Will Sprint Continue Rising from the iPhone 4S Disaster?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Less than one year after Sprint-Nextel (NYSE: S) announced its agreement with Apple (NASDAQ: AAPL) on October 7, 2011, the iPhone 5 is widely reported to be available for pre-order. September 12, 2012 is now the day the iPhone 5 hits the market, although many had expected it last year. When that did not transpire with the iPhone 4S being introduced instead, the share price of Sprint-Nextel was pounded. In a 24-hour period, Sprint-Nextel was downgraded by three analysts. As a result, Sprint-Nextel plunged from around $3.75 on September 1, 2011 to under $2.25 on October 10, 2011.
Fast forward less than eleven months later
Sprint-Nextel has more than doubled to around $5 a share. Year to date, the share price of Sprint-Nextel has risen 115.81%. For the year, earnings-per-share growth is up 16.79%. In large part due to the introduction of the iPhone 5, earnings-per-share growth for the next year is projected to increase by 39.40%. That is a very bullish trend as earnings-per-share growth for Sprint-Nextel over the past five years has been a negative 73.48%.
At this time last year, Sprint-Nextel was at a severe disadvantage to AT&T (NYSE: T) and Verizon Communications (NYSE: VZ), its two main competitors. While it was the first iPhone launch for Sprint-Nextel, it was the second for Verizon Communications and the fifth for AT&T. Sprint had to scramble about to train retail sales associates and customer service reps, stock inventory of iPhones and its accessories, and assimilate the new product into the corporate structure. The results were neither pleasing nor pretty to behold.
Focusing on its strength, unlimited data plans, Sprint-Nextel has been able to recover. The company has been able to meet the minimum iPhone sales objectives, so the $15.5 billion purchase obligation does not seem as onerous as it did before. That is manifested by the share price recovery.
Sprint now appears best positioned to capitalize on the iPhone 5 launch with its unlimited data plans as both AT&T and Verizon no longer have one. In addition, both actively penalize high data users. Sprint-Nextel will now be able to poach these customers from Verizon Communications and AT&T when their contracts expire.
In addition, while Sprint-Nextel is committed to the iPhone 5, AT&T and Verizon Communications are actively distancing themselves from the product. Due to the subsidy costs, earnings have been higher when less iPhones are sold. There are several new smartphones being introduced starting in late August and, based on precedent, betting against the iPhone 5 does not seem to be particularly wise. This results in an advantage for Sprint-Nextel if iPhone 5 sales are strong, as is expected.
Sprint-Nextel can further this advantage with the addition of an iPad or iPad Mini to the product line-up. While the margins are not as high as for the iPhone, any revenue boost is welcome. Not only that, it will relax more the contractual obligations of Sprint-Nextel to Apple for the minimum purchase commitment. It will also cement the ties with the hottest smartphone manufacturer, which is never a bad thing when in third position and competing with AT&T and Verizon.
At $5 a share, the supply-and-demand equation becomes altered for a stock. Sprint-Nextel could rise higher as more institutional investors can now buy the stock. Mutual fund managers like to "window dress" by piling into the hottest stocks. With Sprint-Nextel up triple digits for the year, there will be many institutional fund managers who will want the stock in the portfolio to impress investors. These momentum buyers will take the share price of Sprint-Nextel much higher if it performs well due to strong demand for the iPhone 5.
Now trading around $5, Sprint-Nextel is very close to its 52-week high of $5.49. A very bullish sign for Sprint-Nextel is that the short float has dissipated as its stock price has increased by 118.61% over the last six months of market action. Sprint is now in a position with its unlimited data plan to establish a significant competitive advantage over AT&T and Verizon when the iPhone 5 is released, especially with each moving away from closer ties with Apple. This time, the introduction of a new iPhone will push the share price of Sprint-Nextel higher, not punish it like last year.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.