5 Billion-Dollar Satellite Operator Stocks
Say what you want about Elon Musk, but he should be commended for not kowtowing to the small minority of soon-to-be unemployable tech workers who think they were hired to push activist agendas. Mr. Musk is too busy executing against his own agenda, which is to secure mankind’s future by making inter-planetary travel a reality. As visionaries like Musk continue to make progress in space, there’s an increased interest from investors for exposure to NewSpace themes such as cleaning up space junk, gas stations in space, or even space tourism.
In a recent article, we asked Are There Any Space ETFs Worth Investing In? Turns out there aren’t, but we did come across a handful of stocks that may be worth a closer look. Most of these stocks came across our radar a few years back when we wrote about 10 Satellite Stocks for Your NewSpace Portfolio. They are largely satellite operators that occupy a very specific niche on the satellite value chain.
First, we eliminated companies that didn’t meet our minimum market cap requirement of $1 billion (OHB barely snuck by). The below names didn’t make the cutoff for this article (market cap USD millions in italics).
- Loral Space and Communications ($817)
- ORBCOMM ($649)
- Avio SpA ($375)
- GomSpace ($133)
- Intelsat ($76)
We also left off any defense contractors because we’re more interested in pure-play exposure and less interested in depending on the government for success. That left us with five space stocks.
Five Satellite Operator Stocks
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All of these companies are using satellites they’ve put up in the sky to offer services and products down here on earth. Whether we call them satellite stocks, satellite operator stocks, or space stocks is irrelevant, we’re just interested in whether or not any should be considered for the Nanalyze Disruptive Tech Stock Portfolio. Similar to how hiring managers tackle a stack of applicants, we’ll start by looking for enough red flags to file them in the circular file cabinet.
Iridium Communications Stock
Satellite operator Iridium Communications offers voice and data connectivity through a constellation of 66 cross-linked LEO satellites. The company’s worldwide customer base represents a broad spectrum of industry, including maritime, aeronautical, government/defense, public safety, utilities, oil/gas, mining, and forestry. (All industries that require dependable connectivity, oftentimes in remote places.) The United States government (particularly the Department of Defense) is their single largest customer accounting for 22% of their total revenue for 2019. This is part of a contract with a total value of $738.5 million over its seven-year term, through September 2026. Having a government entity as your biggest customer represents regulatory risk you cannot control and is at the whims of whichever administration happens to be in control.
Revenues are growing over time, but we’re more concerned with the unpredictable business model which is characterized by “high capital costs, primarily incurred every 10 to 15 years, in connection with designing, building and launching new generations of our satellite constellation.” Iridium has 1.6 million subscribers that they need to keep happy at all costs or they’ll be quick to find alternative providers. If Mr. Musk manages to get all 34,000 satellites into space along with cheap Internet for the masses, it’s hard to see how Iridium will be able to compete with SpaceX’s economies of scale. You’ll see this concern raised with all the companies we’ll talk about today.
We’d like to tell you more about Iridium, but their investor relations team has been sleeping on the job and it’s incredibly difficult to figure out what this company does because they just don’t make that sufficiently clear. It’s a recurring theme you’ll see in most of the companies we discuss today – the inability to express in simple terms what it is the company does.
SES does what all these satellite operators do. They place satellites in the atmosphere, and then use them to stream digital content into households – among other things – with video delivery accounting for 75% of 2019 revenues. Half of those revenues come from Europe, a place where Pink Floyd once sang about thirteen channels of shite on the T.V. to choose from. The lads would be surprised to see that there are now more than 43,000 channels of shite to choose from.
As the market moves from standard definition to higher definition, more bandwidth is needed. SES has about 70 satellites in operation that produce the declining revenue streams seen below.
Again, we’re faced with a business model that has a lot of uncertainty around it. Borrow money, build out an expensive satellite constellation, sell the bandwidth it produces, maintain the constellation, plan new constellations, all while making sure you’re able to pay down the mountain of debt you took on to get the business underway. The whole thing becomes even more confusing when they start to depreciate those assets against the balance sheet over time. It’s a complex operation with lots of moving parts that can go wrong, but it also provides a formidable barrier to entry for possible competitors.
The same sort of capital-intensive business model can be seen in our next company.
Eutelsat Communications Stock
One thing to like about how most satellite operators are set up is that their revenue streams come in different forms which provide revenue stability in the form of diversification. Similar to SES, Eutelsat operates a satellite constellation which consists of 39 satellites which produce revenues across a number of segments. Below you can see how each segment has reacted differently in response to The Rona, and what little downside you see is tame compared to what others are suffering.
Given people will always need to be entertaining themselves, ships need to navigate, governments need to do what governments do, these satellite operators might provide some sort of resilience in the face of market turmoil. That is, unless they’re up to their cojones in debt, in which case they’ll start dropping like flies when they can’t service said debt. That’s why you should always pay attention to the debt ratings for these companies if you decide to invest in them. Fitch Ratings put out an excellent piece on Eutelsat’s credit rating a few months ago which is a good read if you’re into that sort of thing.
Eutelsat pays a dividend and exhibits the sort of diversified stability that sounds appealing, that is until you realize that’s not what you’re looking for, and turn your attention to historical revenue growth, of which there is none.
That’s just not the sort of double-digit revenue growth that drew us to the space industry in the first place.
Viasat is a global communications company that we first came across in our piece on Global Internet to Keep Us Connected Everywhere. The 30-year-old company offers broadband technologies, products, and services which are provided from their small network of satellites. The company believes that fewer satellites with greater capacity will be the future as opposed to the Starlink 30,000-plus satellites approach. Revenue for Viasat can be divided into three broad segments (revenue percentages in italics from Q2-2020):
- Government systems (47%) – Global mobile broadband services and products to military and government users
- Satellite services (39%) – Broadband to consumers, enterprises, commercial airlines, and mobile customers
- Commercial networks (14%) – Broadband platforms, ground networking equipment, space-to-earth connectivity systems
The good news is the double-digit revenue growth – a compound annual growth rate (CAGR) of 13% over the past ten years. The bad news is about half of today’s revenues come from government contracts.
Our reasons for not wanting exposure to government money differ from the activists plaguing today’s large tech firms. We’re more concerned with the unpredictability of working with the government, a client who literally has all of the negotiating leverage at all times. Viasat plans to double revenues in the next five years with the government segment shrinking, but still accounting for a substantial amount of revenues.
Having any single customer account for more than 10% of your revenues is a risk, and the U.S. government is no exception.
German companies always seem to have the most convoluted investor decks, and OHB has this skill down pat. It’s as if someone took an internal progress report for the Board of Directors, and then asked all the company’s project managers to provide forward-looking updates for everything. Back around to the CFO for some vague directions on financial guidance, then it’s off to the marketing folks who take zis German monstrosity of a slide deck and translate it to English, making things even worse.
In OHB’s latest financial filing, there’s some interesting stuff like the $159 million asteroid reflection contract they’re working on with the European Space Agency, technology which is expected to debut in 2024. OHB is also working with the ESA on a contract worth over $1 billion which involves monitoring the planet’s CO2 levels from space. Revenues are steadily growing over the years, though it’s difficult to tell where they’re coming from.
One clue can be found in the investor deck which shows 80% of their “realized and expected order intake” (presumably, the projects they’re landing and expecting to land) coming from the ESA, an agency with an $8.2 billion budget. Again, having a single customer account for a majority of your revenues is a big red flag for us. Another big red flag for all these companies is an elephant in the room which everyone is hoping won’t do what it says it will do.
The Starlink Elephant in the Room
We didn’t know much about Starlink’s master plan until we wrote about it in a piece titled The Global Impact of Cheap Satellites and Launches. It’s nothing short of mind-blowing, and if the master plan works, then a lot of companies are going to be in trouble.
Starlink is quietly carpeting the heavens with satellites. Seems rather remarkable that you can now ask Google questions like this and get information from the horse’s mouth:
With nearly 900 satellites in orbit, Starlink seems to be making progress as planned with a beta offering already available for their global internet service. All of the companies we’ve talked about today need to pay a launch company to send their satellites into space. Starlink has their own launch company – SpaceX. That’s why any of the stocks we’ve talked about today should see a fully-functioning satellite constellation from Starlink as a formidable competitive threat. Unless of course Viasat is right, and problems like space junk mean that fewer, more powerful satellites are the winning formula.
Starlink also faces the same problems we’ve highlighted with other satellite operators discussed in this article. They need to launch and maintain a giant satellite constellation which comes with lots of uncertainty. Where Starlink differs is that they have their own private launch company that does things at cost. They’re also producing satellites very quickly and cheaply. It’s a moonshot project that plans to address what is being described as a trillion-dollar opportunity.
Seems like Starlink would be an obvious place to put a bet, but it’s not that simple. For one, they’re not publicly traded, and don’t have any solid plans to have an IPO (though Elon Musk has dropped some hints). Think for a second about how maniacal the hype will be should Starlink ever offer shares to the public. If that happens, just set yourself a long-term purchase schedule and dollar-cost-average your way into that massively over-priced position. Then, when the whole thing finally implodes, back up the truck. Stay cautiously optimistic.
Space stocks have been getting a strong urge to fly as ARK Invest files to release a Space ETF in the face of lackluster competition. Whenever your business model involves shooting expensive equipment into space on the back of rockets that sometimes blow up, then hoping your expensive equipment doesn’t get demolished by some errant piece of space junk, you can expect a great deal of risk – operational, regulatory, and Rumsfeld’s unknown unknowns. We’re on the sidelines right now when it comes to these five satellite operator stocks while we continue to look for space stock diamonds in the rough.
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