2023-04-14 00:00:00 ET
Summary
- We made a new investment in Gogo during the quarter.
- Gogo has a monopoly on the internet connectivity business for private jets in North America.
- We believe Gogo’s stock is significantly undervalued because investors are worried about Elon Musk’s Starlink entering the connectivity market in the next 1-2 years.
The following segment was excerpted from this fund letter .
Gogo ( GOGO )
We made a new investment in Gogo during the quarter. Gogo is likely a familiar brand as it used to provide internet on commercial airplanes; however, the company divested its commercial airline business in 2020 to focus on the much more profitable and fast-growing business of providing internet for business jets.
Gogo has a monopoly on the internet connectivity business for private jets in North America. The company’s air-to-ground network consists of over 150 cell towers broadcasting internet straight up into the sky. Roughly one-third of private jets in the US have internet connectivity today but the penetration rate is expected to approach 100% within the next 10 to 15 years as new jets are line-fit with connectivity equipment right out of the factory and existing jets are gradually upgraded. Just like a cable plan, customers pay monthly internet subscription fees. In the coming years, Gogo will benefit from higher prices as customers upgrade to its 5G service (launching at the end of 2023) and its low earth orbit satellite service (launching in 2024). The company expects revenue to more than double over the next 5 years as it rides these tailwinds.
Gogo is also a very profitable business because it is already at scale with over 6,000 customers and its expenses are largely fixed. In 2022, GOGO generated a 43% Adj. EBITDA margin and will likely see margins expand to over 55% within the next 7 years as the business requires almost no maintenance capex and stands to benefit from operating leverage.
We believe Gogo’s stock is significantly undervalued because investors are worried about Elon Musk’s Starlink entering the connectivity market in the next 1-2 years. However, Starlink would need to overcome extremely high switching costs and several important barriers to entry before it could make a dent in the aviation connectivity market. Furthermore, the solution Starlink has proposed for aviation isn’t commercially viable as it is more than double the cost of Gogo’s current solution and would only work on a small number of large jet models. Starlink appears to be more focused on cracking the commercial airline market which Gogo no longer serves.
Gogo isn’t just standing idle while satellite companies attempt to disrupt its niche. Gogo has a partnership with Starlink competitor OneWeb to launch its own low earth orbit satellite product that will likely be a superior product compared to Starlink. Launching a satellite product will expand Gogo’s TAM to include the international jet market and allow the company to upcharge existing customers for a bolt-on product.
Gogo is also facing a patent infringement lawsuit from competitor SmartSky. SmartSky has been trying to compete with Gogo for nearly a decade and has failed to gain any material market share. The lawsuit appears to be a desperate attempt for the company to monetize its otherwise struggling network. The lawsuit is limited in scope to Gogo’s 5G product and is based on 6 patents where 3 patents are set to expire in 2025. There is a risk that Gogo will be forced to pay a small royalty on some of these patents. A judge has already thrown out a request by SmartSky to place an injunction on the launch of Gogo’s 5G network. Given the circumstances surrounding the lawsuit, we believe Gogo will have a favorable outcome.
Gogo checks most of the boxes we look for in an investment. It is a high-quality business with attractive reinvestment opportunities. Insiders own a significant amount of stock and have demonstrated sound execution. Finally, the stock is attractively priced because the market hasn’t fully appreciated the business transformation story and misunderstands the competitive risks. The SmartSky lawsuit does represent a wildcard risk but we believe that the potential damages are limited and the upside from the secular growth of the aviation connectivity industry outweighs potential adverse court outcomes.
ABOUT LVS ADVISORYLVS Advisory is a boutique investment firm focused on providing active investment management services for individuals, families, and institutions. The LVS Defensive Portfolio is an absolute return strategy focused on capital preservation. The LVS Growth Portfolio is a global equity strategy focused on capital appreciation. Luis V. Sanchez CFA is the Founder and Managing Partner of LVS Advisory. Luis is a licensed Investment Adviser Representative and a CFA Charterholder. LVS Advisory is a Registered Investment Adviser based in New York City. LEGAL DISCLAIMERThe information and statistical data contained herein have been obtained from sources, which we believe to be reliable, but in no way are warranted by us to accuracy or completeness. We do not undertake to advise you as to any change in figures or our views. This is not a solicitation of any order to buy or sell. We, any officer, or any member of their families, may have a position in and may from time to time purchase or sell any of the above mentioned or related securities. Past results are no guarantee of future results. This report includes candid statements and observations regarding investment strategies, individual securities, and economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. These comments may also include the expression of opinions that are speculative in nature and should not be relied upon as statements of fact. LVS Advisory LLC is committed to communicating with our investment partners as candidly as possible because we believe our investors benefit from understanding our investment philosophy, investment process, stock selection methodology and investor temperament. Our views and opinions include “forward-looking statements” which may or may not be accurate over the long term. You should not place undue reliance on forward-looking statements, which are current as of the date of this report. We disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. The information provided in this material should not be considered a recommendation to buy, sell or hold any particular security. |
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LVS Advisory - Gogo: Significantly Undervalued, Checks Most Boxes We Look For In An Investment