Sprint's Upside Possible 5% on Prepaid Sub Gains

Sprint's prepaid plans could help it gain U.S. wireless market share.
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U.S. wireless giant

Sprint

(S) - Get Report

is aggressively pursuing prepaid customers, a market in which it competes mainly with

AT&T

(T) - Get Report

and

Verizon

(VZ) - Get Report

.

Sprint moved to strengthen its prepaid business by acquiring

Virgin Mobile

late last year. Most recently, Sprint has introduced several new prepaid plans at unusually low price points. While this move will likely reduce the company's average revenue per user (ARPU), an important metric in the telecom business, it could also help Sprint gain share in the U.S. wireless market.

This scenario suggests a potential upside of 4% to 5% to our current $4.79 stock price estimate for Sprint.

Prepaid price cuts

Via its Virgin Mobile subsidiary, Sprint introduced three new prepaid monthly plans in May. Marketed under the rubric "Beyond Talk," the plans include unlimited messaging, data, and e-mail and Web. The plans are priced at $25, $40 and $60 respectively. The $60 plan includes unlimited voice, while the $25 plan includes 300 voice minutes.

Virgin Mobile also targets budget-conscious consumers through its PayLo sub-brand, which offers two prepaid plans for $20 a month.

If these low-priced plans succeed, Sprint could see a decline in its prepaid ARPU. We currently expect Sprint's prepaid ARPU to rise slightly in 2010 after sharp declines last year. The declines were due partly to the fact that the Virgin Mobile acquisition closed late in the year, which meant that Virgin Mobile's prepaid revenue contribution was only recognized for a short period. In 2010, Sprint will recognize a full year of prepaid revenue from Virgin Mobile.

You can drag the trendline in the chart below to create your own prepaid ARPU forecast for Sprint and see how it impacts the company's stock price.

Market share gains

On the bright side, the new budget plans are likely to increase Sprint's share of the U.S. prepaid wireless market. In this scenario, we see a potential upside of up to 5% for Sprint's stock.

In the next interactive chart you can drag the trendline to create your own prepaid wireless share estimate for Sprint and see how it impacts the company's stock price.

We think overall that Sprint's new prepaid strategy could work out well for the company. Incremental revenue from prepaid subscriber gains might well offset prepaid ARPU declines, generating net positive cash flows and modestly increase Sprint's share value.

You can see

the complete $4.79 Trefis price estimate for Sprint's stock here

.

Trefis

is a financial community structured around trends, forecasts and insights related to some of the most popular stocks in the U.S.