with the likes of SpaceX and Blue Origin once they do so.
Mary Long: So this company is launching rockets, it's moving quickly. It went public via SPAC in 2021, and since then, the stock is down over 78% from its high. It's marking off all these accomplishments, why is the stock not responding accordingly?
Jason Moser: Well, I think this is one of those classical stories of diversions between the stock and the fundamentals of the business. That's not to say that the market has fundamentally wronged Rocket Lab stock. I think the problem is, we all remember that COVID mania when it came to stocks, especially SPACs, back in those crazy wild, 2020, 2021 days. When Rocket Lab first game to public markets via SPAC, it had a valuation of nearly 170 times sale at one point. Again, 170 times sale. That's very, very, very, very, very expensive. So I can be bullish on a company, but that was just nuts, [laughs] if I may say so myself.
Here's the part that I have to issue the disclaimer. This is an unprofitable company, it's a cash-burning company. Therefore, if you are interested in this business, you have to look at it or approach it from a speculative investment type of perspective, and that's fine. I believe, personally, that every portfolio should have some room for some of those wild bets, or speculative investments that can have, perhaps, binary outcomes. This is however, not a pre-revenue company. So we have seen also a lot of SPACs that came to market, that did not have any sales whatsoever. They were merely just business plans with fancy PowerPoints. We have unfortunately, seen the failure of, actually, several rocket launching companies that came to the public markets via SPAC, including AstroLabs and Firefly. There is actually a real business with Rocket Lab. They are making money, they're selling stuff. They're not making money on the bottom line, yet.
But look, if you look at this, again, as I said, as a speculative hypergrowth investment, we're looking at a company that trading up, maybe less than 10 times 20-27, EV-to-EBITDA. That is enterprise value to earnings before interest, tax, depreciation, amortization. If you pause for a moment, and reflect on the fact that the latest capital raise round for SpaceX valued the company at $180 billion, compared to Rocket Labs enterprise value of $2 billion, you can see that there's maybe some room for growth here. Of course, SpaceX has a huge leader in the field, and its revenue far eclipses that of Rocket Labs. But if we believe in the Rocket Lab management and what they're saying and the kind of projects they're working on, the successful track record in terms of their Electron launches, so far, and building out that space systems side of the business. If they are hopefully, successful with the launch of the Neutron down the road. Maybe there's something.
Mary Long: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks, based solely on what you hear. I'm Mary long. Thanks for listening. We'll see you tomorrow.
