Sling TV Is Exciting, but DISH Network Corp Stock Isn’t

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DISH stock - Sling TV Is Exciting, but DISH Network Corp Stock Isn’t

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Satellite-television giant DISH Network Corp (NASDAQ:DISH) hasn’t been saved from the cord-cutting headwinds which have plagued the entire traditional pay-TV industry.

Over the past several quarters, DISH has continued to lose traditional pay-TV subscribers and DISH stock has fallen by a whole bunch. A year ago, DISH stock was up at $60. Now, it trades under $40.

Bulls want to point to DISH’s over-the-top television offering, Sling TV, as the catalyst which will turn DISH stock around. It is true that Sling TV is a big growth engine with huge growth prospects. Growth from Sling TV will definitely help offset weakness everywhere else.

But weakness everywhere else will persist. And that persistent weakness will keep DISH stock depressed over the next several years.

Here’s a deeper look:

Sling TV Tailwinds Offset by Cord Cutting Headwinds

Sling TV is a very exciting growth aspect of the otherwise troubled DISH business. It is the market leader in the new category of over-the-top television offerings.

At first, traditional pay-TV was disrupted by over-the-top streaming services like Netflix, Inc. (NASDAQ:NFLX). But, now, the traditional pay-TV industry is responding by taking their cable packages, slimming them down, and offering them Netflix-style.

This whole industry is experiencing explosive growth. Sling TV, with 2.2 million subscribers (up 47% year over year), is at the head of the industry.

Sling TV will continue to grow at a robust rate over the next several years. Consumers want to go slim and over-the-top for enhanced priced and convenience, but they don’t want to watch just movies and TV shows. They also want to watch news and live events, like sporting games. That is where Sling TV will thrive, by offering consumers the enhanced price and convenience of an over-the-top streaming service while also bundling in cable stalwarts like news channels and live sporting events.

But growth in Sling TV will come at the expense of the traditional DISH business. The number of DISH TV subscribers continues to fall by roughly 1 million per year, and that trend isn’t showing any sings of slowing. Thus, Sling TV growth will likely be offset by traditional pay-TV declines.

Dish Network Stock Isn’t Priced for Continued Margin Compression

The big problem with DISH is that its growth business (Sling TV) has lower margins than its declining business (DISH TV) due to Sling TV operating at lower average revenue per user (ARPU) rates. This means that so long as Sling TV grows and DISH TV declines, the overall margin profile of the business will erode.

At current levels, DISH stock isn’t priced for that continued margin compression.

I believe that, in 5 years, the company will have the same number of total pay-TV subscribers as it does today. The only difference will be the mix. DISH TV will continue to lose 1 million subs per year, while Sling TV should be able to add 1 million subs per year. In 5 years, then, the sub mix should be 50/50 (versus 85/15 today in favor of DISH TV).

Sub growth isn’t the problem. ARPU is the problem. If the sub mix is 50/50 in 5 years, ARPU will be dramatically lower. It is at $86.43 today. At best, it will be at $80 in 5 years.

An $80 ARPU on 13.2 million total subs implies revenues of roughly $12.7 billion in 5 years. At that point in time, margins will be lower thanks to the lower ARPU. Pre-tax margins currently hover around 11%. Thus, a 10% pre-tax margin in 5 years seems reasonable. That would lead to $1.3 billion in pre-tax profits in 5 years.

After a 21% tax rate, divided among 500 million shares, that equates to roughly $2 in earnings per share.

A market-average forward multiple of 16 on those $2 earnings implies a four-year forward price target of $32.

Bottom Line on DISH Stock

I think DISH stock today is trading above where it should be trading in four years.

Given this, I’m a seller at these levels.

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


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/sling-tv-exciting-dish-network-dish-stock-isnt/.

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