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Prepaid wireless players gain momentum

At least one analyst says there are a lot of reasons to like MetroPCS and Leap Wireless, which both expect to have strong fourth-quarter results.

It's shaping up to be a merry holiday for prepaid wireless service providers MetroPCS and Leap Wireless.

MetroPCS has been successful at drawing in customers with its lower priced family plan promotion, which costs $100 for four lines. Leap, which sells its service under the Cricket Wireless brand, has benefited from its Muve Music service, as well as expanded distribution. Both are expected to exceed expectations, according to Michael Nelson, an analyst at Mizuho Securities.

"Sales appear to be gaining momentum," Nelson said in a research note.

The success of MetroPCS and Leap underscore the shake-up going on in the wireless industry, as budget-conscious customers eschew service contracts and look to prepaid providers. MetroPCS and Leap have gotten competitive, offering smartphones and data plans that undercut the national players.


Their growth, however, will likely come at someone's expense. Potential targets include Sprint Nextel, which has a significant presence in prepaid with its Virgin Mobile and Boost Mobile services, and T-Mobile, which has increasingly relied on prepaid for customer growth. AT&T and Verizon Wireless have focused more on the high end of the market, although both could see some turnover on the low end.

MetroPCS's focus on family plans--Nelson said he expects half of its sales are for family accounts--should reduce turnover down the line, since individuals are less likely to leave a service if their close relatives are all tied to the same account. While the company had some hiccups with its 4G LTE rollout, its service should improve since it began deploying 3G to cover up the trouble spots.

Nelson said he expects MetroPCS to explore options to help mitigate its spectrum shortage, including a potential partnership with Clearwire.

Leap, meanwhile, is seeing early success at the major electronics retailers, Nelson said. He added the company's expanded distribution has been a boon for growth, with the company moving into 5,500 additional locations to reach 11,000 nationwide.

The company has also been leaning on its Muve Music service as a way to stand out from the competition, and it appears to have worked.

Nelson upgraded the investment rating to both companies to buy from neutral, and said both of their stocks looked attractive.