Sell Sprint Stock on This Long-Term Concern (S)

Just days after launching the most aggressive iPhone leasing program ever seen, Sprint (S) realized that it had to make money somewhere, and hiked its unlimited data plan price from $60 to $70 a month.

Sell Sprint Stock on This Long-Term Concern (S)While Sprint remains the cheapest of any unlimited data service providers, such a move can have unintended consequences for Sprint stock, unveiling major business-model issues in comparison to other telecoms.

First and foremost, I believe wholeheartedly that Sprint’s leasing plan will eventually fail and lead to some serious backpeddling by management. Sprint must pay at least $699 for each iPhone it sells, and by charging $1 a month for that base model, and giving customers the option to upgrade just one-year later, there’s no way it can turn a profit on device sales.

With all U.S. telecoms embracing the leasing business model, supply of older iPhones will be through the roof, and not one carrier has unveiled where the demand for those used models exists.

That said, I really like this move by Sprint to hike data prices. The bottom line is that a large wireless company can not lease iPhones for $1 to $10, pay all upfront costs, pay termination fees for incoming customers and then charge just $60 per month for unlimited data and turn a profit.

In fact, just a few days ago, Verizon’s (VZ) management sang a similar tune, warning about surprise balloon payments with competing telecoms in its own iPhone promotion PR, although Verizon’s promotion is much less aggressive than that of Sprint.

So if Sprint can’t achieve a profit under its current business model, or with hardware sales, it must have a plan in place for profiting with data consumption. If not, Sprint stock will suffer long-term.

How U.S. Telecoms Find Growth

With the U.S. wireless industry being mature and fully penetrated on a customer count basis, there are two growth drivers left for nationwide telecoms.

The first is connections, or customers adding additional devices to their existing service plans; whether it be a second phone, tablet, smartwatch, etc. The second growth driver is data consumption, which is in part possible because of customers adding additional lines. Other than that, smartphones upgrade annually with more powerful processors that consume greater amounts of data than its predecessor. Thus, data consumption rises with each smartphone upgrade cycle.

The end result of these two growth drivers is a 57% compound annual growth rate in data consumption worldwide.

With that said, telecoms can theoretically afford to give away iPhones and other smartphones via leasing if they are profiting from this increase in data consumption. This can be done as customers pay more money for higher data packages. But since Sprint charges a flat rate for unlimited data, the company does not really benefit as data consumpton grows. This is a major problem for the carrier.

The Flaw in Sprint’s Business Model

As a result, Sprint finds itself in a situation where it must continuously hike the price of its unlimited data package long-term to counter the strain on its network from increased data consumption. This in turn hurts customer satisfaction ratings and makes the company look unreliable and inconsistent, despite carrying the cheapest overall data prices (Sprint’s new price is still $10 less than T-Mobile’s competing plan).

The silver lining for Sprint, if there is one, is that the carrier would unlikely have upped data prices right now had the reception to its iPhone pricing not been extremely strong. Unfortunately, Sprint is not making money from iPhone sales, and under its current business model, it will have to keep increasing data plan prices just to keep up with consumption.

This is a lose-lose situation — it’s not good for Sprint stock to earn just over $850 for a single-person unlimited data plan with iPhone purchase.

That amount of revenue barely covers the hardware, and if Sprint paid any termination costs, this format suggests that Sprint won’t turn a profit from new iPhone customers for at least a year, until the cycle repeats itself next year with the iPhone 7.

So with Sprint having more than $34 billion in debt and a free cash flow loss of negative $5.3 billion for the last four quarters, I don’t see Sprint’s financials improving any time soon.

Therefore, if you are a Sprint stock investor, it could get worse before getting better … if it gets better at all.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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