On the heels of a 10% drop on Tuesday, Sprint (S) stock is already down 35% in 2016, making it the sole nationwide wireless stock that is not outperforming the market thus far.
At less than $2.40, Sprint stock is trading lower than it has ever traded with Softbank as its parent company. While many still think that Softbank’s leadership and money will help save Sprint, the fact is that S will soon reach penny stock status; it is inevitable.
The problems surrounding Sprint can be summarized in one sentence: It is nowhere near profitable, and debt is just piling up. Sprint has a free cash flow loss of $5 billion over the last four quarters and $32 billion in net long-term debt.
While Sprint plans to cut $2.5 billion in costs this year to try and close that free cash flow gap, S stock is caught in a no-win situation because it has three times more debt maturing this year than it did in 2015, at $3.6 billion. Hence, those cost cuts are canceled out with higher debt payments.
Seeing as Sprint did everything imaginable in 2015 to create aggressive subscriber growth, and still grew slower than its competing three nationwide carriers, it is almost impossible to imagine a scenario where Sprint actually grows in 2016 following higher data prices and a 10% reduction in costs.
When you put all of this information together, it shows a company in complete and utter chaos. That said, some investors will view Sprint stock as a value investment, and will buy S in spite of the chaos. However, that would be a huge mistake, with S stock on a clear path to becoming a penny stock.
Sprint Stock Is Worth Much Less Than This
The basis for this argument lies in Sprint’s valuation and its operating performance.
Sprint was a $7 billion company to start 2012, and is an $9.4 billion company right now. Yet revenues have stagnated since 2011, growing less than 3% in that time.
Furthermore, Sprint’s debt was less than $23 billion when 2011 ended, and S stock posted $429 million in free cash flow during that year. In other words, Sprint now has 40% more debt, slightly lower revenue, and is nowhere near cash flow positive. Yet, today’s Sprint is more valuable! None of it makes sense.
If Sprint was worth $7 billion four years ago, then how could it possibly be worth $9.4 billion today?
The mistake that many investors make is assuming that big stock losses create value. That’s not always true, however — and it’s definitely not the case with Sprint stock.
Given this valuation disconnect and operating performance, one could make a valid argument that Sprint is worth no more than $5 billion, maybe even less given its lack of profits and its unfavorable debt profile. In that event, Sprint stock is actually worth $1.25, which represents a painful 48% drop from current levels.
As of this writing, Brian Nichols does not own positions in any of the aforementioned stocks.
