LEAP of Faith
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a company begins offering the iPhone it usually is a big deal, but when the iPhone becomes available on a prepaid plan, people start to get very excited. This development with Leap Wireless (NASDAQ: LEAP), was chronicled recently on The Motley Fool by Rick Munarriz. In summary, his thought was this company isn't a household name, but by offering the iPhone on a prepaid plan, customers may "leap" at the chance to change.
Rick's other comments were the two largest wireless carriers make it harder to justify going with them because of the change away from unlimited data. Cricket, which is Leap's brand-name in the market, offers a bargain price of $55 for unlimited everything. There are a few problems with this theory. The first is, pricing is clearly not everything when it comes to the iPhone. If this were the case then Sprint (NYSE: S) would be seeing a much larger transition of both Verizon (NYSE: VZ) and AT&T (NYSE: T) customers over to its service. Sprint already offers an unlimited data plan with the iPhone, however the company's network of customers is not large enough to justify many people switching. One thing that AT&T and Verizon clearly understand, is the number of customers you have is a deciding factor in which network to go with. Given that both AT&T and Verizon have over 100 million wireless subscribers, versus about 50 million at Sprint, and just 6.2 million at Leap, makes this argument a nonstarter.
While pricing is important, and $55 per month for unlimited voice, text, and data, could pull in certain customers, many more people pay attention to who their family and friends use. In addition, I recently wrote that the Verizon Share Everything plans are not the horrible deals I first thought they would be. In fact, if you are a secondary user on an existing plan, you could actually pay as little as $40 a month for phone access and have unlimited voice and texts already. While this user would have to watch their data, the extra $15 a month they would spend at Leap, would allow them to move their data package up to the next level anyway. In addition, I would suggest that most customers going with Leap are looking to watch their budget pretty carefully. Rick's comment that, “sure, folks will have to pay retail for their contract-free smartphones” is astoundingly cavalier. To put this a different way, “sure folks looking to save money on their cell phone bill will have to pay $650 for an iPhone.” Something doesn't sound right about that statement.
Leap is expected to report a loss this year and into the future. The company has missed earnings estimates by a mile in three of the last four quarters. Did I mention the company sits on long-term debt of $3.2 billion? Sorry Rick, but this isn't a company to buy even with the iPhone. This leaves investors with a choice of either AT&T, Sprint, or Verizon. Of the three, Sprint has been free cash flow positive in three of the last four quarters, which is progress from prior years. However, the company has over $20 billion in long-term debt, and this debt has grown by $4 billion in the last year or so. AT&T is solidly cash flow positive, and pays roughly a 5% dividend. With expected growth of about 9.5%, Ma Bell could be a good bet. Verizon is also significantly cash flow positive, pays a 4.5% dividend, and is expected to grow at nearly 11%. This is a no brainer, two companies with financial troubles, two companies without. Of the two companies not in financial distress, either one is better than taking this LEAP of faith.
MHenage owns shares of Verizon Communications. The Motley Fool has no positions in the stocks mentioned above. 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.