Summary
- Satellite direct-to-device connectivity has gone mainstream with Apple, T-Mobile, and Iridium all in the game.
- ASTS has built a loyal retail investor base with excellent crowdsourced research.
- AT&T appears to be pursuing a broader partnership.
- Significant non-dilutive capital is available from the 5G Fund for Rural America.
- Key de-risking milestones and share price catalysts are expected in the coming weeks.
D2D Connectivity
Direct-to-device or D2D for short is the next major leap in telecommunications. Satellite phones have been around for decades, but are expensive and cumbersome. In order to connect to far-off satellites, they generally have a large exterior antenna, not to mention usage rates that are a throwback to Ma Bell long distance costs. If you aren't working on an oil rig or sailing across the Atlantic, there isn't a lot of reason to own one.
At the same time, up until 2-3 years ago, it was considered "impossible" for regular cell phones to connect to satellites. This was largely how many industry experts reacted to AST SpaceMobile's (ASTS) initial SPAC filing. Satellites are too far away! Satellites are moving too fast! Mobile phones aren't strong enough! There were dozens of reasons both doubters and incumbents believed this wouldn't work.
The impossible becomes possible
While ASTS was the first company to begin promoting D2D connectivity, too much skepticism, there are now multiple players. Two high-profile partnerships were announced. In September, Apple (AAPL) and Globalstar (GSAT) launched a partnership for the iPhone 14 to give its customers emergency SOS texting. While the data throughput is extremely limited, it was a huge validation of the technology. As part of the deal, Apple is providing Globalstar at least $450M in funding to pay for needed upgrades to increase bandwidth at its ground stations and to fund new satellites. Globalstar in return is setting aside up to 85% of its network for Apple. Apple's SOS service is available today in beta form to US-based iPhone 14 users.
In what was widely viewed as a rushed announcement to steal Apple's thunder, Starlink and T-Mobile announced plans to provide general text service from its 2nd generation Starlink satellites. While the current Starlink Gen 1 and Gen 1.5 constellations are more than capable of reaching stationary satellite dishes, they don't have the antenna power or sensitivity to connect to unmodified mobile phones. Given the larger size of the Starlink Gen 2 satellites, commercial service is believed to be contingent upon its larger Starship rocket and therefore several years away. Without Starship or a modification to its satellite design, Starlink can't economically use the existing Falcon 9 launch capacity. (There is some discrepancy in how Starlink talks about Gen 2 - sometimes referencing its next generation of Starlink service and sometimes referring to larger satellite design.)
Lastly, Iridium (IRDM) is working with an android handset provider to build out D2D texting and low-resolution image messaging. Samsung is widely believed to be the manufacturer .
While all three of these announcements by legacy satellite companies have validated that D2D is a market valued by both telecoms and consumers alike, only ASTS is building out a satellite network designed for high bandwidth, low latency service that approaches current mobile usage requirements.
The below table highlights the key capabilities for these known partnerships.
Comparison of Direct to Device Satellite Services (Twitter user @spacanpanman. Used with permission.)
ASTS Competitive Advantage
There are several key innovations that enable ASTS to stay ahead of the competition. Some of these are patented and likely to be persistent, while others are simply company know-how that provide a few years' head start. I would put these innovations in 3 buckets: business model, satellite design, and software stack.
- Business Model . Seeing the difficulty in consumer adoption of satellite phones, ASTS bypassed that by building a B2B data wholesale business. They have taken the path of least resistance from both an adoption curve and regulatory path. By signing up Mobile Network Operators (MNOs) such as AT&T ( T ), Orange, and Vodafone, they have been able to piggyback on their spectrum access as well as their customer base. It's no surprise that other satellite providers like GSAT found partners as well.
- Satellite Design . Traditionally, satellites are built like high-end custom shoes. Few if any of the parts are off the shelf and price tags are in the hundreds of millions. Cheaper satellites are available, but they tend to be cubesats and microsats, neither of which have the power to connect to a handset. ASTS worked through this problem by creating a modular satellite design composed of many individual microns that are identical. They have a phased array on the front for cell communication, a coolant loop in the middle, a heat sink on the back, and an individual magnetic torque rod. These modules allow ASTS to build satellites assembly line fashion with a higher fraction of off-the-shelf parts.
- Software stack . ASTS has multiple patents for its software enabling radio communication between its satellite and an unmodified mobile phone. The satellite acts as a "bent pipe" effectively transmitting information from the phone to a ground station, enabling most of the computer processing to remain planet-side. As an example, a key challenge in satellite communications is the doppler effect. When the satellite is approaching you, radio waves are compressed, creating a high frequency, and when the satellite is moving away from you, the radio waves are elongated, creating a lower frequency. ASTS' software modulates their transmissions to effectively trick the phone into ignoring the slightly longer delay .
All of the innovations above have had to come together alongside dramatically reduced launch costs to make high bandwidth space-based mobile service possible.
SpaceMob
As indicated by the above table sourced from Twitter, ASTS has developed a devoted following of retail investors. This group includes many experts on telecommunications, manufacturing, finance, and regulatory from all walks of life and is often denoted by including the red "A" emoji icon in their Twitter name. Apparently, those red letters were developed to denote blood type, but they have been repurposed as a badge of support for SpaceMobile.
While many stocks have earned devoted followings online, I have been blown away by the level of research and insight provided by this loosely connected group. Some examples of compelling crowdsourced research include:
- @CatSE___ApeX___ responding to the FCC with corrections before ASTS had a chance to file a formal response with the same details.
- @spacanpanman providing detailed comparisons between satellite size and expected service levels from different companies.
- Using data from amateur astronomers to estimate when the satellite had unfurled its antenna .
- Using data from amateur radio hobbyists to identify when ASTS' Bluewalker 3 prototype began transmitting cellular signals .
During a period without updates from the company, retail investors have been able to not only confirm key milestones such as unfurling of the satellite but been able to do so before Wall Street industry reports. For retail investors like myself, SpaceMob provides a real competitive advantage in access to real-time data and research.
AT&T as Key Partner
While ASTS has signed many MNOs covering most of the globe, there are several that stand out. The greatest among equals is undoubtedly AT&T. With T-Mobile partnering with Starlink, the pressure is on for AT&T to make a direct-to-satellite partnership work. More importantly, AT&T may be the partner that enables significant, non-dilutive financing.
Social Activity
AT&T has ramped up its social media activity around ASTS. On LinkedIn, the company highlighted a visit to SpaceMobile's Midland facility, and on Twitter, AT&T has been actively engaging with the SpaceMob.
- Lance Spencer Head of AT&T's defense business talks up space-based mobile service and its complement to terrestrial towers on LinkedIn.
- Chris Sambar, President of AT&T's Network talks up satellites as a way to provide 100% coverage.
- AT&T's corporate account tweets satellite connectivity emojis .
Either the social media manager at AT&T has been given enormous latitude, or AT&T has very real ambitions of expanding its partnership with ASTS.
FirstNet
Created in 2012, FirstNet was created to provide a nationwide public safety broadband network. In 2017, AT&T was selected to lead a public-private partnership. FirstNet has an annual budget of ~$350 million with AT&T funding an additional $18 billion over 25 years . The network is currently in the process of rolling out 4G and 5G upgrades at a significant cost.
In my personal opinion, I believe AT&T is going to leverage ASTS to deliver on its FirstNet commitments. ASTS had earmarked its first constellation for equatorial service, but on their last earnings call, they called that in to question. They were non-committal on whether they will start with an equatorial inclination or higher latitude.
The announcement I'm expecting is a commitment that the first set of satellites, Block 1, will be repurposed for service in the US with AT&T and FirstNet as the primary users. There's no better way for AT&T to deliver coast-to-coast coverage that meets US government requirements than via satellite, and ASTS is handing them that opportunity.
Nondilutive Capital
The drag on the stock price over the last year has been primarily driven by financing uncertainty. The Company never had the capital to get to positive cash flow with its initial SPAC financing and the risk of dilution has been a constant. With their recent stock sale raising $75M at $5.50 per share, the Company now has runway through the launch of its next 4 satellites later this year.
But they aren't out of the woods yet. That's a long way from a fully functioning 20-30 satellite constellation. I believe the AT&T partnership will address this concern. GSAT was paid $450M by Apple to provide far inferior service as compared to what ASTS has to offer AT&T. On the back of a FirstNet service agreement, AT&T could easily redirect some of that $15B for capital investment to ASTS and solve all of the Company's financing risks.
5G Fund for Rural America
There is another government program that has the potential to support ASTS. The 5G Fund for Rural America was established in 2020 with up to $9B in funding available for companies providing service to underserved regions of the country.
The program has been plagued with delays, and the final map of service levels has yet to be agreed by the FCC. Serving these locations with local 5G towers is likely to be prohibitively expensive, so I expect all the major MNOs to begin searching for alternative paths forward. It's obvious to me that AT&T will be looking to position its partnership with ASTS as a cost-effective and favorable alternative to ground-based service. Unfortunately, this funding is unlikely to be made available until 2024. Phase 2 in particular is targeted towards 5G support for precision agriculture, which is the kind of application that satellite coverage is perfect for.
Stock Price Catalysts
Now that I've highlighted the fundamental investment case for ASTS, let's consider shorter-term stock price catalysts. The Company's share price has been a disaster, underperforming even the Russell growth company benchmarks.
I believe the upcoming catalysts will turn that around in the coming weeks or months:
- Successful testing of Bluewalker 3 announced by the next earnings call.
- Announcement of an expanded partnership with AT&T including upfront payments and capital expenditure reimbursement for Block 2 satellites in 1H 2023.
- Addition to the Russell 3000 index in May and June. Index inclusion has yet to be discussed in this article, but it is highly likely. The only rule that prevented ASTS from joining the Russell 3000 last year was its concentrated ownership level. With the additional stock financings, insider ownership has fallen below the key thresholds enabling ASTS inclusion going forward. Index inclusion drives a 5-10% monthly excess return .
- Finalizing 5G Fund for Rural America rules allowing satellite-based mobile phone service in late 2023.
For a company with such a novel technology and high risk, I won't be so bold as to put a specific target price on its shares, but given the historical volatility, I will be disappointed if we don't surpass all-time highs of $14 in the next 3 months.
For further details see:
AST SpaceMobile: Upcoming Catalysts To Drive Share Price Higher