The comments echoed those made recently by Morningstar’s Brian Han, who also sees Spark as over-sold.

But in bad news for the company, Gardiner lowered his ceiling for short-term comeback as he reduced his 12-month target price from $4.25 to $3.60 (Han says Spark’s “intrinsic value” is $4.30).

2degrees rising

“The revised [Spark] guidance issued at the end of October indicated softer trading conditions but also the impact of competition on customer numbers and average revenue per user, particularly in the enterprise and Government sectors,” Gardiner said.

“2degrees appears to have been the main beneficiary of this as it attempts to grow its enterprise business off a low base.”

The Craigs analyst points to the strong full-year results privately held 2degrees filed with the Companies Office on November 28, which included a 16% rise in operating earnings to $339m and a 7% increase in revenue to $1.34 billion.

Recent boosts for 2degrees include displacing Spark in a massive contract with the Government’s Network for Learning, which covers services for more than 2500 schools from next March to 2031.

“We have revised our market estimates and Spark forecasts to assume 2degrees adds 50-100 bps [half to 1%] of mobile market share per year over the next five years, and effectively takes more than half of market additions,” Gardiner says.

“We also assume MVNO [mobile virtual network operator] market share increases.”

MVNOs such as Kogan Mobile use the incumbents’ networks under wholesale deals encouraged by the Commerce Commission but their collective market share has wallowed under 1%.

“The growth of the challenger brands comes at the expense of Spark and One NZ, in terms of customer additions and arpu [average revenue per user],” Gardiner said.

One NZ has been so far immune from the trend.

The telco’s first-half operating earnings rose 9% to $304m as its operating costs fell by $14m after a restructure last year, although its first-half revenue dipped to $940m from the year-ago $963m.

Its full-year operating earnings guidance was maintained at $580-$620m.

Chief executive Jason Paris said One NZ had already gone through the cost-cutting process Spark still has under way as it seeks to cut $50m or 10% from its labour costs.

One NZ has also made an unusual move with its big push to be Starlink’s first NZ partner for its soon-to-launch direct-to-cell service, which has the potential to give it a point of difference in an increasingly commoditised industry.

One NZ’s MVNOs will not be granted access. (2degrees’ boss Mark Callander argues that a few years down the track, every telco will have agreements with every satellite provider.)

Spark’s below-guidance FY24 result and downgrades for FY25 have been pinned in large part on the soft economy and, in particular, the tough Government and enterprise markets.

But some have also seen strategic missteps.

“In 2022, Spark sold 70% of its mobile tower business for $900 million to a Canadian investment fund, the Ontario Teachers’ Pension Plan,” Spark investment director Mark Lister wrote this week.

“It elected to return a good chunk of it to shareholders by way of an on-market share buyback, which began early last year.

“In hindsight, the conservative option would have been to hang on to this capital.”

Spark is now looking at options to raise up to $1b to build new data centres over the next five years to cash in on the AI boom.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.