DISH - DISH Network: Short Squeeze And Amazon Takeover Potential

2023-07-12 04:53:07 ET

Summary

• DISH Network has been working hard to develop the 4th largest wireless network nationally, spending $10 billion to purchase spectrum wavelength rights and build out wireless infrastructure since 2020.
• A massive 27% of float is now confidently short the company, as sales and profitability at the legacy satellite TV business flounder.
• Rumors of Amazon considering a takeover of DISH have resurfaced, which would allow Amazon to market Prime members a proprietary-technology wireless plan in-house, complementing its AWS and cloud leadership position.
• Technical momentum appears to be reversing in July, with a significant short squeeze on Amazon rumors now possible.

It's rare to find a beat-up blue chip with so many different stories, both positive and negative, floating around at the same time as DISH Network ( DISH ) over the last month. During the past five years, the company has been trying to diversify away from its legacy business of satellite transmission for television towards becoming a viable 4th wireless carrier nationally. To do this it has used cash flows from the stagnate satellite division and a mountain of debt to finance the purchase of 5G wavelength spectrum from the government and build out the wireless idea. Around $21 billion in total debt is now on the books at last report, with a $10 billion spend on capital expenditures for wireless over the last three years alone.

Cofounder, Chairman and largest shareholder for voting control Charlie Ergen was rumored to be in Dubai during May searching for extra funding to complete DISH's national phone network. As of June 26th reporting to the SEC, 70 year-old Mr. Ergen owned 51.5% of voting control, including Class A and Class B shares.

Chief Operating Officer Narayan Iyengar resigned in June , and rumors of a potential merger with much smaller rival EchoStar ( SATS ) appeared last week (also controlled by Charlie Ergen).

Unfortunately, operating results on sales and earnings have disappointed Wall Street and investors for a number of years running. The immediate outlook for 2023 and 2024 is not any brighter, with the company expected to deliver only minimal overall profits from here.

Short Sellers Rejoice?

So, as the company has struggling and net profits disappearing, short sellers have jumped on the bandwagon believing the stock is headed to zero. And, during 2022-23, DISH's stock quote has cratered, giving all kinds of confidence to shorts to pile on. Today's almost 11% borrowed and presold position on the outstanding share count plus 27% representation on net float (excluding Mr. Ergen's controlling stake and other insider holdings) have exploded to quite extraordinary proportions this year.

The question I ask is - what if the selling (and related price dump) is overdone? What if the company can raise satellite TV prices enough to cover the loss of customers? What if the novel computer-streaming over the internet wireless business model catches on? What if the enemy of all short sellers, a dreaded buyout offer becomes reality?

Amazon Takeover Odds

While at face value the short seller dive into positioning makes plenty of sense, wireless development partner Amazon ( AMZN ) is lurking in the background as a potential suitor. Why would Amazon want to acquire DISH on the cheap?

Well, rumors 5-6 weeks ago that Amazon is considering offering Prime subscription members a cut-rate wireless plan circulated again for the second time on Wall Street. Instead of leasing space from one of the Big 3 wireless providers, why not purchase DISH at a depressed price (with the help of exaggerated short selling) and develop the whole concept in house?

To me, a combination makes perfect sense on both sides of the transaction. I am sure Mr. Ergen would like to cash out at this stage of his life and keep his reputation somewhat intact (where a bankruptcy would ruin it). Essentially, if Amazon wants to purchase the company, negotiations with only one person are critical and necessary. By offering a nice premium on the miniscule $3.7 billion equity market capitalization (at $7 per share for DISH) today vs. $16.3 billion in trailing annual sales and $2.6 billion in EBITDA, the majority of other shareholders would jump at the chance to recover steep losses.

My thinking is Amazon would love to market the new internet-based communication and 5G wireless network being developed to businesses and consumers alike. It would nicely complement the AWS and cloud leadership position held by this enterprise, with all kinds of cross-promotion opportunities opened. In addition, with 5G wireless coverage reaching up to 70% of the U.S. population as of June 2023 (meeting FCC commitments), a cut-rate DISH-owned plan could quickly steal customers from the other major wireless carriers ( AT&T, Verizon, T-Mobile US ) and completely disrupt the industry.

In fact, the 5G wireless and broadband network already uses some interesting scalable technologies beyond what the largest U.S. carriers have in use, with Amazon's cloud help. This may make a DISH takeover deal more desirable than renting space at another major carrier. According to the June 15th company press release announcing DISH's reach to 70% of the U.S. population,

"Our teams have worked tirelessly for years, and this achievement is a testament to their dedication and commitment as we grow the world's first and only 5G cloud-native Open RAN network," said Dave Mayo, executive vice president, Network Development, DISH Wireless. "We appreciate the continued support and efforts of our partners as DISH continues to lead the industry in Open RAN deployment."

DISH is also the first wireless service provider to launch 5G voice service – called voice over new radio (VoNR) – in the U.S. Since going live in Las Vegas last year, DISH steadily increased VoNR functionality to additional markets. Our VoNR service now covers more than 70 million people across the U.S. through both Boost Mobile and Boost Infinite. DISH plans to continue rolling out VoNR service as the network is further optimized for this next-generation voice technology.

"As a leader in Open RAN technology, DISH is playing a major role in the transformation of America's wireless infrastructure and the way the world communicates," said John Swieringa, president and chief operating officer, DISH Wireless. "We have made significant progress on our network buildout, and can now focus on monetizing the network through retail and enterprise growth. With more markets across the country offering the DISH 5G network for voice, text and data services, our business can start realizing the benefits of owner economics."

Amazon's $1.2 trillion market cap could easily absorb paying $7-9 billion upfront to DISH shareholders ($14 to $18 per share as my estimated takeover offer range, still half of last year's price), while $21 billion in debt could be refinanced at lower rates available to Amazon in the bond market. My suggestion is a straight forward, all-share offer would be the smartest way to accomplish a deal for everyone, with no upfront cash from Amazon required.

Chart Pattern Reversal in July?

What's really captured my attention over the last week is the low-volume rise in price above DISH's 50-day moving average. After months of wild swings on heavy volume turnover (given all the rapid-fire news stories, rumors and company events), selling pressure now appears exhausted. All the short sellers and weak hand holders have dumped. Where do we go from today for a share supply/demand balancing act?

Given all the bearish news and a stock price cascading lower in 2023, I have not had any interest in owning shares. But, the Amazon rumors and a chart pattern moving in the right direction since the end of June have forced me to rethink the investment proposition.

Truth be told, the low-volume rise to $7.40 intraday (July 11th) following the wicked high-volume span of May and June could support some type of retracement in price, even if it's just a normal technical rebound back to $9 or $10 per share.

Other chart positives include a divergence in momentum at the price bottom in late June. I have highlighted below with green circles the lows reached in the Accumulation/Distribution Line , Negative Volume Index , and On Balance Volume indicators AHEAD of price (circled in red). This setup adds to the exhausted selling logic.

Final Thoughts

With a massive bear-led position created by short sellers already existing and the likelihood rumors will persist of an expanded wireless partnership with Amazon using its growing 5G network buildout (to the actual announcement of an takeover deal), could in combination absolutely propel DISH to sharp gains in the coming months. My view is just the "fear" of a potential takeover bid could cause short sellers to cover en masse, shooting price over $10 a share without any news.

That doesn't mean DISH is an investment without long-term risk. On the current trajectory, the share quote could fall all the way to zero in a bankruptcy situation by 2025-26 (100% loss of invested capital), especially in a deep recession scenario.

On the reward side of the equation is an Amazon takeover bid well above $14 per share. In my risk/reward analysis, a possible share price decline of say -50% over the next 12 months (halfway to bankruptcy) is weighed against upside potential of +100% or slightly more. Not a terrific bargain by any means, but an investment with "short squeeze" turnaround written all over it.

I officially rate shares a Hold for long-term accounts. Yet, primarily with a focus on "short-term" profits as a goal, I believe purchasing DISH shares for a swing trade is quite defensible. If I can get $8.50 to $10.00 for my stake by the end of summer, I will almost surely take most, if not all of my DISH chips off the table. A temporary short squeeze is my baseline forecast. At $10+ for a purchase price, the risk/reward setup makes less sense, unless a merger with Amazon plays out.

Assuming a takeover bid does not transpire by late September, I suggest greatly reducing your exposure. As a standalone business, with rising interest expense on higher rates, plus the need for additional capital to finish the 5G network, DISH may continue to underperform the S&P 500 over the next 2-3 years.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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