Sprint Has "Apple" Issues

Bernstein analyst Craig Moffett downgraded Sprint shares to "underperform" from "market-perform," and more significantly thinks there is a risk Sprint could go bankrupt in about four years. You might wonder why.

Moffett argues there is potential danger ahead because of Sprint's heavy debt loads. Heavy debt frequently is an issue that trips up lots of firms. Nor is the need to invest heavily in new generations of technology.

For Sprint, perhaps more so than for other service providers in the U.S. market, there are investment issues related to a specific device. Some time in 2012, it is possible Apple will introduce Long Term Evolution versions of the Apple iPhone.

The problem is that Sprint does not, in Moffett's opinion, have the ability to buy or clear enough spectrum to compete with iPhones using Long Term Evolution expected to be offered by AT&T and Verizon Wireless.

You might be tempted to argue that Sprint simply can sell other devices, and doesn't "need" the iPhone. But Sprint, and most observers, thinks Sprint has to offer the iPhone. Many would say T-Mobile USA's current issues with subscriber growth are a direct result of its inability to sell a version of the iPhone that works on its network.

"We expect Sprint’s competitiveness to begin to backslide when LTE becomes the nation’s de facto standard,” Moffett says.

"To be clear, we are not predicting a Sprint bankruptcy. We are merely acknowledging that it is a very legitimate risk. And notwithstanding a recent rally in Sprint shares, we believe that risk is rising," Moffett said in a research note.

Moffett said he does not expect Sprint to file for bankruptcy any time soon. But he cautioned that it is due to repay $2.6 billion of its debt in 2015, the same year $3 billion in debt comes due for Clearwire Corp, which is majority owned by Sprint.

Sprint already has made a $15.5 billion commitment  to buy iPhones from Apple over the next few years, whether or not Sprint can sell them.

Sprint is also embarking on a $7 billion network upgrade to support LTE, but some worry spectrum could be an issue, in addition to increasing Sprint's debt load.

It might be stretching matters just a bit to say the Apple iPhone now has become a problem that will cause Sprint to fail, financially. But the iPhone appears to be a significant driver of capital investment Sprint cannot easily afford.