(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
(Author's Note: Globalstar's market capitalization is over $300 million. However, its stock price is under $1. Please be aware of the risks associated with low-priced stocks.)
Rumors abound that Amazon (AMZN) has taken a look under the hood of Globalstar's (OTC:GSAT) satellite-based network. Bloomberg believes that Amazon is seeking to "create a more comprehensive user experience, encompassing how consumers get online, what device they use to connect to the Web and what they do on the Internet."
Analysts at PoisedToTriple Research investigated the rumors and found conclusive evidence that the rumors are indeed fact. In this article, I will reveal the evidence. We will also discuss why shares of GSAT have the potential to rise more than five-fold and what it will take for that potential to be unlocked.
For starters, Globalstar is a provider of voice and data communications services. It delivers its service to satellite phones via its fleet of 36 low-orbit satellites. This enables it to deliver voice and data to areas that can't be adequately served by traditional mobile carriers, like Verizon (VZ) and AT&T (T). GSAT customers include FEMA, the New York City Office of Emergency Management, the NYPD, Disney (DIS) and FedEx (FDX).
On August 13, GSAT announced it second-quarter results. The company reported revenue of $19.8 million, down from $20.0 million in 2012. However, under the covers, there were several exciting figures and events that were hidden by the lackluster top line results.
For starters, service revenue increased 9%. Better yet, the average revenue per user (ARPU) for its Duplex (voice/data) service increased 27% to more than $21. During the quarter, Globalstar also refinanced its 5.75% Convertible Senior Unsecured Notes, lifting a dark cloud that was hanging over its financial health.
Beyond the financial statements, GSAT made even greater progress. Its satellites, launched on February 6, have successfully completed in-orbit testing. Most have gone into service. Thus, completion of its second-generation "constellation" is nearly complete. This will restore the service capability of its Duplex services.
The implications could be significant. Globalstar has been petitioning the FCC such that it can utilize its Mobile Satellite Services (MSS) spectrum "terrestrially to support mobile broadband applications throughout the United States". On June 20, Globalstar met with FCC Chairwoman Clyburn and believes the FCC will decide by year end.
GSAT claims that its Terrestrial Low Power Service is the only near-term solution to "the increasing congestion being experienced in the public Wi-Fi bands". Specifically, Globalstar believes that its network can immediately increase the country's Wi-Fi capacity by 33%. This additional capacity is sorely needed. Last year, U.S. mobile data traffic increased 70%, even as we head toward a shortage in spectrum availability. This has created an opportunity for Wi-Fi technology vendors to deliver offloading to ease the growing congestion.
GSAT appears to be well-positioned to benefit. In June, the company announced the successful completion of tests that demonstrated the power of combining its service with Ruckus Wi-Fi equipment.
The tests were conducted by Jarvinian, a research and investment organization focused on addressing the looming wireless spectrum shortage. Coincidentally, an employee of Jarvinian, submitted a filing with the FCC, as reported by TFM Associates MSS Blog:
"… recent TLPS testing in the Bay Area was undertaken "to help a major technology company assess the significant performance benefits of TLPS for a transformative consumer broadband application". His filing did not state the name of this company, but the testing under Globalstar's experimental license (issued by the FCC on April 1) was undertaken at 3 locations in Cupertino and Sunnyvale …"
All three locations were traced to Amazon properties.
TMF Associates went on to offer its opinion that GSAT plans to resolve all interference issues, specifically with certain television stations. It then hopes to land the contract for Amazon's secretive, but "transformative" consumer broadband initiative. It also stated that Globalstar believes its spectrum to be "even more valuable than that of Clearwire (CLWR) (CLWRR), because of the unique compatibility of TLPS with existing WiFi equipment, implying that it puts a value of at least $2B on the 22MHz of TLPS spectrum".
If they're right, investors stand to reap a major windfall. Assuming a favorable FCC ruling, we believe that several parties in addition to Amazon would be interested in Globalstar's network. At present, Globalstar's market valuation currently stands around $300 million. Adding the potential value of its spectrum to the value of its core business implies that the value of GSAT's stock could ultimately increase by approximately 600% to $2.2 billion.
To be clear, this valuation would require the FCC to provide a favorable ruling. However, if recent interactions are any indication, the potential reward is far greater than GSAT's current share price reflects.
In fact, even if GSAT doesn't achieve its 6-bagger potential, the company's recent satellite success, refinancing, and emerging businesses momentum provide a floor under the shares. 2014 estimates have been creeping upward. Revenue is now expected to increase by 37% to $117 million. A net loss of 16-cents is currently expected, but that has improved by 2-cents over the past 90 days. Keep in mind, GSAT's net loss is largely driven by non-cash items. This is evidenced by its positive operating cash flow ($3+ million over the past 12 months).
This core business limits the downside risk on GSAT's shares. The risks are further mitigated by GSAT's $400 million book value, which exceeds its market cap by $100 million. Both, the core business (plus a modest valuation for its spectrum assets) and its book value provide justification for the shares to trade for at least 33% above its current levels.
Because of this, GSAT's activities with the FCC and Amazon represent a free call option that could deliver triple-digit gains to investors. Accordingly, we are introducing GSAT as a new addition to our Poised To Triple Speculative Portfolio.