To what extent can Sprint Corp (NYSE:S) stock sustain its dominant rally? This has been the biggest question on investors’ minds as S stock — up 132% in twelve months — has largely outperformed its larger rivals AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ).
Sprint stock, which has responded to the operational improvements under the leadership of CEO Marcelo Claure, has made investors rich.
S stock closed Friday at $8.50, yielding gains of more than 70% since rising from a June 2016 low under $5 per share. FBR Capital analyst David Dixon, who reiterated his Outperform rating on the stock and raised his price target to $11 earlier this year, still expects some 30% returns in the next eight months.
S Stock: Can You Hear the Profits Now?
Dixon sees Sprint benefiting from a combination of increased subscriber growth and stronger free cash flow in the quarters ahead. InvestorPlace writer James Brumley, who calls the situation with Sprint stock “really grim”, disagrees. Not a fan of Claure, Brumley believes heavy short covering has been a major factor in the gains Sprint stock has enjoyed. That’s tough to dispute given that some 20% of Sprint’s float is in the hands of short sellers.
But does that takeaway from the underlying fundamental improvements the company has made? In its fiscal third quarter, S grew customers with 577,000 total net additions. And not only did Q3 revenue grow nearly 5% year-over-year, easily beating Street expectations, but Sprint boosted its full-year outlook. Notably, the subscriber additions, which grew at the expense of Verizon, came from Sprint’s highest-profit contribution category, compared to those of Verizon and AT&T — albeit much larger — which resulted from promotions and discounts to grow subscribers.
Once thought to be on the verge of bankruptcy, Sprint’s total liquidity reached $9.1 billion as of the third quarter, including $6.1 billion in cash, equivalents and short-term investments. And that’s to say nothing about how the so-called “Paul Effect” — touting the reliability of Sprint’s networks compared to Verizon and AT&T — continues to resonate with wireless consumers. Known for his “Can you hear me now?” line, Paul Marcarelli has been a hit for Sprint.
The company’s string of successes has given it the confidence to want to end its long-time offer in which it charges half the price of certain plans its rivals offer. Sprint’s new pricing plan now excludes the 50% discount it used to offer as an incentive to lure rivals’ customers. This is in response to the unlimited data plans AT&T and Verizon has begun to offer. With subscriber growing at a strong pace, ending the 50% discount will mean higher profits in the quarters ahead.
Bottom Line for Sprint Stock
Sprint stock has declined about 12% since reaching its 52-week high of $9.65 in January. And that has created a solid buying opportunity, especially as the company continues to benefit from its combination of cost cuts and network investments. And with the possibility of a merger with T-Mobile US Inc (NASDAQ:TMUS) still on the table, there are tons of growth catalysts that can send S stock towards $10 to $10.50 per share, delivering 17% to 23% returns in the next 12 to 18 months.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
