Word of a merger between Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS) has been in the rumor mill for quite some time. Now that the idea is gaining momentum, investors have been piling into Sprint stock. If the deal does go down, I wouldn’t expect S stock to get much more of a bump.
Sprint stock is up 40% since early November. Part of that is the post-election bull market and another part of that is two straight quarters of sales growth — the first time Sprint’s revenues have grown in consecutive quarters since 2012.
But it is also due to the resurfacing of its potential merger with TMUS, which would create a union between the third- and fourth-largest wireless carriers in America.
T-Mobile Rumors Helping Fuel S Stock
Momentum for the Sprint-T-Mobile merger picked up last month when Reuters reported that Sprint’s parent company, Softbank Corp. (Japan) (OTCMKTS:SFTBY), would be willing to give up control of Sprint to help facilitate a merger with T-Mobile. That report essentially confirmed rumors that helped fuel a 12% run-up in Sprint stock from Feb. 7 through Feb. 17. S has since fallen back to Earth a bit, dipping below $9 earlier this week. But it’s still up 7% in the last three weeks.
Given that Sprint is not a profitable company and hasn’t sustained a full year of sales growth since 2012, the recent merger talk has been a gift for the stock. Few of the people who cover Sprint stock think it can last: The average price target for S stock among 21 analysts tracked by Yahoo! Finance is $7.28 — more than 18% below its current share price.
Some of that pessimism could simply be pervading doubt that a merger with T-Mobile will actually happen. Sprint, after all, has been trying to acquire its rival since 2014. During that time, T-Mobile has actually leapfrogged S as the nation’s third-largest wireless carrier, and routinely grows its sales by double digits. In other words, TMUS is doing quite well on its own, and may no longer need Sprint. Interest in a merger may be mostly one-sided at this point.
Sprint Stock Overvalued
While Sprint is still adding subscribers, its debt ($37 billion and counting) is mounting, free cash flow is stagnant and its market share is dwindling amid all the increased competition.
As the company has become less relevant in the crowded wireless field, S stock has been bleeding value accordingly. A decade ago, Sprint stock traded at more than $20 a share. It hasn’t been higher than $10 since 2007. After more than doubling in the past year, S stock is pushing the limits of its full potential as constituted.
If a T-Mobile deal does finally go down, that would certainly be a long-term game changer for Sprint. But right now, that’s a big if, though some investors seem to be treating S stock as if it’s a done deal.
Bottom line: Sprint stock is more likely to retreat than push higher in the short-term. Since the start of the year, S has routinely met resistance in the $9.30 to $9.40 range. Don’t expect the stock to break through that overhead resistance until a T-Mobile deal gets done. And even then, the gains could be modest based on how high Sprint stock has already risen.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.