Intelsat – A NewSpace Stock On Sale?
Thematic investments in disruptive technologies are tricky. Even if you’re able to find some pure-play stocks, technologies and business models evolve so quickly that you may find that you backed an entire pack of losing horses. Solar and 3D printing are both great examples of under-performing themes that have disappointed investors over the past decade.
Another theme that’s difficult to play if you’re a retail investor is the future trillion-dollar space industry they now call “NewSpace.” A few years back we wrote about how Investing in the Space Industry with “Space Stocks” is difficult when thought leaders like Morgan Stanley list Apple, Google, and Microsoft as the top-three holdings in their “Space 20” space stocks portfolio. (It’s the old “Invest in Everything with Google” thesis which is commonly used by pundits when they can’t find any pure-play stocks for any given theme.) Still, there are some pure-play NewSpace stocks to be found, like satellite operator Intelsat (I).
Intelsat Stock’s Volatile Ride
If you want to invest in disruptive technologies, prepare to stomach extreme levels of volatility. Take Intelsat, for example. Shares were trading around $3 a share back in Nov 2017. If you bought shares of Intelsat at that time, you may have praised your Nostradamus-like investing acumen when less than one year later shares reached $30 giving you a spectacular +900% return in less than a year’s time. Now, imagine you kept holding those shares until today. As of the last market close, you’d be down -30% on your position.
Here’s what that emotional roller coaster would have looked like with an investment of $10,000 in Intelsat:
- Nov 2017 – $10,000
- Oct 2018 – $100,000
- Mar 2020 – $7,000
With shares of Intelsat at an all-time low, there are probably some bag holders wondering how they ended up here along with some investors on the sidelines wondering if there is value to be had here.
We first wrote about Intelsat back in Jan 2018 in our piece on 10 Satellite Stocks for Your NewSpace Portfolio. The Luxembourg company provides “the world’s most extensive and secure communications network” via the 50 or so satellites they have in operation. Here’s a comment we made in that article:
Past performance is not indicative of future performance and all that, but shares of Intelsat have managed to lose -93% of their value in the past 5 years. Maybe it’s the $14 billion of debt on their books, or maybe it’s the failed merger with OneWeb that Softbank was trying to engineer, but this stock appears to be going nowhere fast at the moment.Nanalyze, Jan 2018
And they continued to go nowhere fast until four months later when the price began climbing to $30 a share. Then, in Nov 2019, the share price dropped as quickly as it rose, settling to $1.64 a share where it sits today, and giving the company a market cap of just under $300 million. One reason for the sharp fall in Nov 2018 was a decision by the FCC to repurpose the C-band spectrum for 5G. An article by CNBC sums up the decision’s impact on Intelsat – “they’re not going to get the $8 billion to $10 billion windfall they were expecting.” In the finance world we call that “regulatory risk,” and it’s a huge problem because you can’t really control it, even if you spend loads of money lobbying. A windfall of cash would have helped Intelsat ease their extremely heavy debt load.
The Intelsat Debt Problem
When assessing the attractiveness for any given investment, you’ll find plenty of people who will point to the “pros.” We prefer to go straight for the “cons” to try and find a deal-breaker. For Intelsat, that’s their debt. As of Dec 2019, Intelsat carried $14.7 billion of debt on their books. (They’ll pay about $1.1 billion in 2020 alone.) Looking back on 2019, we see just how much this debt load impacts the bottom line.
Intelsat’s 2019 revenues of just over $2 billion were offset by operating expenses of around $1.6 billion meaning “income from operations” came in at around $388 million. That money went towards paying 2019 interest expenses totaling $1.27 billion, meaning they lost about $900 million in 2019, leaving them with about $455 million cash on the books going into 2020.
How will they raise more money to service this massive debt load? Increasing net income might be tough, considering that 43% of Intelsat’s income comes from media companies that may be impacted in any number of ways by today’s coronavirus happenings. Word on the street is that media companies will incur huge losses from sporting events being canceled. Will this be offset by the increased viewing numbers resulting from everyone getting quarantined? Who knows, but these unknowns also represent risks that Intelsat can’t control.
Intelsat could also raise money by selling shares – which are trading at an all-time low – or by increasing their debt load. Selling shares will dilute existing shareholders and cause the share price to drop further, but that also depends on what price institutional investors will be willing to pay. Based on the markets today, investors of all kinds are probably becoming a lot more risk-averse. The same holds true for raising more debt. New lenders won’t look favorably upon the current situation and demand high rates to cover the risks. With OneWeb said to be considering bankruptcy due to a cash crunch, it looks like problems in the NewSpace industry may become more widespread. That’s why NewSpace investors ought to consider diversifying their holdings a bit.
A NewSpace ETF
In April of last year, the first NewSpace ETF came online – the Procure Space ETF (UFO) – which is based on the S-Network Space Index. With just $13 million in assets today, it hasn’t exactly attracted much investment money. Still, it provides retail investors with a more diversified way to play the NewSpace theme. Here are their top-10 holdings with Intelsat sitting in second place.
There are plenty of other satellite companies in the list, all of which may be threatened by NewSpace startups like Starlink, a company that plans to provide global bandwidth to the masses for very cheap.
Finance professionals with advanced degrees have a hard time valuing sophisticated operations like Intelsat, so don’t think as an amateur retail investor you’re in any better position to understand what share price constitutes a bargain here. Trying to time the market and “call the bottom” is often referred to as “trying to catch a falling knife,” especially in our present environment of uncertainty. While dabbling in a NewSpace ETF might provide a better alternative than stock-picking, you might be better off considering the discounts to be had in some of the best dividend growth investing stocks on the market.