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I have taken a lot of stick here (and rightly so) for my negative calls on Sprint (NYSE:S).

In February I said it was circling the drain. In April I asked whether it would survive. And it's now trading at twice the level it was at on those two occasions.

But if you bought when I said sell before, now may be a good time to take some profits. Because the updrafts on the stock are weak, and the road ahead is expensive.

Sprint's 2012 has been boosted by the iPhone and prepaid. It bought Virgin Mobile, its most successful re-seller of services, in 2009 for $483 million and that deal is paying off.

CEO Dan Hesse tried to double-down on that strategy earlier this year with a bid for MetroPCS, but his board shot him down.

Here is why:

  • This is the low end of the market, so margins aren't fat and churn will always be high.
  • The iPhone success can be a double-edged sword as the company must book costs before it can generate revenue. It's now on the good side of that trade but another iPhone is due out soon.
  • The success of Virgin as a brand requires advertising a different brand and, thus, leaves little on the table for Sprint's own branding efforts.

This last is the point made by long-time analyst Jeff Kagan, who notes that Sprint has never done an effective or consistent job in advertising and public relations, hiding its own brand behind subsidiaries like Nextel and Virgin, gaining little long-term equity with customers.

Kagan also points out a larger problem for Sprint. That is, its network technology is behind-the-curve. It will take a lot of money to upgrade from 3G to 4G LTE. It's now spending that money, but the network upgrade won't be done until the end of next year. Meanwhile it's left with market crumbs and big bills.

So why hasn't the stock fallen out of bed again? Probably because of persistent takeover rumors, like those spread here by Jonathan Yates at SmallCapNetwork. Apple (NASDAQ:AAPL) may buy them. Samsung may buy them. (He doesn't say it, but Google (NASDAQ:GOOG) may buy them?

Truth is, no one is likely to buy them. As I've said before, wireless is a capital sink. There is a negative return on invested capital because gear becomes obsolete before it can be written-off through cash for services. This fact has not changed in 10 years and it's not going to change.

Sprint needs an exit strategy, and so do its investors. You had a good laugh at my expense but the fun is about to be over.

Source: Sprint Needs An Exit Strategy