Scrappy Sprint Should Survive
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sprint (NYSE: S) raced ahead this August with stellar second quarter results, handily beating estimates and pointing towards a tighter race with arch rivals AT&T (NYSE: T), Verizon (NYSE: VZ) and T-Mobile.
Five takeaways from June 2012 earnings
iPhone sales rang in at 1.5 million, cumulatively topping 4.5 million since Sprint signed the contract with Apple (NASDAQ: AAPL) last October. Sprint is on the hook for $15.5 billion to Apple over four years and with activations of 1.5 million iPhones each quarter, Sprint should be able to put this bogey to rest.
ARPU (Average Revenue per User each month), increased to a record high of $63.38, an increase of $4.61 on the back of the iPhone. Of the 1.5 million iPhone subscribers, 40% were new. Commendably, this trend continued over three quarters (Q4-11, 40% new out of 1.8 million, Q-1-12, and 44% new out of 1.5 million)
Sprint also managed to keep a larger number of Nextel subscribers within its fold – reversing a trend, which usually saw a migration to AT&T and Verizon. Sprint is dumping Nextel and transferring their subscribers to the Sprint platform.
In spite of large outlays to build the new 4G LTE and Sprint platforms, cash actually improved and Sprint pre-paid a loan of $1 billion.
Post Paid Churn reduced to 1.69% from 2%. Since the cell phone market is saturated, churn is the best benchmark of mobile performance. If this trend continues, Sprint should take more subscribers away from Verizon and AT&T.
Should we buy now?
Unfortunately for those who didn’t call on time, the stock sprinted from $3.37 to $4.05 on July 26th and has moved to around $5 since.
Investors like me will want to buy on dips and should do so, but with these caveats.
Going all in with the iPhone instead of folding has turned out to be a gutsy and successful move so far for CEO Dan Hesse. Now comes the hard part, differentiating yourself from the field.
The most attractive reason for buying this stock is not just the iPhone but that Sprint is playing to Apple’s demographic well by keeping things simple. If I had to choose between a simpler, cheaper alternative like Sprint and a convoluted, expensive plan where I have to keep tabs on usage at a supposedly faster speed -- I would more likely go for the unlimited data plan. Thankfully Sprint is not pitching it as a cheaper plan but as a truly unlimited plan.
Look out for the speed bumps
Clearwire (Sprint owns 48% of Clearwire) is not even close to sorting its own problems of rollout, demand, spectrum availability, and shortage of cash.
Sprint’s 4G LTE (fourth generation network) is not available in more than ten markets, way below Verizon’s 230 and AT&T’s 35. Management does not believe that this is going to be an issue.
All these huge increases in subscriber adds and ARPU growth are on a small base; in 2013 and 2014 Sprint is going to find it more difficult to grow as fast. The cell phone market is saturated and most subscriber wins are at each other's expense. However, more importantly the smart phone market is not.
Sprint is still at least two to three years away from profitability and any valuation benchmark is going to be a percentage of sales. Sprint has already climbed to 43% of sales – to a great extent most of the good news is factored into this price.
With all the hoopla of the iPhone, Sprint’s 2nd quarter 2012 revenues have gone up only 6% over 2011. Even after two years Sprint is going to be valued as a percentage of sales – there won’t be profits to assign a price/earnings multiple. Both Verizon and AT&T, with about three times Sprint’s revenues are valued at 1.12 and 1.71 times sales, respectively. If we were to value Sprint at 50% of assumed 2013 sales of $35.84 billion, Sprint’s market cap could increase to $17.9 billion -- about 18% higher over the next 12-18 months. Not a sprint anymore but a steady crawl.
Valuation aside, I believe scrappy Sprint will survive, and some of the accolades from its consumers remind us that Telecom companies are supposed to be about good service. Sprint should drive this point home on its simple unlimited plan – it does work well reinforcing its image as the scrappy underdog against the other big evil Telecom companies that are gouging the customer.
poach 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.