Kerrisdale Capital will host a conference call today at 10:30am ET to discuss the Straight Path report.

To participate in the conference call, dial 888-567-1602 (US and Canada) or 862-255-5346 (international) and reference the Kerrisdale Capital call.

A replay will be available following the call at kerr.co/strp-jan19.

We are short shares of Straight Path Communications, a disgraced “5G” hype vehicle whose stock price surged last week for an unusual reason: the announcement of a harsh regulatory crackdown. After a pseudonymous short seller in 2015 accused Straight Path of “fraud,” the FCC opened its own investigation into whether the company had violated its legal duty to actually provide service rather than merely hoard spectrum for the sake of speculation. To end this investigation, Straight Path agreed to pay up to $100 million over time, surrender many of its licenses, and sell its entire remaining spectrum portfolio, with 20% of the sale proceeds going to the FCC.

The market greeted this news joyously, apparently relieved that Straight Path had avoided an even more draconian penalty and convinced that a spectrum sale would be fast and lucrative. This optimism is badly misplaced. Straight Path’s spectrum is worth far less than the company’s current half-billion-dollar market cap. Indeed, as we discuss below, Verizon is set to buy a similar amount of higher-quality spectrum from a sophisticated, deep-pocketed seller – Carl Icahn – for just $200 million, 61% lower than where Straight Path trades, implying massive downside for its stock price even before taking into account the harsh FCC penalties. Adjusting for these penalties and the lower quality of Straight Path’s spectrum, we believe the true downside exceeds 70%. The notion that a company that holds less than $10 million in cash, burns $7 million a year, and must pay out $15 million in fines in the next nine months will drive a drastically harder bargain than Carl Icahn – in a government-mandated fire sale – is beyond absurd. Yet to own Straight Path at this price, that’s what one must believe.

Further weakening Straight Path’s bargaining position is the immense supply of alternative millimeter-wave spectrum. In a rulemaking concluded last July, the FCC effectively expanded the 39GHz band that houses the vast majority of Straight Path’s spectrum by 71%; with so much directly adjacent greenfield spectrum, Straight Path’s holdings are nothing special. Moreover, a follow-on rulemaking, initiated at the same time and now in its final phase, proposes to open up an additional 18 gigahertz of mmWave spectrum for mobile use, likely quintupling the existing inventory and further diluting Straight Path’s value.

As much as management might want to raise capital and hold out for an unrealistic sweetheart deal, a little-noticed term of the FCC settlement makes that a dangerous strategy, allowing the FCC to re-open its investigation after twelve months and potentially revoke Straight Path’s licenses. Likewise, shareholders confident that Straight Path’s former parent company will foot the bill for its fines fail to appreciate the legal subtleties that put this outcome in serious doubt. But who can blame them? At this point, hope is the only real asset Straight Path has left.

Read our full report here.