Sprint Mulls The End Of Unlimited Data; How Could It Impact The Stock?

-72.50%
Downside
23.16
Market
6.37
Trefis
S: SentinelOne logo
S
SentinelOne

Sprint (NYSE:S) CEO Marcelo Claure recently indicated that the carrier might increase prices on unlimited data plans later this year. The carrier could also potentially eliminate these plans in the future, following the lead of Verizon (NYSE:VZ) and AT&T (NYSE:T), which did away with unlimited data plans years ago. [1] The potential shift certainly won’t be easy for Sprint, since unlimited data has been one of the biggest draws for customers on the Sprint network, and churn numbers could increase as a consequence. Accordingly, the company isn’t letting go of this selling point just yet; in fact, the company just introduced a new all-in plan that offers customers a leased phone along with unlimited data, messaging and voice for $80 per month. That said, eliminating unlimited data could yield rich rewards for Sprint over the long run, if done in the right fashion. It could help Sprint shore up its data ARPU – increasingly the most crucial valuation driver for telcos – while also helping to lower congestion and improve the quality of its network. If Sprint is able to pull this off, in conjunction with its ambitious network modernization plan, we believe that there could be a significant upside to its stock price.

We have a $5.70 price estimate for Sprint, which represents a 25% upside to the current market price.

See our complete analysis for  AT&TVerizonSprint

Relevant Articles
  1. Sprint’s Stock Looks Expensive Compared To AT&T After Rising 93% In 2 Months!
  2. Sprint’s Stock Price Doubled In 15 Days; Is Market Overvaluing Sprint Just Before Its Merger With T-Mobile?
  3. Where Is Sprint Corp Spending Most Of Its Money?
  4. Machine Learning Answers: Sprint Stock Is Down 15% Over The Last Quarter, What Are The Chances It’ll Rebound?
  5. Sprint Valuation: Fairly Priced
  6. How Does Sprint Make Money?

Easing Network Congestion And Improving Quality

Network quality is a key differentiator in the wireless business and it remains the biggest determinant of carriers’ pricing power and ARPUs. Although Sprint’s network quality has been something of a mixed bag in the past, things have been improving. Per RootMetrics network quality report for the second half of 2014, Sprint’s overall network performance improved significantly over the first half, closing the gap with market leaders Verizon and AT&T in terms of voice and text performance. However, the company remained the worst performer in the crucial data performance and speed metrics, which may be partly due to its lax data policies (related: Verizon Best In Wireless Network Quality, Sprint Leads In Improvement). Sprint has indicated that it will embark on a massive network improvement drive and its CEO believes the company’s network performance will match or exceed rivals Verizon and AT&T within two years. Most of the efforts are likely to be centered on the company’s deep 2.5 GHz spectrum holdings, which could be a costly affair, given the lower overage limitations (and higher infrastructure costs) of high-frequency spectrum. Reducing network congestion by cutting down on unlimited plans (or increasing prices on these plans) could also help the company shore up its network quality in a relatively cost effective manner, while garnering funds for its expansions.

Separately, according to The Wall Street Journal, Sprint has stopped its data-throttling policy for heavy users, as the Federal Communications Commission’s updated net-neutrality regulations went into effect in June. [2] This could put pressure on the network. By potentially imposing data caps, Sprint could ease network congestion and improve quality without violating net neutrality provisions. The FCC has been doubling down on its net neutrality enforcement. For instance, the agency fined AT&T up to $100 million, accusing the carrier of misleading customers by throttling data speeds on its unlimited mobile plans.

Higher Data ARPUs Provide A Significant Valuation Upside

The first and most important step of Sprint’s turnaround plan was stopping subscriber losses, and the company has seen some progress on this front. Sprint’s aggressive promotional pricing plans helped it post overall net additions of 1.2 million subscribers during Q4 2014, as compared to a net loss of 383,000 in the prior year quarter. However, undercutting the competition has come at the expense of lower revenues and weak margins. Overall revenue declined by about 7% year-over-year to $8.3 billion during Q4 FY2014. This is something Sprint can ill afford, given its huge debt load (net debt of over $28 billion). It’s likely that the company will eventually switch gears from stabilizing its customer base to improving ARPU from existing customers. However, increasing prices on unlimited plans or ceasing to offer them altogether won’t be easy, considering Sprint’s recent track record of discounting, and it’s certain to come at the expense of higher customer churn numbers. That said, the effect of this could be mitigated, since T-Mobile is the only other U.S. carrier that currently offers unlimited data. T-Mobile itself could eventually decide to follow suit, given the oligopolistic nature of the U.S. wireless market.

Our current $5.70 price estimate assumes that Sprint’s Internet & SMS subscriber revenue will grow from about $26/subscriber in 2015 to about $31/subscriber by 2021, which is the final year of our discounted cash flow model. In contrast, we expect the metric for market leader Verizon to rise from about $33/subscriber to about $43/subscriber over the same time frame. If we assume that Sprint were to improve its network quality sufficiently to take on Verizon, while moving towards tiered data plans, allowing its Internet & SMS ARPU to rise to about $40/subscriber, with market share declining slightly to about 9% by 2021 (assuming higher churn owing to higher pricing), this could increase our current price estimate by about 35% to about $7.70.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Sprint’s Claure: Unlimited prices might go up later this year; network is getting better, FierceWireless, June 2015 []
  2. An Early Net-Neutrality Win: Rules Prompt Sprint to Stop Throttling, WSJ, June 2015 []