Sprint’s Huge Bet on the iPhone Threatens to Sink Stock

Sprint (NYSE:S) will get the right to finally sell the iPhone when Apple (NASDAQ:AAPL) introduces its new device in today’s event. However, according to a Wall Street Journal report, Sprint has made a commitment to buy at least 30.5 million iPhones in the next four years that makes this a whopping $20 billion commitment at today’s rates. ^[1] We believe that this size of a bet will certainly hit Sprint’s bottom-line in the near term, which already trails well behind those of bigger rivals Verizon (NYSE:VZ) and AT&T (NYSE:T).

No wonder Sprint’s stock was down 10% in yesterday’s trading session and is seeing heavy selling this morning.

See our complete analysis for Sprint stock here

Sprint Looking to Nearly Double its Subscriber Base

As of Q2 2011, Sprint had about 52 million subscribers, out of which only about 33 million were postpaid subscribers. ^[2] These postpaid subscribers will be the customers most likely to upgrade or buy iPhones as prepaid subscribers are typically more cost conscious and don’t buy the most advanced devices. Nonetheless, we expect Sprint to offer some deals for these customers as well in the hopes of converting more prepaid to postpaid subs.

Sprint’s bet to sell more than 30 million iPhones in 4 years is a huge one and, in terms of magnitude, it will need to double its postpaid subscriber base to sell these many iPhones. Compare these statistics with its competitors: AT&T activated 3.6 million iPhones and Verizon 2.3 million iPhones in the last quarter, and each of these telcos have a subscriber base of around 100 million. So this is a huge gamble on Sprint’s part.

However, part of Sprint’s appeal is that, unlike its larger rivals, it still offers unlimited smartphone data plans, something desirable to iPhone owners given they consume above average amounts of data. This is something we discussed in our earlier note titled Sprint’s Unlimited Plan Could Win Some Data Junkies from AT&T, Verizon where we mentioned that an unlimited data plan would be a unique selling point for the company and could help it gain more subscribers.

Bottom-line bound to get hit

Sprint’s margins are bound to get hit due to the higher subsidy costs associated with the iPhone, and since iPhone users are heavy data users, uncapped data usage by them could clog up Sprint’s network resulting in a need to either spend more to improve the network or eliminate the unlimited plans. See Why Investors Are Divided Over Sprint iPhone Deal.

In light of yesterday’s leg down, our $4.75 price estimate for Sprint’s stock is about 70% above market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Inside Sprint’s Bet on iPhone, Wall Street Journal citing people familiar with the matter, October 4th, 2011 [↩]
2. Data available in Sprint’s Q2 2011 SEC filings [↩]