Why EchoStar Stock Is Falling Today

Telecom and satellite company EchoStar (NASDAQ: SATS) is reportedly considering a bankruptcy filing to protect its spectrum licenses. Investors are not taking the threat lightly, sending EchoStar shares down as much as 15% at the open and down 8% as of 11 a.m. Eastern.

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A preemptive filing on the horizon?

EchoStar is a satellite television and communications company currently focused on growing a nationwide cellular business. The company owns Boost Mobile, the nation's fourth-largest wireless carrier, and is building out the network using its spectrum holdings.

But regulators appear to be growing impatient with the company's progress. Reports surfaced last month that the Federal Communications Commission has opened an investigation into EchoStar's compliance with federal requirements to build out a nationwide 5G network according to milestones set in 2019.

EchoStar responded with evidence that it is indeed building out the network as required, but the spectrum resources are valuable and coveted by several companies. Included in that list is SpaceX, whose chairman, Elon Musk, has complained about EchoStar's progress and demanded the spectrum be opened to other users, including SpaceX's Starlink.

Late Friday, The Wall Street Journal reported EchoStar is considering a Chapter 11 bankruptcy filing as a way to shield its spectrum licenses from the threat of revocation. In theory, a filing would leave decisions about the spectrum up to a judge, not regulators.

Given EchoStar's structure, it is not entirely out of the question that shareholders would get something out of a bankruptcy. But it is a very high-risk bet. In bankruptcy, equity holders have the least protection, and shares are often zeroed out.

Is EchoStar a buy?

EchoStar declined to comment on the bankruptcy rumors, and a filing is far from certain. Political winds change direction quickly, and it is possible recent events in Washington could cause the FCC not to prioritize the EchoStar spectrum.

If the company does file, debt holders are likely to capture a lot of the value of the reorganized company.

There's a lot of risk to EchoStar right now, but also a lot of potential value if the company is allowed to continue on its path toward building Boost Mobile. Investors considering buying in should be prepared for further turbulence and limit EchoStar to a small part of a well-diversified portfolio.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.