GSAT - Globalstar: Partnering With Apple And Qualcomm Is Advantageous

2023-06-13 04:25:44 ET

Summary

• Globalstar has partnered with Apple and Qualcomm, leveraging its satellite communication services and frequency spectrum for emergency messaging and private 5G networks.
• The company's revenues have surged, and it is monetizing its spectrum assets, with the potential for significant growth in the private 5G network market.
• Despite some risks and competition, Globalstar's unique Band 53 spectrum and expanding ecosystem make it a reasonable buy at $1.5 per share.
• It is also getting refunded for the capex it spends.

Globalstar ( GSAT ), a provider of global satellite communications services, is famous for having inked an agreement with Apple (NASDAQ: AAPL ) last year in order to enable an always-connected iPhone, even in regions not deprived of mobile cellular coverage. It has recently forged a partnership with Qualcomm (NASDAQ: QCOM ) for private 5G networks.

Now, having both a smartphone and semiconductor giant as partners can be advantageous, and this thesis aims to identify what value space-driven terrestrial communications can bring to GSAT stock which remains well below its 2022 peaks as shown below with the share price currently trading around $1.2.

For this purpose, I will consider how the company is monetizing its spectrum assets and what differentiates it with respect to competitors, but, first, I assess how the top line and capital expenses are performing in its telecom operator (telco) role for Apple.

Apple is Helping Finances

Apple uses Globalstar's network for emergency messaging services in case someone is lost in the forest or is stranded at sea, or in locations unreachable by conventional mobile cellular connectivity. To achieve coverage, it operates a constellation of low Earth orbit satellites that provide both voice and data services in remote locations, but a specialized phone is required. In addition, the space-based telco offers asset tracking which is used mostly by companies in the oil and gas, maritime, and forestry industry.

Talking figures, revenues have surged to $58.6 million in the first quarter of 2023 with the company beating topline expectations. These include some expected wholesale service revenue from the Apple collaboration as I had detailed in a previous thesis when the deal was made, as well as sales from its legacy segments including IoT (Internet of Things), SPOT, and Duplex.

Diving into the bottom line, sales increasing faster than costs have led to an operating income of $7.2 million, thereby breaking with a long string of losses. Also, as per the cash flow statement, the amount of capital spent has surged from $14.9 million to $66.1 million in the latest quarter with most of the money used to expand its satellite constellation to cover North America in more depth and the rest of the world as part of the Apple partnership.

Now, as part of the agreement, Apple is financing 95% of the expenses incurred which could amount to $250 million over a period of time and with Globalstar getting refunded upon achieving specific milestones. This signifies that it does not need to contract additional debt. As a matter of fact, the first tranche has already been received in April part of which was used to pay MDA , its satellite supplier.

This strategy to get paid for Capex is noteworthy and in sharp contrast to the capital-intensive telecom services business model. Furthermore, after executing the Direct-to-Device (or iPhone to satellite) business, with the service operational both in North America and parts of Europe , Globalstar's agreement with Qualcomm comes as the next step in playing an even more prominent role in satellite-driven terrestrial communications, this time covering private 5G wireless networks.

Detailing and Valuing the Qualcomm Deal

First, Qualcomm is no stranger to the Globalstar-Apple partnership as its Snapdragon X65 modem equips the iPhone 14 for linking up directly with satellites orbiting the earth thousands of kilometers above our heads. For this purpose, the semiconductor play has worked closely with the satellite provider which possesses a key spectrum asset in the form of Band 53 within the 2.4GHz terrestrial spectrum range, approved by the FCC in 2017.

It is precisely Band 53 that will be used by Qualcomm to drive its 5G private network in a chip-to-cloud fashion. In this context, most of us are familiar with 5G public networks being deployed by mobile network operators like T-Mobile (NASDAQ: TMUS ) which have the necessary expertise, spectrum assets, and sales channels for the task. However, this is not the case for system integrators working on private wireless projects involving the use of small cells, and, this is where Qualcomm's 5G RAN Platforms combined with Microsoft's (NASDAQ: MSFT ) private MEC (multi-access compute) aims to provide a turnkey solution aimed at reducing complexity for projects. As for Globalstar's role, it is the provider of frequency spectrum assets needed to make it all work.

In addition, there are licensing opportunities for the space-based telco again with respect to its Band 53 since the private wireless market is seeing more traction as large mining companies, and port operators look to adopt it. As such, it can monetize its spectrum assets in the global private 5G network market, which is expected to grow at a mind-blowing compounded annual growth rate of 51.2% from 2023 to 2030. Now, this market was worth $1.61 billion in 2022, and assuming that Globalstar just manages to grind 3% by 2024, revenues of $48.3 million are possible. As a result, these could sweeten FY'24's income statement by incrementing it from the estimated $219.17 million to $267.47 million as per the table below.

This would in turn represent an increase of 22% over those expected for FY'23 instead of the 4.78% estimated by analysts. Now, since sales form the denominator of the Price-to-Sales multiple, the forward P/S falls to 8.27x, or ((219.17/267.47) x 10.09) instead of the initial 10.09x. This translates to a share price of $1.51 ((10.09/8.27) x 1.24) based on the current share price of $1.24 or a 22% upside.

Some Cautionary Words

Still, when compared to peers from the communication sector, Globalstar is richly valued with a valuation grade of F as pictured below. Therefore, it is particularly susceptible to volatility, especially during periods when the Federal Reserve has to make decisions about monetary policy. In this case, a hike in interest rates helps to promote the value strategy, which can be particularly detrimental to this predominantly growth stock.

Furthermore, as seen in the introductory chart, the price has oscillated between the $0.87 - $2.28 range during the last year and this is likely to continue depending on how the scaling of the business proceeds together with the progress made on the building of satellites which have to be in orbit by 2025 .

Sticking to caution, investors will note that I abstain from assigning additional value to Globalstar due to its presence in the Direct-to-Device market as it is likely to face competition from Iridium ( IRDM ) which is also looking to integrate its band of frequencies into Qualcomm's chips. Also, with network redundancy in mind, Apple may ink an agreement with Elon Musk's Starlink ( STRLK ), which has already partnered with T-Mobile, again for space-driven mobile emergency services. In this connection, given the pervasiveness of land-based mobile cellular coverage throughout the world for the majority of use cases, it will take some time before Direct-to-Device messaging via satellites starts to make a meaningful impact on subscribers' behavior. Consequently, expect Apple-led wholesale service revenues to continue flowing, but, not surging, unless Globalstar bags a contract with Samsung ( OTCPK:SSNLF ) for its smartphones to receive emergency messages directly through satellites.

Partnering with Giants with the Band 53 Differentiator

On the other hand, there are opportunities in private 5G small cell deployment as Band 53 signaling is less likely to be attenuated by interference when being shared across macro towers like the one operated by American Tower ( AMT ). Another advantage is that the band is already compatible with Qualcomm's chipset which may be the primary reason which led Apple to choose Globalstar.

As such, it has been easier for the company to monetize its band, as early as 2021, namely by Nokia ( NOK ) for setting up an industrial-grade LTE/5G private wireless at the Port of Seattle. More recently, it expanded its use in four European countries for the provisioning of complementary (together with existing mobile cellular networks) terrestrial services in ground stations.

Looking ahead, with Qualcomm's platform approach aiming to reduce system complexity, private 5G deployments should become more commoditized and gain wider adoption, especially from large corporations spread over a large geographical area. Finally, with its ecosystem continuing to expand while it is getting refunded for the capital it spends, Globalstar deserves to be valued better, and, at $1.5, it constitutes a reasonable buy as this is much lower than in Seeking Alpha's rating summary.

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