DISH: Material Short-Term Potential Upside; Raising Target to $42 -- Pivotal Research Group

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Post a better than expected 3Q result, DISH’s first quarterly result with purchased TMUS/S assets and new useful disclosure, we updated the model which included our first stab at forecasting DISH’s 5G project and ’21 quarterly projections. We also conservatively decided to reduce our target value for DISH’s Sat TV business (which continues to be surprisingly resilient and cash generative) from 5X to 4X EBITDA [which is clearly not capturing the benefits of an inevitable merger with DIRECTV (and its significant synergies].

 We view our new nearly $20B valuation for DISH’s 5G project (based on a DCF with a 12X ‘2030 EBITDA multiple w/ a 12% discount rate) as reasonable and if Ergen is successful with his innovative network could end up being quite conservative. Interestingly, we helped cover the original DISH in the late 90’s when they were attempting to launch an innovative new Sat TV platform and we find the parallels interesting (for example there were plenty of pundits back than regarding the low chance of success for DISH vs. the status quo cable players). The changes to our model + a move to a YE’21 target price from YE’20 led to a modest $1 target price increase in our target price to $42.

DISH shares have traded off post the DOJ noting they would not approve a combo of DISH/DTV, AT&T seriously considering selling a stake in DIRECTV for 3.75X EBITDA (frankly we view this move by AT&T as a sign of the valuation bottom for the space) and amidst the aforementioned skepticism regarding the potential for DISH success as a major U.S. wireless provider. We anticipate events (some of which could be short term) that could boost the stock substantially off current levels including: 1) a likely inevitable merger with DIRECTV (massive synergies + a PayTV monopoly in 10-15M households with DISH as the controlling shareholder and at likely a very attractive DIRECTV valuation) as early as ’22 (as private equity buyers of DIRECTV have to view a deal with DISH as the end-game), 2) likely substantial long term upside if Ergen is successful building out his new wireless network for ~$10B (and the TMUS MVNO is very beneficial to his buildout allowing him to defer tower expenses substantially and launch a nationwide network materially sooner) with cable as a quite obvious inevitable partner for DISH (and perhaps an inevitable large investor in the project), 3) a shot that they could get ~$3B in designated discounts reinstated by the likely new FCC head and 4) the most interesting potentiallyshort-term event is we would not be surprised to see a substantial equity investor (possibly a tech company with wireless ambitions such as AAPL, GOOG or AMZN) emerging over the next 6 months to take a stake in the DISH wireless venture (a ~10% stake would be substantial, help insure the project is successful while allowing DISH to maintain independence) in front of DISH’s participation in the upcoming (Dec 8th) likely expensive C-Band auction (which is projected to raise $30-$40B). Clearly, without a substantial equity investor it is going to be difficult for DISH to participate aggressively in the C-band auction. In addition, DISH will have some small proving-out markets in 1H of ’21 and at least one large market in 2H’21 that should help prove out the technology. Wireless for all of these Internet players is increasingly vital (Apple makes the most sense to us) and getting in on the ground floor with DISH’s new technology would potentially be quite attractive while insuring an innovative 4th wireless player emerges. If DISH were to announce this type of investment we would not be surprised to see DISH stock hit our target price that day (50+% upside).

RISKS: 1) Traditional PayTV is a dying business, 2) the wireless buildout could be delayed or cost substantially more than $10B to build out, 3) DISH lacks a best in class data business to bundle with their PayTV offering, 4) there is substantial debt on core PayTV business (non-recourse to parent where wireless spectrum resides), 5) potential additional costs to reauction certain spectrum, 6) DISH may resort to equity/equity like securities to fund their wireless build out, 7) DISH is competing against powerful entrenched incumbents


By: Jeffrey Wlodarczak, Principal and Entertainment/Interactive Subscription Services Analyst, Pivotal Research Group

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