Sprint: A Rally Is Possible, But Not Any Time Soon

| About: Sprint Corporation (S)

The past five trading sessions have given long term Sprint (NYSE:S) shareholders heartache intertwined with exuberance. Since October 4th, Sprint's stock has seen five intraday movements over 10%, including four over 15% and one over 20%. Fortunately, the 26.47% move was a 2.5 hour intraday run enabling investors to take profits during the extreme volatility.

These whimsical share price fluctuations were due to two reasons. The first was a rumor regarding Sprint committing roughly $20 billion in iPhones. The second was Sprint's analyst meeting on October 7th.

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(Sprint chart from September 17, 2011 through October 10, 2011.)

Sprint's stock has been spiraling out of control and investors have seen the share price slide 30% since September 29th. The vast majority of these losses have come during the last two trading sessions which have sent the share price tumbling almost 28%. After this slide, two questions arise. The first question asks if Sprint is now a buy after the stock has been sold off. Or, is Sprint destined for a long drawn out bankruptcy? I will get to these questions later, however, first it is important to review what has happened over the last five days that has increased Sprint's volatility and decreased the share price.

As I mentioned above, the first step to this puzzle is October 3rd, which is when a rumor surfaced stating Sprint has committed to buy over 30 million iPhones from Apple (NASDAQ:AAPL). While many analysts feel this move will negatively impact Sprint, I believe the long term commitment might drive the company and the share price to new highs not seen in over a decade. When this rumor first broke on October 3rd, the stock was punished by investors interpreting the data as a negative.

It is important to note I agree Sprint's margins will be punished with this deal, however, in the ultra long term Sprint may bring in more customers because Verizon (NYSE:VZ) and AT&T (NYSE:T) do not offer unlimited data plans. I will discuss the slew of analysts that feel the deal will negatively impact Sprint later.

The next important event was October 4th, which was Apple's anticipated special event to officially unveil the newest iPhone. Over the first hour of trading, Sprint's stock plummeted about 18% to 2.25 at one point as no official announcement was made regarding the Sprint Apple partnership. This is baffling because investors sold the stock after news Sprint committed $20 billion to the iPhone and then sold off again when the news was possibly wrong. Nevertheless, after Apple announced Sprint will offer the iPhone, Sprint's stock rallied 26.4% from the 2.25 bottom. It is important to note this volatile day saw over 163.5 million shares trade hands as the stock finished a hair above where it began the day.

After two positive days on October 5th and 6th, Sprint's share price plunged 38% from top to bottom over the past two sessions. October 7th was Sprint's analyst meeting and the day was a disaster for shareholders to say the least. After news surfaced regarding Sprint's 4G LTE, shareholders sold off. There were three forms of bad news that sent shareholders running for cover. The first is Sprint will need to raise capital to build the company's 4G LTE network. How Sprint will do this is unknown at the moment but I'm hoping for investor's sake Sprint does not go the route of another public offering at a much lower price than the current share price. Many micro cap biotechnology companies offer public offerings at lower prices and long term shareholders suffer short term pain.

Adding insult to injury, Sprint announced the 4G LTE project will cost about $10 billion. The positive about this is Sprint will save around $11 billion through 2017. One issue is if a faster network is developed before 2017, Sprint will not only be stuck with a slower network, but also they would have to wait until 2017 to at least break even. However, if Sprint can perfect the 4G LTE service and another lightning fast upgrade does not come about, Sprint will see substantial savings every year after 2017. This is something ultra long term investors will need to keep in mind before selling their Sprint shares.

The final bit of bad news for Sprint came on Monday October 10th as analysts downgraded the company citing issues regarding the 4G LTE plan and the iPhone commitment. Within the past week, 11 firms have openly released negative notes regarding Sprint. These firms are J.P. Morgan, Macquarie, Barclays, UBS, Deutsche, Raymond James, Collins Stewart, Kaufman Brothers, Atlantic Equities, Mizuho Securities USA, and S&P. These 11 firms in some way have contributed negativity regarding Sprint and the share price has suffered. Please note several of the firms have mentioned Sprint is setting up a strong long term position, however, the short term (1-2 years) will not provide shareholders with profits. As you may have noticed, the most important point to remember is Sprint has short term issues; but the long term will be prosperous if the company can avoid any missteps.

This leads us to three final questions:

Do I believe Sprint will go bankrupt? No, I do not believe this will happen for two reasons. First the company will see increased iPhone customers as Verizon and AT&T customers tire of added fees with less service. Secondly, Sprint already has a loyal customer base and this will not change now that Sprint offers the iPhone alongside several Android devices. Even though the stock is likely to continue moving downward, the company will continue to bring in revenue and possibly positive net income within the next 4-8 quarters. Therefore, Sprint will not face bankruptcy by any stretch of the imagination.

Where will the stock go from here? Currently, Sprint's share price will continue to move downwards for at least 2-3 days. The volume on Monday was over 306 million which indicates investors were selling off and possibly buying puts to protect against future losses. Moving forward, bearish traders may want to look into 1.50 puts for two reasons. First, Sprint will be heading below 2.00 before finding a strong resistance that should push the stock back above 2.00. However, this segues into the second reason which is if the overall market slides again Sprint will plunge as shareholders realize Sprint is years away from delivering profits.

Will Sprint rally? Yes, a rally is possible, however, not any time soon. The biggest problem with Sprint is a lack of planning regarding the 4G LTE network. Many analysts and investors see this announcement as a sort of desperation statement just as Netflix's (NASDAQ:NFLX) Qwikster plan that was ultimately killed. If Sprint can propose the groundwork for the 4G LTE plan, shareholders may think differently about the company's future.

If this does not happen, it is plain and simple: Sprint's stock will not rally. The worst case scenario for Sprint is a delay in the 4G LTE plan. If this happens we may see another sell off as shareholders become fed up with the lack of control and planning from Sprint's management. On the bright side, at least consumers will be happy they can get the iPhone for less than Verizon and AT&T with a better data plan.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.