DISH Network Corp (NASDAQ:DISH) stock, trading within 5% of all-time highs, is sitting pretty.
But investors may want to think twice before holding this pay-television provider. While I’m actually a big fan of the underlying company itself, the valuation of DISH stock is out of control.
DISH stock is up an impressive 34% in the last year, outperforming the S&P 500 by about 20 percentage points. It’s certainly hard to sell a stock when it seems like it’s busy making you gobs of money, but when things are getting frothy, there’s no shame in taking your gains and getting out.
The Good: Sling TV, DISH Stock is a Buyout Target
Last month, DISH announced its new Sling TV service, a low-cost, internet-based bundle of channels that embraces the cord-cutting, a-la-carte mentality. It was a bold move by DISH, which became the first major TV provider to offer such a package to the masses. InvestorPlace contributor Jonathan Berr explains:
Called Sling TV, the Internet-based TV service is aimed squarely at millennials who increasingly are quitting pay TV (if they ever even signed up for it). For $20 per month, subscribers get access to variety of popular channels including Adult Swim, along with Scripps Networks Interactive’s (NYSE:SNI) Food Network and HGTV, as well as Time Warner Inc’s (NYSE:TWX) TNT, TBS and CNN. But the real coup for Dish Network is ESPN.
DISH stock has an opportunity to climb at the expense of industry rivals if its $20-per-month service catches on and DISH is embraced as the first-mover.
Shareholders are also aware that DISH stock could be a legitimate takeover target, operating as it does in the highly competitive and rapidly consolidating cable business. One need look no further than the two proposed mega-mergers in this space — one between Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc (NYSE:TWC), the other between AT&T Inc. (NYSE:T) and DirecTV (NASDAQ:DTV) — to see why DISH, too, could soon be bought out.
The Bad: Blatant Overvaluation, Fickle Networks
Unfortunately, waiting and praying for a buyout isn’t in the best interest of believers in DISH stock. First of all, it’s highly speculative, making it an inherently risky strategy. Secondly, even if we assume DISH could be an attractive acquisition, it’s current valuation is prohibitively high — do shareholders think the stock has already been bought out?
DISH stock currently trades at 45 times projected 2015 earnings and 43 times 2016 earnings. When AT&T announced the buyout of DIRECTV stock for $95 per share last May, it valued DirecTV at under 16 times forward 2015 earnings and under 15 times forward 2016 earnings.
With both DISH and DirecTV slated to grow in the mid-single digits over the next few years, why does DISH stock deserve such a healthy premium? The tough answer: It doesn’t.
On top of that, DISH has suffered some much-publicized, unproductive tiffs with content providers over their rates, most notably Fox News and Fox Business, subsidiaries of Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA).
DISH lost 63,000 subscribers last quarter after the two parties couldn’t agree to carriage terms, resulting in a three-week blackout of Fox News Channel. That was more than double the impact analysts expected, MSNMoney reports.
DISH also experienced a month-long blackout in 2014 of eight Turner Broadcasting channels, including CNN and Adult Swim.
With these risks in the open and DISH stock’s massive overvaluation in mind, stay far away from this deceptively alluring stock.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
