After failing to acquire T-Mobile (NASDAQ:TMUS) earlier this year, Sprint (NYSE:S) officially entered the wireless service price wars in August. The company has consistently lost customers for several years, but Sprint is now willing to sacrifice margins to gain long-term subscribers. However, given the company's financial state, 2015 is setting up to be a make or break year for the carrier.
Earlier this month, Sprint announced one of the most aggressive plans we're seen thus far in the wireless price war. Sprint has vowed to cut AT&T (NYSE:T) and Verizon (NYSE:VZ) customers' bills in half, in exchange for their business. For example, Verizon customers paying $140 for four lines and 10GB of data will pay $70 if they switch to Sprint. Plus, Sprint will pay early termination fees up to $350.
Sprint is hoping that such aggressive pricing will lead to renewed interest in the carrier's services. Since cutting prices in August, Sprint has seen increased demand. During its last quarter, Sprint noted that postpaid phone net losses slowed by 60% in the month of September. Therefore, many investors see Sprint's new plan attracting new customers and leading to postpaid growth year-over-year.
The problem is that Sprint has lost 336,000 and 181,000 post-paid subscribers in its last two quarters, respectively. Not to mention, Sprint was recently voted the worst carrier in the U.S. by Consumer Reports. This means Sprint has to overcome quite a bit of negative consumer sentiment in its attempt to grow its subscriber base larger.
Now here's the kicker: Sprint may very well find subscriber growth, but in the process it is sacrificing revenue per user as well as margins. During the last 12 months, Sprint has lost $4 billion in free cash flow and its operating margin is negative 5%. Therefore, unless Sprint's latest tactics result in significant, meaningful subscriber growth - like one million plus subs on a quarterly basis - its operating margin is going to fall off a cliff.
That said, Sprint already has $27 billion in net debt, and according to Evercore, the company will need to raise another $3 billion in capital to cover next year's expected losses. This means Sprint is already expected to issue more debt, which is the most likely scenario given the unlikelihood of parent company Softbank wanting to dilute its shares with an offering.
Sprint's aggressive service plan prices, combined with its lack of profitability and its enormous debt position, mean 2015 is a huge year for the company. If Sprint fails to attract new customers, its industry-leading debt-to-equity ratio of nearly 1.3 could skyrocket even higher. At that point, Sprint's stock price would most certainly collapse even more than it has in 2014. And, with no profits and a horrendous balance sheet, Sprint might not be able to make good on its debt obligations. This includes $10.6 billion in current liabilities.
All things considered, I think the fact that Sprint scored dead last in Consumer Reports' survey as the worst cell phone service provider in the U.S. is very telling in that consumers will not leave Verizon or AT&T despite the lower prices Sprint now offers. The company has constantly cut employees, and in November, announced another 2,000 job cuts. Naturally, with fewer employees, customer service suffers, making Sprint's road to recovery even more difficult.
Not to mention, there are serious questions as to how current Sprint subscribers will respond to the company's new low service prices. Current customers aren't going to like the low prices new customers are getting when they are paying higher prices. Therefore, Sprint may gain Verizon and AT&T subs, but may lose current subs. The bottom line is that it's tough to find a scenario where Sprint comes out on top. It is a tarnished brand with too much debt and no profitability. As a result, I think a share price below $3 by the end of next year is very possible, and that a long-term price target of $0 is not out of the question. Needless to say, I would not invest in Sprint at any price, as I see no value based on the most likely of scenarios.
Disclosure: The author is long VZ.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.