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Wall St.: Dish Isn’t Best Served Cold

Dish network chairman and CEO Charlie Ergen has managed to gain Wall Street favor by snapping up wireless spectrum at bargain prices over the past several years. But Ergen saw sentiment begin to change last week after it became clearer that not only will he not sell his spectrum to the highest bidder, he may actually be serious about building his own wireless network with it.

That has forced analysts who have been following the stock for years to take a hard — even a harsh — look at Dish. If the satellite-TV company isn’t going to sell its spectrum to the highest bidder, which at one point was valued upwards of $40 billion, and instead is going to possibly spend billions to build out a competing wireless network, what’s the point in owning the stock?

Dish shares have been on a roller-coaster ride for the past few years: they rose 26% in 2014, declined 22% in 2015, were flat in 2016 and are up about 4% so far this year. The stock closed at $60.38 on May 3, down 7% from its $65 price on April 27.

Dish bought even more spectrum in the recently closed 600-Megahertz federal auction, bidding about $6 billion on licenses it said could help it build a national network around 5G technology and the Internet of Things.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak lowered his rating on the stock to “hold” from “buy” as other analysts expressed caution, adding that with a core business short on fundamentals, it’s getting harder to see the light at the end of Dish’s darkening tunnel.

Wlodarczak wasn’t as down on the company as some other analysts, basing his downgrade on the increasingly unlikely view Dish will be able to sell spectrum in the near term.

“In our view, the most logical partner/acquisition candidates may be off the table for at least the balance of ’17,” Wlodarczak wrote. “This would likely leave players that are more partners in building out Dish spectrum, which it is a more uncertain outlook than expected by the market, in our view.”

Dish has to build out its wireless network to 70% of the country by 2020. The company has said in the past that it would only do so with a partner, but last week Ergen said Dish has the balance sheet capacity to create the network on its own.

Dish is talking to vendors and could begin building the network late next year, Ergen added.

“We have a tremendous set of assets at Dish,” Ergen said on the company’s earnings conference call. “And it’s our job as management to put those assets to work in the most economic long-term model that makes sense for our shareholders and for our customers. And that’s what we’ll do.”

Wlodarczak wasn’t ready to write Ergen off just yet, adding in his note that he didn’t slap a “sell” rating on the stock because he continues to believe in “Ergen’s ability to create substantial value via his valuable spectrum holdings, and ultimately that his spectrum holdings are worth more than is implied by the market currently.”

Others weren’t so optimistic. Barclays analyst Kannan Venkateshwar wrote in a research note that while he had expected Dish to go down the buildout path, “the mere consideration of an organic path for spectrum build-out is likely to be perceived negatively by most investors. In our view, this is because Dish’s equity valuation is largely a thought experiment rather than anchored in any fundamentals.”

Telsey Advisory Group media analyst Tom Eagan wrote, “Dish’s business model is proving increasingly unsustainable,” adding that its potential list of partners is diminishing.

It doesn’t help that the core business — satellite TV — is in steep decline. Dish lost about 320,000 satellite customers in the first quarter and its over-the-top Sling TV business, once growing enough to take up the slack, is slowing. Dish doesn’t release Sling TV subscriber figures but some analysts estimate it added about 177,000 customers in the first quarter, slightly above the 169,000 additions in the prior year, but down from the 273,000 additions in the fourth quarter.

The descent of Dish’s core satellite business has been rapid. Dish ended the March quarter with 12.3 million satellite- TV subscribers, or about 1 million less than in Q1 2016. At the same time, its Sling TV over-the-top service has added about 700,000 customers, according to MoffettNathanson principal and senior analyst Craig Moffett.

While Sling customers are cheaper to maintain — Moffett estimated that subscriber acquisition costs for satellite- TV customers are about $850 each, while Sling TV SAC is about $50 — they also generate much less revenue. Sling TV charges between $20 and $40 per month for its service, while overall satellite-TV ARPU is about $90 per month.

That reduction in SAC (Moffett estimated that including Sling TV, blended SAC is about $539 per subscriber) and reduced gross customer additions (at 369,000, down from 496,000 in the previous year) helped Dish tick up cash flow slightly (0.1%) in the quarter, but sent revenue down 3.8%, its worst quarterly showing ever — and a possible indicator of worse times to come.

Moffett wrote that in the fourth quarter, Dish revenue was declining at a rate of about 1.4% per year. Six months earlier, it was growing. “Shrinking gross additions in order to sustain EBITDA works for a little while,” Moffett added, “but only for a little while.”

In the past, analysts and Dish itself shrugged off the satellite declines, adding that satellite TV was a maturing business and the real growth was in over-the-top services like Sling TV.

Dish isn’t the only one that feels that way — AT&T’s DirecTV has seen its core satellite growth slow and has been encouraging price conscious satellite customers to switch to its OTT product, DirecTV Now.

But with Dish, there was always the added cushion of spectrum. If times got too rough, they could always sell out to one of the many bandwidth hungry incumbents such as Verizon, AT&T, Sprint or T-Mobile.

Now that cushion has deflated, at least for the time being.