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Investment Overview for Sprint (NYSE:S)
Below are key drivers of Sprint's value that present opportunities for upside or downside to the current Trefis price estimate for Sprint:
Mobile Plans & Phones
Sprint Postpaid wireless market share: We estimate that this figure will increase moderately from about 9.8% in 2015 to about 10% by 2017 and remain relatively flat thereafter. This is likely to be driven by a subscriber shift towards high speed 4G and data as well as Sprint's improving network quality. However, if Sprint's market share declines to about 9.5% by 2022 owing to intense competition or hiccups in in planned network upgrade, this could result in a 15% downside to our price estimate. On the other hand, if Sprint does well and captures 10.5% market share by end of our forecast period, there could be a 15% upside to our price estimate.
Mobile SG&A as % of gross profits: We expect this figure to decline from about 40% in 2015 to around 33% in 2016, as Sprint puts its aggressive cost reduction plans into effect. Over the long-term, we expect the figure to trend marginally upwards to about 37% by 2022. If the number rises to around 40% by in 2022, this could result in a 10% downside to our price estimate. On the other hand, if the number remains at levels of about 33% through 2022, there could be an upside of over 20% to our current price estimate.
Postpaid ARPU: We estimate that this number will gradually improve from about $54 in 2015 to about $59 by 2022 driven by Sprint's improving network quality and higher mobile data consumption on Sprint's 4G network. However, if intense competition or other headwinds cause the number to remain at current levels, there could be a downside of 20% to our current price estimate. On the other hand, if Sprint is able to improve pricing to over $63 by 2022, this could result in a 20% upside to our price estimate.
Sprint Nextel resulted from the $35 billion merger of Sprint and Nextel in 2005. Following shutdown of the Nextel network in 2013 and the subsequent acquisition of a majority stake in Sprint Nextel by Softbank, the company reverted to its old name, Sprint Corporation.
The company makes money primarily through mobile phone subscription plans for consumers and businesses. It is the fourth largest wireless service provider (behind Verizon, AT&T and T-Mobile) in the US. It also provides its wireless network resources for resale to wholesale and regional operators. Sprint also offers voice and data communication services over legacy fixed-lines.
Saturating wireless market
The U.S. wireless market is saturating, with the total number of wireless connections standing at over 355 million and the number of wireless phone subscribers standing at roughly 320 million, ahead of the U.S. population of about 319 million. It's likely that growth in the number of wireless phone connections - which represents the most lucrative segment of the wireless market - will slow significantly going forward. Carriers are likely to focus on retaining existing customers and winning over porting customers, while driving an incremental upside from areas such as connected devices and tablets, M2M connections and wholesale services to drive growth in service revenues.
Highly leveraged balance sheet
Sprint is very highly leveraged, with over $40 billion in debt and a market cap of under $20 billion as of December 2015. The carrier has been walking a tight rope, as it continues to burn through cash in order to stem its customer attritions and improve network quality, while contending with shrinking revenues. While Sprint does have backer with deep pockets in Softbank,its majority shareholder, the company's debt load is a major concern.
Loss of Subscriber Base Since Sprint Nextel Merger
Sprint Nextel has been losing postpaid subscribers at a rapid pace in recent years. Most of these losses are due to sustained losses incurred on Nextel's iDEN network. However, with a bulk of the losses having occurred already and Sprint being able to transition a good number of Nextel customers to its CDMA network, the losses have declined in recent quarters.
Scarcity of wireless spectrum
The wireless market is intensely competitive, with the number of wireless subscriber connections exceeding the total population in the U.S. As an ever increasing number of smartphone users demand higher speeds and congestion-free networks, wireless carriers are hard-pressed for additional spectrum in order to meet these demands. Sprint's LTE deal with Clearwire gives it a very comfortable spectrum position (in the higher bands) in an industry where spectrum availability could play a very huge role going forward.
Mobile Voice Plan Pricing Declines Offset by Data
Mobile voice plan pricing has seen a gradual decline, as competition has intensified and technology (primarily speed and reliability) and reach have improved. Increasingly, data access is a significant part of usage. So, while average voice revenues have been on a downward trend, the increased data revenue contribution has helped mitigate the impact on total ARPU.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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