Sprint Corp (NYSE:S) got a huge boost last year when reports began circulating that controlling shareholder Masayoshi Son was more interested in launching a $100 billion venture fund than pursuing his old dream of global mobile domination and thus might offload the carrier. Since the start of the year, however, the rumors have kept flying while S stock has gone nowhere.
This is not entirely a bad thing. AT&T Inc. (NYSE:T) is down 8.9% for the year, and Verizon Communications Inc. (NYSE:VZ) is down 10.4%, despite their second-quarter earnings surprises. Hanging in is a little like winning.
So what’s going on with S stock?
The value of profitless mobile is set. It’s about $1 of market cap for each $1 of revenue. That’s where Sprint is valued — $33.47 billion in revenue valued at $32.83 billion. If Sprint were making money that would be different, but not much. Even with a dividend yielding 5%, AT&T has a market cap of $240 billion on trailing 12-month revenue of $163 billion.
S Stock: Why Pay More?
Despite all this, analysts keep pounding the table for Sprint stock, certain that someone — usually described as T-Mobile US Inc (NASDAQ:TMUS), is about to offer a ton of money for it.
Why should they? T-Mobile has trailing 12-month revenue of $37.2 billion, and earned $1.46 billion last year, and its market cap is $51.34 billion. Its valuation, in other words, is close to AT&T’s, and paying a premium for Sprint will just drag that down.
Sprint is expecting to report a break-even quarter Aug. 1, before the market opens, on $8.19 billion in revenue. The bullish call of InvestorPlace contributor Richard Saintvilus says you shouldn’t be selling here, not that you should be buying it with both hands here.
As Ryan Fuhrmann notes, S is the number-four player in a market that isn’t growing as it once did. Mobile is subject to Moore’s Law — the price of moving bits keeps dropping — and ending net neutrality doesn’t mean customers will stand for carriers refusing to let you access stories like this one.
Sprint Earnings: The Rumor Mill Grinds On
With the rational price for S stock fixed, rumors are all that can move the stock, and they’re not working.
Comcast Corporation (NASDAQ:CMCSA) and Charter Communications, Inc. (NASDAQ:CHTR) recently had a two-month exclusivity window to offer a deal. Supposedly they are still talking, but the exclusivity period has lapsed and Charter is saying it has “no interest.” Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and Liberty Media Formula One (NASDAQ:LMCA) are supposed to be considering an investment, but are they really?
The continuing rumors of a sale all circle back, in the end, to T-Mobile grabbing it for the market share and the math is simple. Put S and TMUS together and you have three equally-strong national carriers, as opposed to two strong ones and two weak ones.
When Son-san bought a controlling interest in Sprint four years ago there was a brief hope that the company could be turned around, the shares peaking at $10.79 at the end of that year. They traded as low as $2.66 each early in 2016, before the rumors of a sale started.
Now T-Mobile CEO John Legere is supposedly the savior who will make Sprint profitable, as he has made T-Mobile profitable. Maybe he can do that, but prove that in the market before buying it. Legere’s strategy has been to launch a very loud price war, and doubling-down on it through Sprint doesn’t sound to me like it means bigger profit for anyone.
Assuming differently, and buying the rumor of a sale, at an unsustainable premium over the current value of the company, sounds like a good way to lose money.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
