Investment Thesis
Shares of Globalstar (NYSE:GSAT) haven’t really gone anywhere, ranging from $1-2 per share over the past year. The market has priced this company at an expensive valuation of 10x sales and over 6x book value, leading me to believe the shares have already priced in a lot of the coming positive developments. With large capex coming up, I do not believe this company will be free cash flow positive anytime soon, leading me to rate shares as a sell because it is too expensive and too early to buy into Globalstar’s story today.
Company Overview
Globalstar according to the annual report “provides Mobile Satellite Services including voice and data communications services as well as wholesale capacity services through its global satellite network”. Their satellites are considered Low Earth Orbit, which means they are near enough to provide services to humans on Earth at any time.
Their Globalstar satellite system offers many solutions to businesses and individuals, such as GPS asset tracking, emergency and remote communications, data management and mapping, and other services that rely on a satellite. Nowadays, because satellite phone and TV aren’t really used or relevant in today’s economy, Globalstar has shifted to provide B2B services which can be attractive to investors for their potentially sticky cash flows they provide.
The bulk of the revenue comes from service revenue, or the money they make from their satellites and ground network. The company has service agreements with their customers where they “allocate network capacity to support the Services and Partner to enable Band 53/n53 for use in cellular-enabled devices designated by Partner for use with the Services”. So, investors can see that they have long-term service agreements that set Globalstar up to receive recurring service fees.
Ultimately, the company is still trying to find relevant ways to make use of its satellite assets but is still in its early stages. The company is currently free cash flow negative and faces a lot of competition in the satellite space. My take is that it is too early and also too expensive to take a flier on Globalstar because I think their Service Agreements revenue is still in its early stages and is already overpriced at 10x sales. Investors seem to be paying a lot for the uncertain future, so it’s best to take a pass on this name for now, in my view.
Working For The Government
The company reported first quarter 2024 earnings with the following results:
- Service revenue increased $0.5 million during the first quarter of 2024 from the first quarter of 2023.
- Loss from operations was $4.7 million during the first quarter of 2024, compared to income from operations of $7.2 million during the first quarter of 2023.
- Adjusted EBITDA was $29.6 million during the first quarter of 2024 compared to $32.6 million during the prior year’s first quarter, due primarily to lower subscriber equipment revenue.
The company announced that they are leaning more towards projects from the government, “In February, we initiated the proof-of-concept phase for a government services company to utilize our satellite network for mission-critical applications with over-the-air testing expected this quarter”. This government contract should increase revenue significantly, and is reported to “contains annual minimum revenue commitments escalating to $20 million in the fifth year”.
My take is that the company’s revenue growth rate does not justify a P/S ratio of 10. Even with government contracts and new service agreements, it is very hard for investors to justify paying such a hefty price for a company whose satellites are seeing not that many use cases in today’s economy, in my opinion. Sure, there are fringe cases for emergency messaging, GPS asset tracking and the like, but to me, it is unlikely to accelerate revenues anytime soon.
One major positive that investors might like is that their Commercial IoT services are in high demand, as revenues here “increased 24% for the three months ended March 31, 2024, compared to the same period in 2023”. Both ARPU and subscribers here are up YoY, which tells me that their asset-tracking solutions are potentially very viable as companies want to keep track of their productivity.
Many of their solutions here on solar-powered, which is likely ideal and attractive to customers who want to reduce their carbon footprint. All in all, although there were positive developments in the first quarter earnings, I believe revenues aren’t increasing fast enough to justify today’s premium valuation. Furthermore, it does not look like the company will be free cash flow positive anytime soon as they still have to invest heavily into their satellites to maintain their competitive position. Thus, I feel it is too early to invest in Globalstar and suggest investors stay away from this name today.
The Race To Outer Space
Globalstar does not appear to be unique in its offerings, and other companies can offer better service at a lower price in my view. For instance, Viasat (VSAT) also offers satellite-based services that seem to be more successful than Globalstar. They both offer remote communications services and commercial IoT applications, so it looks to me that the market opportunity here is not exclusive to just Globalstar.
Other competitors include SpaceX, which is reported in the company’s own annual report “has launched its Starlink constellation and has plans to enter the direct-to-cellular market through a series of partnerships”. I believe competitors such as SpaceX have more resources, talent, and exclusive partnerships that make it more likely to become the #1 or #2 direct-to-cellular service provider. If SpaceX takes the cake, it poses a major risk to Globalstar’s shareholders as they cannot compete on service or price and many of their satellite investments may become impaired.
I am skeptical if Globalstar can remain relevant in an increasingly competitive world that revolves around satellites. Their asset-intensive business requires a lot of money to sustain, and Globalstar’s financial position seems weaker than their competitors. Viasat is spending $1.5 billion annually on investments in capex compared to Globalstar’s $157 million, almost a 10x difference in spend. Therefore, I remain increasingly cautious on Globalstar’s competitive position as I see other satellite companies potentially gaining speed in the race to outer space.
Valuation – $0.33 Fair Value
The stock trades extremely expensive to its peers, at 10x sales and over 6x book value, which is much higher than the sector median. Right away, I believe the stock looks overvalued and therefore think investors need to be careful about overpaying. Globalstar does not appear to be the market leader in the satellite space and it has a very hefty price tag, leading me to rate shares neutrally.
Assuming revenues grow at 15%, which is around the FWD revenue growth rate of 20% according to Seeking Alpha, I think sales will reach $300 million by 2026. If we assume EBITDA margins to hold up around 35%, which is close to the TTM EBITDA margin of 36%, then our annual EBITDA should be around $105 million. Apply an EBITDA multiple of 10x, which is equal to the TTM sector median, gets me $1 billion in EV, rounded down.
Subtract net debt of $368 million gets me a fair market cap of $632 million. Divide by shares outstanding of 1.883 billion gets me $0.33 fair value per share. Investors can see the stock is immensely overvalued and does not deserve such a massive premium to its peers. Many of Globalstar’s competitors seem to be much more advanced, ahead, and have a bigger scale than Globalstar.
I think investors are overpaying for this stock today and would not recommend buying it at today’s price. A sell rating is appropriate due to the extreme valuation this company presents, at over 10x sales. In my opinion, the market is overvaluing Globalstar’s growth prospects and does not account for the competitive risk that could slow the company down. With no positive free cash flow, this money-losing company does not appear to be worth over $2 billion.
Potential Upsides
I could be wrong on my bearish thesis if the company somehow grows revenues dramatically to justify a P/S ratio of 10. If the government ramps up its dependence on Globalstar’s satellites and gives it a stronger reputation in the industry, it is possible that we see Globalstar fly up in terms of market share.
New products that are unique could drive Globalstar’s competitive position, as the company has announced that they have begun shipping their XCOM RAM product, which is seeing some initial success. The XCOM RAM product could be a major breakthrough that drives sales as it claims to “deliver >4x capacity gains and superior performance versus baseline 5G NR systems in both downlink and uplink transmissions” according to the website.
Potentially, new industries could pop up and see new demand for satellite services that Globalstar could capitalize on. It’s possible that we see the development of AI and machine learning create new use cases that require more satellites, thus increasing demand for the services Globalstar provides. Therefore, it’s possible that the P/S ratio of 10 is justified and that investors are extremely optimistic about new use cases the market hasn’t seen yet.
Sell Globalstar
It is rare to justify buying a company at 10x sales. In most cases, this is a clear and obvious sign of overvaluation, as it would take 10 years for investors to get their money back, assuming every dollar of sales translates to profit. This ridiculous assumption was penned by Scott McNealy back in the dot-com bubble, and I think aptly fits this stock as well. Investors should sell or avoid buying this name until the valuation becomes more affordable, as rising competition and negative free cash flows make this stock too expensive, in my view.
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