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Sprint Corporation Has Seen Better Days

Sprint Corporation's (NYSE: S  ) attempt to acquire T-Mobile (NYSE: TMUS  ) has officially failed to materialize, as the former announced that it's abandoning its pursuit due to excessive regulatory hurdles . This means that Sprint won't be able to capitalize on T-Mobile's $3 billion cash position, growing customer base, and its spectrum. In other words, Sprint is left with its own business, and for current and prospective subscribers, this is not a positive.

Is Sprint so bad?
In 2011 AT&T failed to acquire T-Mobile, which then resulted in the latter receiving compensation valued at $6 billion in combined cash and spectrum . With this compensation T-Mobile has staged its turnaround, and has been able to afford some of the most aggressive service plans that the industry has ever seen.

Meanwhile, Sprint has had no such break, nothing to give the company a second chance at rejuvenating its tarnished brand. Yet, many still believe that Sprint has experienced a come-back in recent years, as the company is nearly three-times as valuable today as it was in late-2011.

However, much of this assumption of a stronger Sprint is artificially inflated, in part due to the Apple's (NASDAQ: AAPL  ) iPhone. In the years prior to late-2011 Sprint did not have right to sell the iPhone, and quickly lost subscribers and saw its debt skyrocket as peers like AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) thrived behind the success of a device that sold more than 70 million units during the fiscal year of 2011.

Therefore, when Sprint gained the iPhone, which was coming off two years where it grew 81% and 93% year-over-year, respectively, in units sold, it was the hottest must-have device in America . Yet, even during these growth years of the iPhone, Sprint did not do so profitability, and its revenue growth was only marginal.

Albeit, Sprint did reverse the trend of losing subscribers once it gained the iPhone, but now with the device reaching peak penetration levels within the U.S., and unit growth near flat , Sprint has since fallen back to its old tricks.

In the first six months of 2014, Sprint has lost approximately 633,000 subscribers . Meanwhile, T-Mobile and Verizon both gained more than 1.5 million subscribers in the second quarter alone. While Sprint did produce operating income in excess of $500 million during its last quarter, its highest in seven years, parent SoftBank's CEO Masayoshi Son recently said that price competition will intensify in the immediate future and that Sprint is testing more aggressive plans. In other words, its brief but sweet period of profits are unlikely to last.

In total chaos?
Following Sprint's announcement that it would not pursue a T-Mobile acquisition, the latter's CEO John Legere took to Twitter to bash Sprint, calling it total Chaos!

Unfortunately, Legere is right, as Sprint lacks a clear direction, and doesn't have the financial flexibility to completely reinvent its brand like T-Mobile has done.

Sprint has nearly $60 billion in liabilities, over $9 billion of which is current, and while its $519 million of operating income during the second quarter looks nice, investors must observe that Sprint's cash and cash equivalents declined $800 million during the same period.

Hence, the company is not financially strong enough to make any drastic changes, and if it does implement aggressive service plans, the company better hope it works, or the outcome will be a faster cash burn. With all of these unknowns, total chaos seems like a fair description of Sprint.

Foolish Thoughts
John Legere clearly believes the Sprint bus will crash, and when you look at all the moving pieces, he might very well be right. T-Mobile has officially surpassed Sprint as the number one prepaid wireless service provider , and has added at least 1.5 million net new customers for five quarters in a row . Meanwhile, Sprint continues to lose subscribers.

Furthermore, there's a reason that Sprint had planned to keep the T-Mobile name over its own had the buyout occurred, because its brand is tarnished and faces real threats. The most significant of those threats might be T-Mobile, and as the two companies now go their separate ways, investors and subscribers are likely better off staying or moving to T-Mobile before the chaos causes the bus to crash.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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9/2/2015 12:59 PM
S $4.99 Down -0.03 -0.60%
Sprint CAPS Rating: **
TMUS $38.80 Down -0.16 -0.41%
T-Mobile US CAPS Rating: ***