How Sprint’s Aggressive Plans to Expand Wireless Market Share will Pan Out

Sprint (NYSE:S) recently announced that it’s raising $4 billion through debt offering to finance its own network upgrades as well as finance part of the capital requirements of its ailing WiMax network partner, Clearwire. Sprint’s ability to raise cash from the capital markets to meet its growing debt and its decision to fund Clearwire gave a boost to its stock. Amid competitive pressures from AT&T (NYSE:T) and Verizon (NYSE:VZ) and the burden of mounting debt, Sprint hasn’t been effective in controlling subscriber churn which is crucial if it wants to stand by its commitment of buying at least 30.5 million iPhones in the next four years – a feat achievable only if it can grow its subscriber base substantially. We believe these pressures will continue to have an impact on its wireless market share in the medium term.

Our complete analysis for Sprint Nextel’s stock is here.

2012 Significant for Sprint

The past two months have been exciting for Sprint. It first bagged the iPhone deal to become the only carrier to offer unlimited data access to subscribers, and the booming sales of the iPhone 4GS should have brought some relief to the company. The next bold step was the announcement of buying at least 30.5 million iPhones in the next four years, which means a massive commitment of $15.5 billion, something we discussed in our article Sprint’s Huge Bet on the iPhone Threatens to Sink Stock.

To justify that kind of huge sales, Sprint will need to nearly double its postpaid subscriber base, which in the current scenario looks bleak, given the carrier’s rising subscriber churn rate. Last quarter, Sprint saw a net loss of 44,000 in postpaid subscribers and churn increased to 1.91% from 1.75% in Q2, even though its postpaid ARPU increased with growing smartphone penetration. ^[1]

Sprint is making big bets and making huge investments in developing its own LTE network which should be complete by 2013. It is also helping out Clearwire to roll its own 4G LTE network that Sprint’s subscribers will be able to use – an announcement made by the company during Q3 earnings call. To fund these initiatives and meet its piling debt, Sprint is raising $4 billion  by issuing $3 billion of seven-year 9 percent notes and $1 billion of ten-year 11.5% notes. (See Sprint Taps Bond Market, May Help Fund Ailing Clearwire)

While an ambitious target to expand its market share, we are cautious about Sprint’s ability to tackle subscriber churn in the coming quarters amid concerns of rising debt and heavy capital investments impacting its bottom-line.

While we estimate Sprint’s CDMA wireless market share will increase from 9.8% in 2012 to 11.5% by the end of our forecast period, Trefis members project an increase from 10.6% to 13.5% during the same period. The member estimates imply an upside of 21% to the Trefis price estimate for Sprint Nextel’s stock.

We currently have a Trefis price estimate of $4.73 for Sprint Nextel’s stock, about 84% above the current market price.

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1. Sprint Nextel Reports Third Quarter 2011 Results, Oct 26, 2011 [↩]