Over the past five days, shares of Sprint (S) have been on a tear, rallying over 11% as the S&P 500 (SPY) has remained virtually flat. This rally, while certainly impressive, begs the question of why it is occurring in the first place. Telecommunications stocks like Sprint, AT&T (T), and Verizon (VZ) rarely move in such a dramatic fashion. Indeed, AT&T and Verizon sport betas of just 0.61 and 0.54 respectively. Even Sprint, with its low share price, and constant news surrounding Clearwire, its debt, etc..., has a beta of 1.06, not much higher than the broader market.
So what exactly is going on at Sprint to cause such a move higher? The company has issued no material financial news in the past five days. And the only product announcement has been the ZTE Fury. It is difficult to argue that this one smartphone, which is not a flagship device, could send Sprint's stock soaring over 11%.
If products are not the cause of Sprint's rally? Then what is? Simply put, the rally is due to a reassessment of Sprint's competitive position in the wireless landscape. It has long been argued that Sprint simply cannot compete in the American wireless market. With AT&T and Verizon pressuring it from the high end, and T-Mobile and numerous Tier 2 wireless companies (Leap, Metro PCS, etc...) pressuring it from the low-end, it would seem that Sprint faces the competitive challenges of being stuck in the middle of the market.
But, it is crucial to understand that Sprint's position in the market is not necessarily a liability. Its prepaid side serves millions of customers, and Sprint has enjoyed success in that market. In 2011, Sprint added 4.293 million prepaid customers, up from the 3.615 million in added in 2011. Sprint has also dramatically expended ARPU in the prepaid business, with prepaid ARPU averaging $25.43 in 2011, up from $21.64 in 2010.
However, the market has largely ignored Sprint's solidly profitable prepaid business. Rightly or wrongly, the market instead focuses on the challenges Sprint is facing in its postpaid business. And it is impossible to deny that Sprint has faced challenges. For years, the company had to deal with the fact that it lacked the iPhone, and then was forced to pay billions to secure the iPhone. We have profiled Sprint several times before, and for a more concrete overview of the business, our previous articles will be of more use, as this article focuses on Sprint's recent rally.
Recent events may have served to strengthen Sprint's relative position in the postpaid market, as well as its financial profile. We believe that there are three reasons as to why Sprint has rallied, and we detail them below.
AT&T and Verizon have both stopped offering unlimited data plans in the market, and those who are grandfathered into unlimited data plans see their speeds reduced after a certain level of usage. For AT&T, it is 3 gigabytes on a 3G plan and 5 gigabytes on a 4G plan. Verizon has not outlined a definitive policy on throttling. T-Mobile throttles data speeds based on the price of the plan you have. The higher the price, the higher the throttling threshold is. Sprint however, still offers unlimited plans, and does not throttle data speeds, ever.
As people use more and more data on their smartphpones, it is inevitable that data consumption will rise. But with 3 of the top 4 American wireless carriers now limiting data speeds for their customers, people may begin to face limitations in what they want to do with their smartphones. Enter Sprint. Sprint is now the only carrier to offer unlimited data plans, with no throttling of speed. Given that Sprint's 4G network is run via Clearwire (CLWR), we see no spectrum issues for Sprint, as Clearwire is the largest holder of spectrum in the United States.
One of the biggest issues that Sprint has faced in the last several years is subscriber losses. Since the Nextel acquisition, Sprint has lost subscribers year after year. But, with the controversy over unlimited data and throttling growing, Sprint's subscriber fortunes may be beginning to turn around. On Thursday, March 8, shares of Sprint rallied due to a Wells Fargo report that argues the company is poised to lure subscribers away from AT&T due to the smartphone data controversy. The firm also believes that Sprint can lure customers away from T-Mobile due to that carrier's lack of the iPhone. Wells Fargo notes that while it expects Sprint to still lose subscribers in the first quarter, which is a seasonally weak one for the carrier, those losses should be smaller than in the past, due to Sprint's combination of unlimited data plans and the iPhone.
On Friday, March 9, Sprint shares continued their rally, soaring nearly 7%. Once again, perceived improvements in Sprint's competitive position were the cause. The spark this time was a Bloomberg report that says the FCC has asked for more data on the spectrum deal between Verizon and Comcast. Given that Sprint was seen by the markets as a potential loser in this deal, any roadblocks set up by the FCC to that deal is a net positive for Sprint. Stifel Nicolaus called it a "partial victory" for wireless operators like Sprint.
The third reason Sprint rallied is not grounded in news, but rather a theory that we arrived at. It is one that involves Clearwire. Sprint is set to terminate its spectrum deal with LightSquared as early as next week, due to the FCC's refusal to allow LightSquared to commence operations. This development is seen by the media as a positive for Clearwire, and it undoubtedly is. But it is possible, at least in our opinion, that some traders and investors see this as benefiting Sprint as well, albeit in a roundabout way.
Since its inception, Clearwire has had billions in losses, which has weighed on its stock price. And via GAAP, Sprint has to share in those losses. A portion of Sprint's GAAP losses are due to Sprint's stake in Clearwire, and changes in the fair value of that stake appear on Sprint's income statements. We have argued before that it is unfair to judge Sprint's operational performance on its GAAP earnings alone, for they are impacted by items such as its Clearwire stake, which is a strategic investment that is never meant to be sold. Therefore, Sprint will never actually realize any gains or losses on its Clearwire stake.
We believe that it is possible that some market participants see Sprint as being a beneficiary of LightSquared's collapse. If Sprint cannot get the spectrum it needs, it must turn even more toward Clearwire to accelerate its 4G buildout. As such, it is very likely that Clearwire shares will rally as its competitive position is strengthened and its relationship with Sprint solidified even more. And if Clearwire's stock rises, Sprint's GAAP losses shrink because the fair value of its investment rises. Therefore, if Clearwire's stock rallies as it is seen by the markets as a stronger company, Sprint's GAAP losses will shrink. And it is possible that some traders have reached that conclusion and driven up Sprint's share price to reflect that.
This article is by no means intended to be a comprehensive overview of Sprint. Our prior articles on the company dive into the details of Sprint's operations. Even with this rally, we think that shares of Sprint are a buy. The Reuters average price target for Sprint currently stands at $3.88, representing upside of almost 40% from current levels. We think that in the quarters to come, Sprint will continue its turnaround. As the company proves itself to investors, we expect the shares to continue to go higher in the long run.