GSAT - Globalstar: Apple Deal Is A Big Step In The Right Direction

Summary

• Globalstar's recent partnership with Apple is a huge step in the right direction.
• There is an awful lot of good baked into Globalstar's valuation right now.
• The LEO satellite is a great speculative opportunity, but investors should be asking for more.

Satellite communications hit the center stage earlier this year as Tesla ( TSLA ) CEO Elon Musk provided Ukraine with Starlink internet connections during the Russian invasion. The partnership opened the world’s eyes to how satellite communications can be an affordable and innovative way to bring high-speed internet and mobile services to remote areas and lower socioeconomic regions. Starlink and SpaceX are not the only names in the space; they are simply the most high profile. Companies like Globalstar, Inc ( GSAT ) have been in the industry since 1991, when it was established in Covington, Louisiana. Globalstar officially received its US spectrum allocation from the FCC in 1995, and the very first call was made three years later in 1998. Since then, Globalstar has established one of the strongest networks of LEOs or Low Earth Orbit satellites to power its communications system.

As of 2022, Globalstar has established 24 ground stations that serve as a mesh bridge for its LEO satellite network. This connection provides a communications network that is already used in over 120 countries around the world and transmits over 1.8 billion messages every year.

Globalstar Signs A Massive Partnership

If you have been following GSAT’s stock this year, you already know that it has held up surprisingly well during the bear market. So far in 2022, GSAT has gained 54% and is also positive over the past 52 weeks of trading as well. Much of the company’s momentum revolves around a new partnership with tech giant Apple ( AAPL ). Apple’s newest iPhone 14 will utilize Globalstar’s network to make emergency calls even if the user is out of service range. This is one of the primary drivers behind the need to establish LEO networks worldwide. Apple has long been the goose that lays the golden egg for speculative companies like Globalstar. This time has been no different, as the deal lifted the stock by more than 40%. It has also greatly improved the financial outlook of the management team. The company now expects 2023 revenue to come in somewhere between $185 million and $230 million. Apple will also pay almost all of approved capital spending for the new satellites the company will have to deploy. The company will likely have to raise debt because of this deal, but investors should make no mistake here. This deal is certainly a massive positive for the company.

Globalstar’s partnership with Apple might just be the tip of the iceberg. Apple has also been rumored to be interested in establishing its own line of satellite phones. Presumably, it would be much easier to partner with an existing LEO network than establish its own. An existing partnership with Globalstar could give the company the inside track to broader adoption by companies like Apple.

This is not to say there aren’t other companies that could provide an LEO network for Apple. Starlink is an obvious front-runner with massive capital backing, while AST Spacemobile (ASTS) is also an emerging rival. Investors should not put all of their eggs in the Globalstar basket, but an established partnership with Apple is always a positive step in the right direction.

Valuation and Forward-Looking Commentary

Globalstar is a loss-making company. Its major problem for some time now has been its balance sheet and cash flow. We can see from the snip below that even with raising debt, trends in the company's cash balance don't make for good reading.

The management team has done its best to make a business model work when the market for its services has not yet fully developed. The technology is impressive, but it may be some time before its value can fully be expressed in terms of profit and loss. It is also important to note that the main barrier to entry in developing similar systems is capital. Other companies could offer similar services if this ever becomes a hot market. Still, it would perhaps be easier to purchase Globalstar due to the great job the team has done at building relationships in the space. The management team also does a great job at delivering to EPS estimates. The company has beaten or matched expectations in three of the last four earnings reports.

It is also important to note that the EPS losses with Globalstar are seldom large blowout losses. Leadership has managed to keep the bleeding under control, which is commendable. There is also the issue of debt. As we mentioned before, Globalstar tends to rely on lenders when advantageous to the company. Leadership has actually done a pretty good job managing leverage. They don't allow the situation to ever get out of control and tend to borrow for good reasons. I think investors should look at this favorably, despite the challenges with its addressable market.

We can also see that total long-term debt has been trending downwards, though we can expect some borrowing due to the Apple deal we discussed earlier. Surprisingly, the company is still trading quite richly. It only does about eight cents per share of revenue, but that means investors are paying roughly $22 for each dollar of the company sales, which are levels normally reserved for the most promising opportunities.

It is difficult to see where explosive growth would come from in the short term to justify this type of valuation. More deals with major players like Apple would, of course, lift the stock sharply, but going into what could be a global economic slowdown, I have my reservations.

The Takeaway

In terms of investing in an emerging technology that could disrupt a global industry, then yes, LEO satellite networks are a great speculative investment for the future. But that’s what it is right now, a speculative investment. The partnership with Apple is promising, but it already seems to be priced into the stock right now. Globalstar seems more of a watchlist stock right now until the company can prove it can continue to expand its global market share in the satellite communications industry. As its industry matures, investors should look for more attractive partnerships like the Apple deal. Until then, I am neutral on GSAT stock.

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