China Mobile (NYSE:CHL) shares have been hit hard in the last couple months, falling 15% against an S&P 500 that's been essentially flat. One big reason for this fall is news that China Mobile is cutting data rates by at least 35% this year in an attempt to convert more of its large subscriber base to 4G and to steal 4G subscribers from the competition. To complement this news, Infonetics expects spending on mobile infrastructure to remain high in 2015, much like the 51% increase it saw last year. Therefore, China Mobile is in a scenario where revenue could be lower and costs higher in 2015, something that no investor wants to see.
The reason this news is no big deal is rather simple: China Mobile operates in an industry unlike the U.S. where the wireless service provider can still find growth. Furthermore, the cuts aren't that bad. Just last year we saw this exact same scenario play out in the U.S. wireless space as T-Mobile launched a vicious price war that then impacted AT&T (NYSE:T), Sprint (NYSE:S) and eventually Verizon (NYSE:VZ). The only difference is that U.S. wireless companies weren't slashing data prices, or at least they weren't marketing it as such.
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Remember the "Double Your Data" promotion by AT&T? It's where AT&T doubled the data package on family share plans without increasing the cost. It was a "promotion" that just never really ended, and since then, carriers have launched even more aggressive plans like Sprint's aim to cut the bill of Verizon and AT&T customers in half while offering the same service. Therefore, one could argue that data prices in the U.S. have been slashed 50% to 75% since the beginning of last year. The only difference is that China Mobile plans to cut prices on existing usage, rather than just adding data to the top-line of a package (ie doubling data for the same rate).
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So in retrospect, China Mobile's cuts are relatively minor. However, while U.S. carriers battle in a mature market, aiming to steal subscribers from one another, China Mobile has an enormous market with untapped potential. Let's take a quick look at the numbers.
At the end of April, China Mobile had 153 million 4G subscribers. That's up from 90 million in last December and just 1.3 million in February of last year. In other words, China Mobile's 4G business is growing ridiculously fast. However, that large 4G user base hardly compares to its total subscriber count of more than 815 million, which increased 8.75 million from the end of December.
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With the overwhelming majority of U.S. wireless subscribers on 4G networks, investors have to assume that the same transition will occur in China as the network is built and then offered on a larger scale. Therefore, it doesn't really matter that China Mobile is cutting data prices by 35% or if it cuts prices by another 35%. Fact of the matter is the 4G market has enough upside in China via subscribers alone to support such cuts while still allowing for top-line growth.
Furthermore, investors can learn even more about the promise for China Mobile's 4G business once considering why U.S. carriers have cut prices so aggressively in the first place. In other words, the U.S. is a mature market, so if there isn't an opportunity for AT&T to double its subscriber count, then why double data allowances? After all, data is one of the few growth markets for U.S. telecoms.
The reason is because of the rate at which data consumption is expected to grow over the next few years. According to Cisco's latest VNI report, global mobile data traffic will increase nearly 10-fold between the years of 2014 and 2019, a compound annualized growth rate of 57%. As you might expect, China is expected to grow even faster than that.
Therefore, if the average smartphone user is going to consume 10x more data in 2019 than they did last year, then it makes sense for U.S. carriers to double data allowances now to ensure a large user base later. In other words, sacrifice revenue and profits now to gain much more later down the road. With that said, the same principle applies to China Mobile: Is it really a bad thing to cut data prices now when the consumption of data is going to grow at such a mindboggling rate? The answer, of course, is no!
All things considered, China Mobile is a company that created $25.89 billion in revenue during its last quarter. That's far less than the near $32 billion and $32.5 billion that Verizon and AT&T created, respectively, in a far smaller market with fewer subscribers. In my opinion, China Mobile's relatively small revenue per subscriber combined with its large network and the expected growth rate of data makes it one of the better investment opportunities in telecom, if not the best. Hence, this 15% pullback makes a great entry point for those who aren't afraid to sacrifice the threat of short-term loss (temporary revenue pressure from data price cuts) for long-term gains.
Disclosure: The author is long CHL. (More...)The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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Source: Why China Mobile Is A Common Sense Buy On This Pullback
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