In-flight Wifi is the future of air travel. Over the next decade, it is expected to expand fifteen-fold, from a $350 million business to a $5 billion business.
Dominant Market Position:
Gogo (NASDAQ:GOGO) has a very dominant position in the market; it has a near-monopoly, with long-term contracts with nine major airlines in North America. The business concept makes a lot of sense as it provides a desirable service to a very captive audience. Gogo has a wide-moat with heavy barriers to entry. It is expensive for airlines to re-wire their planes if they want to change to a different provider, not to mention they are locked in their contracts for multiple years.
Consistent Revenue Growth:
Gogo's Revenue has steadily increased: $36.8 million in 2009, $94.7 million in 2010, $160.2 million in 2011, $233.5 million in 2012, and $311.4 million (est) in 2013. Guidance projects revenue in 2014 will be in the range of $400-422 million.
Room for more growth:
Gogo currently has approximately 2,000 planes connected to their service, with a market of 20,000 in the U.S. alone, not to mention international expansion.
Gogo is undergoing a transition from its air-to-ground network to a satellite connectivity system which will make its internet speed six times faster.
Innovation and Diversification:
Gogo is not just about Wifi, it is also launching texting and calling programs as well as on-demand entertainment systems.
Cheaper than its competition:
ViaSat (NASDAQ:VSAT) is near its all-time high, trading around $70/share, and it's not even profitable. Gogo is well below its all-time high, trading around $20/share.
Being a tech company, there's always uncertainty over what inventions and products will catch on and what fads will go out of style. However, Gogo appears to be a very adaptable company that is prepared to capitalize on future consumer trends and interests. Their plan to launch in-flight texting shows that they are keen on current trends.
There may also be cause for concern that Gogo's long-term debt exceeds current assets. Gogo's long-term debt is $235.6 million, while the net current assets are $212 million.
Another potential risk is the pressure on Gogo to deliver surprises when they report earnings. In their Q4 2013 earnings report, they beat the expectations, delivered strong results, offered upbeat guidance, but their stock still fell. While this doesn't necessarily mean the stock will fall on positive news in the future, it certainly shows investors expect more out of Gogo, in a sense, they are 'expected to beat the expectations.'
Lawsuit could pose a risk:
Gogo is currently facing a class-action anti-trust lawsuit alleging they have engaged in illegal 'monopolistic' practices that discourage healthy competition by locking in airlines into long-term contracts. A trial date is set for September. While this could pose a risk, I believe the plaintiffs are likely to lose; they do not have a legal leg to stand on. When the ruling is announced, it will send Gogo's stock soaring higher.
Many businesses lock their customers in multi-year contracts, and Gogo does not have a technical "monopoly" by any definition. The plaintiffs claim that Gogo controls 85% of the relevant market share, but Gogo says they are defining "relevant" too narrowly, and the court expressed some skepticism toward the plaintiff's 85% figure. You can also tell that the plaintiffs behind this lawsuit are amateurs who cannot get their facts in line: They incorrectly claimed that Gogo has a contract with Southwest Airlines, when that was not the case. They also incorrectly claimed that Gogo had a long-term contract with United Airlines, when in fact it was only a short-term contract.
In a motion to dismiss, Gogo wrote, "Plaintiffs admit that during the period that Gogo allegedly foreclosed competition, several Gogo competitors entered the market and gained market share. These new entrants not only gained market share by executing agreements with airlines with which Gogo does not currently do business (e.g., Southwest Airlines and JetBlue Airways) but also took business that the [complaint] alleges was locked up by Gogo's exclusive dealing contracts."
The judge refused to dismiss the lawsuit, but that shouldn't be interpreted as giving any merit or credibility to the plaintiffs' claims; that will be determined during the September trial. This legal dispute gives the company a catalyst that will drive the stock higher when the uncertainty is resolved.
Conclusion: Gogo has a lot of strengths that will make it an excellent investment, and is likely to maintain its wide-moat competitive advantage for years to come. While the lawsuit they are facing may pose a risk, it is certainly a risk worth taking. There is a lot of pressure on Gogo to deliver earnings surprises, but they certainly have the resources in place to do that.
Disclosure: I am long Gogo. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.