Dish Networks (NASDAQ:DISH) shares rose 10% on Wednesday November 19, 2014. The stock gains were fueled by an ongoing auction of spectrum that has deep implications for Dish Networks. The reason is because Dish Networks already owns a large quantity of spectrum that remains unused today. With initial demand in the auction being surprisingly high, then theoretically the value of Dish's spectrum increases, but just how much may surprise you.
Spectrum is basically an interstate, . or highway that allows for the transportation of data. Mobile data are the cars that travel on the interstate. Naturally, the more cars that travel on an interstate, the slower traffic becomes, and traffic jams ultimately occur. In the case of mobile data, it grew 81% year-over-year in 2013, and since the year 2000 it has grown a combined 18 fold according to Cisco .
In other words, the interstate is getting jammed real quickly, which is why telecom companies are so eager to make their interstates larger and wider. Not to mention, telecom companies own their own spectrum, which means that only its mobile customers can use its highway. The other problem is that not all spectrum is created equally. Think of spectrum as some roads being better than others with fewer potholes, with different speed limits, different lane widths, etc. In order to stop a traffic jam on an interstate or to speed up traffic on one of these inferior spectrum networks, there are two solutions: A new road must be built or the existing highway must be widened to free the flow of traffic.
The catch 22 is that the only way telecom companies can significantly expand their data highway is when the Federal Communications Commission, or FCC, decides to auction new spectrum. Even when a telecom company buys spectrum from another company, that interstate is already in use, and likely crowded itself. Seeing as how the FCC hasn't had a major auction since 2008, Wall Street expected great demand for the current auction. But no one could have expected just how much.
What's going on?
Auction 97 is the name given to the FCC's first major sale of spectrum to U.S. wireless operators since 2008. AT&T, Verizon, T-Mobile U.S., America Movil, and Dish Networks are among the companies involved in this auction, which exceeded $24 billion in winning bids as of Wednesday afternoon. Although, investors won't know which companies won what auctions until the process ends in the next two to three weeks. Until then, the most sought after blocks of spectrum are being bid on first, including one in the New York City area that reportedly sold for $1.19 billion .
Initially, the FCC had set a reserve target of $10 billion for Auction 97, a number that has been well surpassed after just four days of bidding. Based on historical trends of bidding activity, Citigroup analyst Michael Rollins figures that the ultimate value of Auction 97 could top $29 billion. However, that estimate was set on Tuesday when the total take was $14 billion . It's doubtful that Rollins estimated a near $10 billion increase in just 24 hours. In other words, given this unprecedented demand, it is highly possible that this auction could blow past even the most lavish of expectations.
Let's talk Dish Networks
Dish Networks is one of the big companies involved in the bidding process. However, what spectrum Dish ultimately acquires is not necessarily important. Instead, the overall demand for spectrum is what investors are monitoring closely.
The reason is because Dish already owns a large chunk of spectrum, but because Dish doesn't offer mobile services, its spectrum essentially sits on the sideline as an unused asset. Therefore, if Dish were to ever attempt to sell its spectrum, Auction 97 would give the company an idea of demand, and what it could ultimately charge a buyer.
That said, the demand in Auction 97 has exceeded analysts' wildest dreams, but the real kicker for Dish Networks investors is that its spectrum is labeled AWS-4. The FCC is auctioning AWS-3 spectrum at over $1.50/MHz, which is roughly 50% more valuable than the $1.00/MHz that research firm BTIG had expected .
AWS-4 is considered a higher quality "interstate" than AWS-3. Think of AWS-4 like a nine lane, newly paved series of interstates that run seamlessly through Atlanta, meaning it allows for a better flow of data. And remember, Dish's interstate remains unused, sitting beside crowded highways, and looking ever so attractive.
What does this all mean?
All things considered, Dish Networks owns a large block of spectrum, but with no mobile network its spectrum remains unused. In essence, spectrum appears to be an asset that Dish management has acquired over time in hopes of either adding a mobile network later, or as purely an investment with hopes of an appreciated worth. Based on the initial results from Auction 97, it appears that Dish Networks' management has made a wise bet on spectrum.
Back in June, the New York Times suggested that Dish was looking for buyers of its spectrum, and cited analysts who valued it at $17 billion. Given the fact that AWS-3 spectrum is being bought for 50% more than analysts had expected per MHz, combined with the initial demand for this spectrum, investors have to believe that the value in Dish's AWS-4 spectrum must be higher today than June's $17 billion estimation. If its value too increases 50%, then it could be worth $25 billion, or more than 70% of Dish's market capitalization.
Given the fact that Dish Networks still has a successful satellite TV business with 14 million subscribers that has created $14.5 billion in trailing 12-month revenue, Auction 97 might be a great indication that shares of the company are significantly undervalued, and that Dish may hold a successful auction of its own in the near future.
Brian Nichols owns shares of Verizon Communications. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.