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Dish Network’s Most Valuable Asset Could Crater DISH Stock

Dish Network (DISH) stock is down 14% this year, but over a five-year span DISH stock is still up an impressive 220%.

dish-network-stockThe reason for these big gains has little to do with Dish Network’s operating performance, but rather the surging value of its AWS-4 spectrum network, an asset that is highly valuable, but 100% unused at the moment.

Because of this network Dish Network has been at the epicenter of M&A and partnership rumors over the last few years.

However, the realization that bullish expectations won’t materialize will drive DISH stock much lower, potentially causing 50% or more losses.

What Spectrum Means for DISH Stock

Last year, when the FCC’s Auction 97 of AWS-3 spectrum broke all expectations with bids in excess of $40 billion, it did wonders for Dish Network’s stock.

That’s because spectrum is what allows data to flow smoothly from one place to another, and it’s a very valuable commodity in a market where wireless data consumption is surging.

The demand for spectrum at Auction 97 was great for Dish Network, as its AWS-4 spectrum is superior to the AWS-3 spectrum that the FCC was auctioning. As a result, I made a case that Dish Network’s AWS-4 spectrum assets were worth $25 billion shortly after last year’s auction.

With a market capitalization of $29 billion, it is not hard to figure that most of DISH stock is tied to its spectrum network.

While DISH has not created one penny of revenue from this $25 billion asset to date, investors have speculated that Dish Network would monetize the network by acquiring, being acquired, spinning off or even by leasing its network to wireless companies.

Wireless companies, however, have apparently moved forward on network plans without DISH, and it’s the company’s limited options that could be disastrous for DISH stock.

The DISH Spectrum Circus

Over the last couple years it has seemed that T-Mobile (TMUS) — and to a lesser degree Sprint (S)– has been on Dish Network Chairman Charlie Ergen’s radar for acquisition.

Earlier this year DISH was reportedly trying to get the cash together to acquire T-Mobile, and T-Mobile’s chief has certainly seemed to embrace the tie-up. However, T-Mobile’s market capitalization of $31 billion makes it very hard if not impossible for DISH to fund the acquisition.

With Softbank already the owner of Sprint, the next best option was to partner with the larger wireless companies, like Verizon (VZ). A partnership between Dish Network and Verizon was reportedly brewing earlier this year, but last week Verizon’s CFO Fran Shammo said that he sees no need to partner with a third-party for spectrum, and that if VZ needed more spectrum, it would just buy it.

Shammo continued by saying that in the past, it was cheaper to buy spectrum vs. deploying network gear like small cells. However, last year’s Auction 97 turned the table, and it is now cheaper to deploy network gear according to Shammo. This perception by the leading wireless service provider in the U.S. could be a game changer for DISH, as Ergen has essentially bet his company that spectrum would just keep on appreciating in value.

Companies like Verizon, however, are spectrum rich. Verizon has just 40% of its spectrum deployed for LTE use, while others like Sprint see no need to participate in next year’s big spectrum auction.

Collectively, this does not bode well for the valuation of Dish Network’s spectrum, an asset that drives the performance of DISH stock.

Bottom Line for DISH Stock

All things considered, Charlie Ergen realizes the demand for its spectrum network is diminishing, as evident by the DISH stock price.

Last week the outspoken CEO said that carriers would “strategically commit malpractice” by not entertaining the use of its network. However, if it’s more economical to use network equipment, and carriers are spectrum rich for the foreseeable future, then Ergen must realize that it is not strategic malpractice if carriers are finding better ways to utilize capital by addressing other needs.

That said, DISH stock is a must sell right now, as the value of its spectrum continues to deteriorate (caused by increased supply) and the company approaches a deadline where 40% of Dish Network’s spectrum must be connected to mobile devices by 2017. If not, DISH loses much of that $25 billion asset to the FCC, a term that was agreed upon when the FCC approved DISH’s airwaves for mobile and 4G use back in 2012.

Therefore, if Dish Network fails to secure a large partnership or acquisition by early next year, leaving little time to deploy that spectrum, expect this deadline to become a negative catalyst for DISH stock.

Nevertheless, Dish Network’s spectrum is seen as valuable, but sooner or later investors want to see real revenue and profits created from those assets. Based on DISH stock, investors are already getting frustrated, and that frustration could turn to fear very quickly as we head into 2016.

Given what the spectrum network means to DISH stock, investors should not be surprised to see 50% losses or more if DISH doesn’t move fast to monetize this asset.

If history is any indication, such losses are more likely than not.

As of this writing, Brian Nichols was long T stock.

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