I’ve been bullish on Sprint Corp (NYSE:S) stock for some time now — but it’s hard not to be a little cautious at the moment. Sprint stock has given back a good chunk of its post-election gains. Save for a quickly reversed dip in May, S stock now trades at its lowest levels since December.
There are some genuine reasons for concern.
The bull case for Sprint stock never was a perfect story: there’s a substantial amount of debt on the books, and Sprint long has lagged rivals Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) in market share. Those market leaders are struggling with subscriber losses — and their stocks are declining.
Meanwhile, merger and acquisition (M&A) talk long has been seen as a catalyst for S stock. Rumored partners have included T-Mobile US Inc (NASDAQ:TMUS), Charter Communications, Inc. (NASDAQ:CHTR) and even DISH Network Corp (NASDAQ:DISH). But there’s been little news on that front, though the rumors continue to fly.
I still think there are solid reasons to stay long Sprint. The company has improved its balance sheet and cash flow, meaning solvency concerns should be at bay. There are enough options in M&A to believe Sprint could get some sort of deal done if it had to. And I still believe Sprint’s spectrum alone supports something close to the enterprise value of the company.
But I’ll admit to seeing some validity in the concerns raised by Sprint stock bears. And even S stock bulls need to keep a close eye on the story here.
S Stock and the Wireless Industry
The most obvious concern for Sprint stock is that its business doesn’t seem particularly healthy. This is reflected by share prices in the space. AT&T stock only recently bounced off an 18-month low and I still don’t think the stock is cheap. Verizon stock made a similar bounce in July, but still sits well off 2016 highs.
All four companies are competing heavily on price — a competition Sprint itself largely began. The problem for Sprint, even after beating second-quarter expectations, is that its subscriber gains aren’t offsetting that lower pricing. Rather, it’s T-Mobile that seems to be gaining market share — another fact reflected in share prices in the space. Over the past year, VZ stock has declined approximately 8% and T stock 9%. Sprint stock, in contrast, has gained about 18% — but TMUS shares are up around 35%.
Some of the recent weakness in S stock seems to be from investors simply leaving the sector. And, to be honest, that makes some sense. There’s an obvious fear of a “race to the bottom” in terms of pricing. And given the enormous fixed costs required to run a wireless network, those lost pricing dollars have a significant impact on margins — and profits.
Is Anyone Going to Buy out Sprint?
Meanwhile, some sort of M&A outcome for Sprint long has been treated like a fait accompli. But that may not necessarily be the case.
A Sprint/T-Mobile tie-up of some kind long has been considered the most logical outcome. In fact, the reason S stock and TMUS stock took off after Donald Trump’s surprise election was that investors believed Trump-appointed regulators would be more likely to approve a merger. (The supposed rule of thumb is that Democrats want at least four competitors in an industry and Republicans at least three.)
But as T-Mobile outperforms Sprint, the likelihood of such a merger might diminish. T-Mobile might not need Sprint the way it appeared to just a few years ago. At the very least, a stronger T-Mobile likely means a greater share of the merged company would go to those who owned TMUS stock, not S stock.
Charter already has denied having any interest in Sprint. Neither Verizon nor AT&T make much sense. The conventional wisdom that Sprint would not last too much longer as an independent entity, albeit one majority-owned by Softbank Corp. (Japan) (OTCMKTS:SFTBY), might have been too pessimistic.
Still Value in Sprint Stock — and Risk Too
In short, there are valid reasons for Sprint stock to have pulled back a bit over the past few months. But I still think there’s reason to stay long S stock, at least for now.
Sprint’s spectrum remains hugely valuable. Cost-cutting isn’t over. 5G is on the horizon (albeit a few years out). And the intense competition in the industry at the moment likely will abate at some point.
This still is a turnaround play, even if it seems like the turnaround has been going on forever. And it’s still worth betting on that turnaround even if the edge might feel a bit narrower at the moment.
As of this writing, Vince Martin has no positions in any securities mentioned.