DISH Network Corporation (NASDAQ:DISH) has been on a multi-year slide since the summer of 2017. The main driver of this being the sector-wide headwind for pay-TV companies, as more consumers ditch traditional services in favor of streaming and other over-the-top alternatives. While the drastic drop in share price over these past couple of years may entice value investors, DISH Network is caught between a dated business model and deteriorating balance sheet. DISH is currently holding large spectrum assets that can either be sold off or built out, but there is sizable risk throughout both scenarios. We dive deeper into these issues to unwrap why DISH Network has become a speculative stock that we are avoiding completely.
Aging Legacy Business
Over the years, an increasing amount of consumers have been leaving traditional cable and satellite services in favor of streaming and other alternatives. The fluidity of this shift has caused a very competitive war to break out for this business. Full on streaming platforms such as Netflix (NFLX) have emerged, and more are on the way from content creators such as Disney (DIS) and AT&T (T).
DISH Network does have a partial answer to this in the form of Sling TV. Sling TV is an OTT television product that essentially gives DISH Network a means of capturing a piece of modern content consumption. While having Sling TV is better than nothing, there are a couple of issues present. Sling TV is essentially a direct competitor to DISH's legacy services, so cannibalization of sales is a problem that the company faces. On top of that, Sling TV is sold at a much lower price point than DISH Network. DISH makes more per subscriber with its traditional broadcasting services than with Sling TV. So although a customer that converts from traditional DISH to Sling TV represents a partial capture of revenues, DISH Network is still worse off with the Sling TV subscription.
The resulting impact on DISH's financials has been an overall negative. Revenue, cash from operations, and EBITDA are all negative over the past couple of years.
Deteriorating Balance Sheet
The importance of DISH Network's aging legacy business is underlined by the company's balance sheet that continues to be stretched over time. The company has borrowed over the years, pushing the total debt to $15 billion as it currently stands. Over that time frame, the company's cash balance has fallen to less than $1 billion. While the rising debt is enough to stress a balance sheet, the company's shrinking EBITDA has accelerated the increase in leverage.
The company now is leveraged to 5.3X EBITDA, which is more than twice our "warning sign" 2.5X ratio that signals that a company is overburdened with debt. The origin of this debt largely goes back to the company's process of acquiring wireless spectrum assets. This began in 2008, and has totaled a direct investment of $11 billion over the years, and a total outlay of approximately $21 billion. We will circle back to the balance sheet below.
Spectrum Assets Are Not A Slam Dunk
Just about any bullish thesis surrounding DISH Network is built on the company's multi-billion-dollar hoard of spectrum assets. The company has been investing to obtain a bunch of licensing rights to a portion of spectrum. In other words, DISH has been collecting the rights to transmit data on a specific set of radio frequencies. This is a valuable asset because spectrum is a finite resource that companies such as telecom and other data transmitting companies covet and spend billions of dollars on. DISH Network basically arrived at the idea in 2008 that by buying a bunch of this valuable resource, it could be profitably leveraged at some point in the future. It has been estimated by some analysts that DISH's collection of spectrum assets could fetch as much as $30 billion. Considering that this is enough to pay off its total debt twice over - and also twice that of DISH's market cap - it isn't a stretch to envision why this may get investors excited.
Unfortunately, it isn't as straight forward as that. There are various degrees of risk involved in these assets that investors need to be wary of. First of all, DISH Network doesn't seem to have a concrete plan in place for these assets. In the company's most recent annual report, management is "considering options for the commercialization of their wireless spectrum". So let's run through a few scenarios.
DISH Network could ultimately auction the assets off completely. They could fetch $30 billion, or they might not. As recently as the fall, analysts have speculated that competitive dynamics could be causing these assets to fall in value. What if the return on these assets is significantly short of what DISH Network was looking for? Also, once sold, these assets won't generate any passive income for DISH Network.
The other main option that the company has is to utilize the assets by building out a network itself, or through partnerships. Management has spoken of an IoT type of application (internet of things). In this talk, it mentions research and development and other ground floor terms that indicate the process is clearly not yet fleshed out. How does it know what its return will be on these investments? Does the return justify the cost? How can DISH Network invest on its own with a stretched balance sheet, and how can it obtain favorable terms on an end result that had to be lifted to fruition by a partnership? There are questions, but not enough information to answer them.
When you really dive into DISH's roadmap and future ambitions, there are simply many questions and not enough answers. The deteriorating balance sheet and declining financials are simply forcing the company to feel the pressure to do something. Whatever that ends up being, it is much too speculative for us to feel comfortable with DISH as an investment.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.