Sprint Facing Headwinds

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Trefis) -- In Sprint's (S) recent earnings, higher customer acquisition costs, lower average revenues per customers and a decline in postpaid subscribers stood out as worrying trends.

In addition, there was a lack of a clear 4G strategy that has also been a persistent concern and contributed to the stock's 20% slide post-earnings. Although Sprint is growing its overall user base, higher competition from AT&T (T) and Verizon (VZ) is forcing it to spend more on promotional deals and subsidies to acquire these customers, which are increasingly prepaid subscribers who spend less on average.

We have updated our estimates and our revised $4.75 price estimate for Sprint stock is about 15% above market price.

The telecom providers' smartphone portfolio is growing from the juicy data revenues that heavy smartphone users bring in. Both AT&T and Verizon have demonstrated how important this can be given their success with offering the iPhone.

Earlier this year, AT&T started offering iPhone 3GS for $49, which then forced Sprint to increase the subsidy on the smartphones that it sells. Sprint has also started to shift from mail-in rebates to instant rebates program, in which customers can choose for instant rebates for smartphones rather than the earlier method of claiming the rebate through mail after a specified period of time (which lends itself to people forgetting to mail in their rebates). These competitive pressures drive up the cost of doing business for Sprint.

Sprint lost around 101,000 postpaid retail subscribers while it gained around 670,000 prepaid retail subscribers in the last quarter. Prepaid subscribers typically have lower ARPU levels compared to postpaid, and this gap widened in this quarter, as prepaid ARPU declined sequentially while postpaid ARPU increased sequentially. This also meant that the average ARPU declined during the quarter, which put further pressure on the gross margins.

See our complete analysis for Sprint stock here.

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.