New Carriers Pushing Sprint Lower -- But Will Have Little Fundamental Impact

By Brian Nichols - October 4, 2012 | Tickers: AAPL, S | 0 Comments

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Sprint Nextel’s (NYSE: S) 2012 rally may be coming to an end after the stock lost 6% of its value in the first three days of the week. There are some signs that its rally is losing steam, as it has been more difficult for the stock to maintain levels above the $5.20 range. In some ways Sprint may benefit from a good pullback, as its traded higher throughout the majority of Q2 and Q3 of 2012. Eventually, all stocks see a slowdown in momentum. And with Sprint's rally being more related to the potential of the iPhone to its business rather than key developments it is likely that investors want significant fundamental improvements before taking the stock higher. Therefore, after a 120% gain in 2012, investors may want to see signs of profitability in the future, as the company is now getting too expensive to buy on the pure basis of speculation. As a result, it makes sense that Sprint would trade significantly lower following negative comments including a questionable outlook from an analyst and reports of new competitors in the iPhone 5 distributor market. With that being said, how should investors play this pullback and how relevant is the addition of new iPhone carriers to the future of Sprint? Is this a buying opportunity or is it a chance to take profits? 

For anyone who has ever followed my Sprint articles on Seeking Alpha you know that I’ve gone from one extreme to the other. In 2011 I genuinely hated the stock, but towards the end of 2011 when the stock was trading under $3, and the company had bought the rights to the Apple (NASDAQ: AAPL) iPhone, I became the stock’s biggest cheerleader. Because after all, Apple is a game changer. It has the most sought after devices and it was Sprint's inability to sell Apple products that led to much of its loss during the iPhone 3 and 4 eras. Therefore, when the stock was trading at a lower level in 2012 with the iPhone, than in 2011 without the iPhone, it seemed like a can't miss opportunity, and ten months later I have been proven correct.

When the stock was trading around $2.40 I couldn’t shut up. I was telling anyone who would listen to buy the stock. And over a course of a year I’ve been pretty good at calling its trends, if I may say so myself. But after its recent loss, something feels different, and Sprint has been a volatile stock throughout its trend higher. However, I believe that the threat of increased competition and the addition of new carriers is creating a sense of fear in the minds of investors. The iPhone is everything to Sprint, its clear path from bankruptcy to profitability, and the thought that it could lose potential customers due to new carriers is a scary thought to some investors. Personally, I view the additional carriers as a non-issue, but in regards to Sprint's valuation, I do think it has reached a level of resistance and will trade volatile within its current range until the fundamentals push it higher, or lower. 

New Competition

According to PC Mag, local wireless network companies Cellcom, nTelos, Appalachian Wireless, C Spire, and GCI are all getting the iPhone. In addition, prepaid provider Cricket Communications will also sell the phone, starting at $499.99. Most of the local, and smaller, network providers are offering discounts to customers on the iPhone 5, and this threat of adding six new carriers has created a lot of panic on behalf of Sprint shareholders.

I think sometimes people forget the size and presence of Sprint. It’s not a local provider, but rather a large company, that has a comparable number of locations to companies such as AT&T and Verizon. These new carriers are local carriers, and some are in locations where Sprint doesn’t even exist. For example, Appalachian Wireless is a provider in the Eastern Kentucky region of the country. I know this because last weekend I was in this area, visiting my wife’s family in her hometown. It’s a very odd place. In order to reach the destination you go up and down around and around then eventually after 100 miles down a two lane highway you pop up on a fairly decent city at the bottom of a crater that calls itself Pikeville (no pun intended). Now, while visiting this town I had virtually no service, and I use AT&T. I actually made the joke (which they didn’t like) and asked how they communicated? There answer was “Appalachian Wireless”.

Unfortunately, I wasn’t in Pikeville long enough to know whether or not the city has AT&T or Sprint. But from what I saw, Appalachian Wireless was the primary carrier for this small region of the country. In my opinion, the fact that this carrier is providing its customers with the iPhone is irrelevant for Sprint. In fact, the only carrier that could have some effect is Cricket, but then again since it doesn’t offer contracts the price is very expensive compared to the three larger carriers.

I may be wrong, but given the choice I have to believe that most customers prefer one of the three large carriers. Obviously, in places such as Pikeville, KY, the clear choice is Appalachian Wireless because it has the best network for that specific area. At this point, Sprint still has Nextel customers to convert, and still has the unlimited data that is appealing to customers. In terms of size and valuation the stock is still attractive, but I do think it could continue to pullback. It has been a great rally for Sprint, and for my sake I hope it continues, but after a large YTD rally and questions surrounding its immediate growth, a pullback does seem likely and perhaps a healthy possibility. But, I don’t think the new carriers will have too much of an effect on Sprint, therefore making this pullback an opportunity. 

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