Description

Overview

GSAT is a next-generation satellite and terrestrial telecom infrastructure provider which has overcome several historical challenges and reached an inflection point.

The business has two parts: (1) Mobile Satellite Services (“MSS”) which are core operations and involve the sale of products and services based off GSAT’s satellite network; and (2) spectrum, including 11.5 MHz of US and international S-Band (Band 53) spectrum. We do not believe the value of the spectrum is reflected in the stock price.

Over the past year, GSAT’s technology has received great validation from several large companies (e.g., Apple, Nokia, and Qualcomm) and the MSS business has been transformed. They landed Apple as a customer and financing partner, brought on a highly incentivized, high-profile CEO in former Qualcomm CEO Paul Jacobs, and made considerable progress on deleveraging.

Despite these transformative events, GSAT is down nearly 30% since the company’s Investor Day in November 2022. In the past, GSAT has also been subject to drama which has likely led many institutional investors to write the company off entirely.  For reference, investors can find two posts on VIC pitching it as a short. Short activist, Kerrisdale Capital, also wrote about the company several years ago. These bearish reports generally either argue GSAT’s spectrum is worthless and/or that the stock is overvalued. We believe the opposite is true about GSAT’s valuation today and that its spectrum may be worth billions. And for the record, Kerrisdale was completely wrong about another spectrum play, Stright Path Communications (STRP), which was a 9x bagger within a year.

We think the improved trajectory of GSAT’s MSS business provides nice downside protection, while near-term opportunities to monetize GSAT’s spectrum in the US and globally offer huge upside potential. C-band and L-band could drive further upside.

Apple is Significant Validation

On September 7, 2022, GSAT partnered with Apple to operate the satellite for Apple’s “Emergency SOS” feature on the iPhone. This is a transformative deal which will stabilize and grow GSAT’s MSS operations. The current agreement is driving $100M of annualized revenue (at 75%+ Adj. EBITDA margins), with a significant ramp expected in 2026. According to the 2022 Investor Day, management expects GSAT to do $250-300M in revenue with $137-171M of adj EBITDA in 2026e. For perspective, in 2022, GSAT did ~$150M in total revenue with <40% EBITDA margins!  

We do not think the market has fully appreciated how strategic the relationship is. Apple provided $252M to cover 95% of the build-out costs associated with GSAT’s new constellation. This effectively amounts to a near-15-year CapEx holiday, completely transforming the financial profile of the business.

As part of the deal, Apple even secured a right-of-first-refusal (ROFR) to acquire GSAT and warrants representing 2.6% of the company.

Emergency SOS is just the beginning – we expect the relationship to grow significantly.

Appointment of Dr. Paul Jacobs as CEO a Key Turning Point

With MSS on track to stabilize and grow, GSAT’s next move was to bring in a prolific CEO to finally unlock the value of its immense spectrum holdings.

On August 29, 2023, GSAT appointed Dr. Paul Jacobs as its new CEO. Jacobs was previously CEO and Chairman of Qualcomm (QCOM). His father, Irwin Jacobs, founded Qualcomm and actually placed the first call on the GSAT system in 1998.

We think Jacobs’ highly relevant history of monetizing underappreciated spectrum makes him the right man to bring GSAT’s long-awaited vision to fruition. At QCOM, Jacobs acquired $700M of spectrum and sold it to AT&T a couple years later for $1.9B. During his tenure as CEO (2005-2014), QCOM’s revenue grew from $5.7B to $25.7B and its market cap increased by >$50B.

Importantly, Jacobs is also highly incentivized to create value at GSAT. His compensation package features price-triggered RSUs from $2-10 per share. If the stock reaches $10, Jacobs would receive a >$400M payout. The stock is at $1.42 today.

Strategic Value

If GSAT fails to gain recognition for these opportunities, we think the new management team could sell the company. GSAT already has relationships with a long list of potential suitors. We’ve spoken about Apple and the relationship with Qualcomm, but we see several other potential purchasers. Softbank invested in GSAT when Jacobs was appointed as CEO, and they have a portfolio of satellite network investments. SpaceX is working with GSAT for rocket launches and owns the Starlink LEO constellation. Amazon would be able to realize synergies with its Kuiper satellite business. Other players such as Google, Eutelstat Oneweb, and cellular carriers could also be interested.

The best precedent to consider how GSAT could trade in a takeout scenario is STRP. STRP showed similar underperformance during its time in the public markets before AT&T and Verizon got into a bidding war for the company. Prior to being targeted, STRP was trading in the mid-$20s. Ultimately, Verizon took it out at $184 per share less than a year later – a 9x return if you owned it before the bidding war began.

SOTP Valuation

In our opinion, GSAT could be worth over $6 per share before factoring in any upside potential from C-Band and L-Band. We value the core MSS at $1.20 per share, US S-Band at ~$2 per share, and International S-Band at ~$3 per share.

For MSS, we apply an 18x multiple to 2026e EBITDA of $154M and discount it back at 10%. We include the PV of their $2B of NOLs. For the US S-Band, we assume $1.00 MHz-PoP (11.5 MHz size and 330M PoP). Finally, for International S-Band we assume $0.80MHz-PoP (16.5 MHz size and 469M PoP).

Given the backing of Apple and overall trajectory of the MSS business we believe our estimates are conservative. Bullish sell-side analysts are much higher than us, with their price targets ranging from $4-8 per share. We note that these analysts use more aggressive estimates for MSS. However, most of their targets also neglect to give credit to GSAT’s $2B of NOLs or spectrum assets beyond S-Band.

Risks

• Spectrum deals are delayed or fail to materialize

Catalyst

• Spectrum monetization
• Sale of the company
• Improved investor awareness / new initiations