Sprint’s Stock Price Doubled In 15 Days; Is Market Overvaluing Sprint Just Before Its Merger With T-Mobile?

Sprint Corp (NYSE: S) saw its stock price double in the last two weeks from $4.37 on January 31, 2020 to $8.69 as of February 14, 2020. This surge in stock price was driven by the green light from a district judge to the $26.5 billion merger between the 3^rd and 4^th largest players in the telecom space – Sprint Corp and T-Mobile. The combined entity will provide stiff competition to Verizon and AT&T, which are much larger compared to Sprint and T-Mobile. However, Trefis believes that the 100% stock price appreciation could be an overreaction and the stock price is overvalued currently. As per Trefis, the fair value of Sprint’s stock is around $6. Compared to $8.69 as of February 14, 2020. This reflects a downside of close to 30% from its current level.

View the Trefis interactive dashboard on Sprint Valuation that details the factors driving a lower stock price estimate for the company, where you can alter the key assumptions and arrive at your own estimate for Sprint’s stock.

Company Overview

• Sprint provides services on a postpaid and prepaid payment basis to retail subscribers, which includes the sale of wireless services that utilize the Sprint network. It also provides wireline services to other communications companies and targeted business customers.
• It competes with other wireless carriers such as AT&T, Verizon Wireless, and T-Mobile, technology companies such as Microsoft, Google, Apple, and cable companies such as Comcast’s Xfinity Mobile and Charter’s Spectrum Mobile.

Estimating Revenue

• Sprint’s total revenue has grown slightly from $33.3 billion in FY 2017 to almost $33.6 billion in FY 2019, but is expected to decline to $32.2 billion in FY 2020 and further to $31.7 billion by FY 2021.
• Revenue decline of about $1.9 billion over the next two years is likely to be driven by about a $2.2 billion decline in Service Revenues, partially offset by around $0.2 billion growth in Equipment Sales and Rentals divisions

Service Revenue

• Overall, Services revenue declined from $25.4 billion in fiscal 2017 to $22.9 billion in fiscal 2019, driven by lower retail postpaid and prepaid revenues.
• We expect revenue to decline by 2.2 billion in the next two years, to about $20.7 billion in fiscal 2021, driven by a fall in average revenue per user (ARPU) for postpaid and prepaid subscribers.
• A lower ARPU will be driven by an increase in subscribers on lower price plans and promotional activities.
• Services sales contributed 68% of total revenue in fiscal 2019. Though this share is expected to go down to 66% in fiscal 2021, it is still expected to contribute a large part of the company’s revenue.
• Mounting competition, particularly with equipment, could hurt subscriber growth. However, we expect postpaid and prepaid subscriber growth to stabilize with the recent commercial 5G launch announcement.

To understand how Sprint’s revenue trend compares with that of its major peers, view our dashboard analysis.

Estimating Net Income

• Net income increased sharply from -$1.2 billion in 2017 to $7.4 billion in 2018 due to one-time tax benefits received, before falling back to -$1.9 billion in 2019.
• Net income margin increased from -3.6% in 2017 to 22.8% in 2018 before dropping to -5.8% in 2019. The sharp fall in 2019 was due to the company having completed its annual impairment testing for goodwill assigned to the Wireless reporting unit and as a result, recorded a non-cash impairment charge of $2.0 billion for the year.
• Margins are expected to improve in the near term to -2% in 2020 and 2021, on the back of better cost management, reflected in declining trend of cost of sales as a % of revenue, driven by a decrease in volume of used postpaid devices sold to third parties, a decline in postpaid and prepaid devices sold as a result of the higher mix of postpaid subscribers choosing to lease their devices, and lower accessory costs.

Estimating Revenue Per Share

• Revenue per share (RPS) has increased marginally from $8.22 in 2017 to $8.28 in 2019, due to marginally higher revenue.
• However, with the top line expected to shrink in the near term and with share count remaining almost flat, revenue per share is expected to go down to $7.84 in 2020 and further to $7.74 in 2021.

Stock Price Estimation

• As per Sprint Valuation by Trefis, we have a price estimate of $6 per share for Sprint’s stock.
• The stock price estimate is arrived at by using the discounted cash flow valuation technique, which you can find in Sprint’s detailed financial model here.
• Based on projected RPS of $7.74 per share in FY 2021 and a stock price estimate of $6 per share, Sprint’s forward price-to-sales (P/S) multiple stands at 0.8x.
• We have used the P/S multiple for valuation as the company has made losses in most of the recent years and is expected to remain loss-making over the next two years.

To understand how Sprint’s P/S multiple over the years stands in comparison to its major peers, view our interactive dashboard.

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