Sprint Recovers After Beatdown

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) -- On Friday, embattled wireless carrier Sprint's ( S) shares fell by around 20% after it announced plans to raise additional capital to fund the launch of its LTE service by mid-2012. This morning, shares were down an additional 5%. They are gaining now.

The plan will take it away from the currently deployed WiMax as its 4G technology of choice. Although this switch will help support faster data speeds, investors dumped its shares fearing the impact of additional debt the company will have to incur to meet this aggressive rollout plan.

Sprint's network upgrade is a high-risk strategy.

See our complete analysis for Sprint stock here

High Debt Might Derail the Stock

Sprint already has a highly leveraged balance sheet, with net debt of $11.4 billion compared to a market cap of merely $7.2 billion. The announcement that it will likely need to raise more capital to fund the LTE will make the balance sheet even less attractive. While we believe that the market's response has been somewhat exaggerated, it is not entirely unwarranted.

If we tweak the Trefis model for Sprint to include increasing capital expenditures in the next five years, we can see that the stock price forecast plummets, showing a high sensitivity to capital expenditures.

LTE, Network Modernization Plan

Currently, Sprint's WiMax network is being provided by Clearwire ( CLWR). By chalking out a plan to spend on its own network and gradually phasing out Clearwire, Sprint's management has indicated that it believes this will decrease the operating costs of wireless data transmission.

To understand the upside potential this presents, this move should be viewed in conjunction with the company's Network Vision Project that will eliminate one of the two discrete networks the company operates, cutting costs substantially, as well as the recently announced plan to provide iPhone users with unlimited data plans.

The margins on unlimited data plans are usually lower, but the decreased network costs will enable the company to provide these plans without taking a long-term hit to margins. If successfully implemented, this should translate into increased market share in the wireless market with little to no impact on margins.

Sprint is treading a very fine line here by betting on its own LTE network and the iPhone deal. If the company is able to lure iPhone users with its unlimited data plans and at the same time increase speeds and eventually cut costs by using its own 4G network, the long-term prospects look good.

However, the significant debt balance leaves the company with little room for error.

In light of Friday's selloff, our $4.75 price estimate for Sprint's stock is about double the market price.

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.

More from Technology

Facebook Takes Aim at YouTube, But It'll Be an Uphill Online Battle

Facebook Takes Aim at YouTube, But It'll Be an Uphill Online Battle

Microsoft Chief Says Its ICE Contract Isn't Part of Child Separation Policy

Microsoft Chief Says Its ICE Contract Isn't Part of Child Separation Policy

Immigration, Instagram and Oil - Here's What You Can't Miss Wednesday

Immigration, Instagram and Oil - Here's What You Can't Miss Wednesday

What Will GM Do With Cruise -- and Is Its Stock Worth $55?

What Will GM Do With Cruise -- and Is Its Stock Worth $55?

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio