Possible 5% Upside for Sprint Stock on Prepaid Subscriber Gains

-72.70%
Downside
23.32
Market
6.37
Trefis
S: SentinelOne logo
S
SentinelOne

U.S. wireless giant Sprint (NYSE:S) is aggressively pursuing prepaid customers, a market where it competes mainly with AT&T (NYSE:T) and Verizon (NYSE:VZ).

Sprint moved to strengthen its prepaid business by acquiring Virgin Mobile late last year. Most recently, Sprint has introduced several  new prepaid plans at unusually low price points. While this move will likely reduce the company’s average revenue per user (ARPU), an important metric in the telecom business, it could  also help Sprint gain share in the U.S. wireless market.

This scenario suggests a potential upside of 4-5% to our current $4.79 stock price estimate for Sprint. Our analysis follows below.

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Prepaid price cuts

Via its Virgin Mobile subsidiary, Sprint introduced three new prepaid monthly plans in May of this year. Marketed under the rubric “Beyond Talk,” they include unlimited messaging, data, e-mail and web. These plans are priced at $25, $40 and $60 respectively. The $60 plan includes unlimited voice, while the $25 plan includes 300 voice minutes.

Virgin Mobile also targets budget-conscious consumers through its PayLo sub-brand, which offers two prepaid plans for $20 a month.

If these low-priced plans succeed, Sprint could see a decline in its  prepaid ARPU. We currently expect Sprint’s prepaid ARPU to rise slightly in 2010 after sharp declines last year. The declines were due partly to the fact that the Virgin Mobile acquisition closed late in the year, which meant that Virgin Mobile’s prepaid revenue contribution was only recognized for a short period. In 2010 Sprint will recognize a full year of prepaid revenue from Virgin Mobile.

You can drag the trend-line in the chart below to create your own prepaid ARPU forecast for Sprint and see how it impacts the company’s stock price.

Market share gains

On the bright side, the new budget plans are likely to increase Sprint’s share of the U.S. prepaid wireless market. In this scenario, we see a potential upside of up to 5% for Sprint’s stock. In the next interactive chart you can drag the trend-line to create your own prepaid wireless share estimate for Sprint and see how it impacts the company’s stock price.

Overall we think Sprint’s new prepaid strategy could work out well for the company. Incremental revenues from prepaid subscriber gains might well offset prepaid ARPU declines, generating net positive cash flows and modestly increasing Sprint’s share value.

You can see the complete $4.79 Trefis price estimate for Sprint’s stock here.