2012 has been a sizzling year for telecom also-ran Sprint Nextel (NYSE:S) — despite Thursday’s 4% losses, the stock’s 120% run has made it one of the market’s best performers year-to-date.
But considering that monumental rise has the stock currently above $5 just five years after it was trading in the low $20s … well, investors might want to proceed with a little caution. Or maybe even head back toward the doors.
Sprint has made real strides in improving its business. In the latest quarter, the company generated $209 million in free cash flow — an impressive feat in light of the large investments the company had to make in its network infrastructure. In all, Sprint has $6.8 billion in the bank.
The company also showed progress with its key metrics. For instance, over the past year, the postpaid average revenue per user increased by $4.31 to $63.38, a record. Sprint also has been getting control of its churn, which came to 1.69% in the quarter — also the best in the company’s history, and an indication that its efforts to improve customer service are getting results.
Sprint is on track with its Network Vision plan, in which the company is deploying new 4G LTE service — it’s currently available in 15 cities, including five major metro areas, and the upgrade should be complete by the end of 2013.
As for the Apple (NASDAQ:AAPL) iPhone business, Sprint certainly is getting a nice boost there, too. After all, about 40% of the activations represent new customers — and these customers typically have low churn rates.
All of this sounds good, right? Definitely. But there’s a little trouble behind the good, and investors need to pay attention to these important factors.
First, Sprint has taken a low-cost strategy, which has differentiated the company from its duopolistic rivals, AT&T (NYSE:T) and Verizon (NYSE:VZ) — but which pressure margins, especially as its members continue to take full advantage of Sprint’s unlimited data plans. And Sprint might reach for a dictionary if you said “profits” within earshot.
Also, the adoption of the iPhone business is nice, but far from a cure-all. Sprint is on the hook for at least 30.5 million devices through 2014, and that deal involves major subsidies. Ergo, any slowing of iPhone sales could prove to be a big problem. Considering the persistent weakness of the global economy, and the high price of iPhones, this is entirely possible — despite iPhone’s mania.
Meanwhile, Sprint still must spend heavily on advertising to compete against AT&T and Verizon, which have the lead with their own LTE networks.
Sprint has done a tremendous job pulling out of its slump, and it continues to rack up private and governmental deals. But the company still is subject to a number of risks, and perhaps the biggest is the new iPhone, which could put Sprint’s stock price in jeopardy if reception is anything but fantastic.
While a continued revival might be in Sprint’s cards, it has made an almost unchecked run for a company with plenty of red ink and near-dominant competition. If you’ve been in Sprint and enjoyed part of this year’s doubling, do yourself a favor and take some profits. You’ll probably have a chance to get back in for a discount.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.