On December 23, the FCC announced the adoption of Globalstar's (NASDAQ:GSAT) revised petition for terrestrial authority. On January 6, Globalstar held a conference call to discuss its view of the implications. Predictably, this reignited the battleground debate surrounding GSAT's proper valuation.
Some believe that the FCC ruling presages a rise in the shares from the current sub-$2 levels to something north of $6. Others contend that the equity has no value. This article will provide my view on the ongoing debate.
For the record, I initiated coverage on Globalstar back in 2013 at $0.67 per share. Looking at the range of outcomes, one could simplistically argue for a $0 valuation or a $4 valuation on the flip of a coin… and therefore a fair value of $2.
My due diligence and calculations were more complex, but that was the basic premise. So, GSAT remained in my Official Portfolio until the stock tripled to $2.01, at which point, I declared that the balance of risk/reward had reached equilibrium (which I view as unattractive).
It's true that the stock kept rising, but that only tilted the balance of risk and reward in a bearish direction. Thus, when the stock reached $4.15, I declared it a short in my 1% Portfolio. That call also paid off handsomely.
Why flip back and forth on the stock? It's simple. Almost every stock is a buy at the right price and a short at the right price. Some stocks are long-term buy-and-holds, but many can be played on the basis of risk versus reward. One look at this eight-year chart tells you that Globalstar fits in the latter bucket.
Incidentally, since my last call on GSAT, its average share price has been just under $2.00 (thus validating my original risk/reward calculations). Though the fundamentals have altered, the ultimate calculations haven't changed much. In my book, $2 still represents an appropriate level of risk and reward.
But can the same be said if the stock reaches $6 (or even $4)? I don't think so. At either level, I would likely short GSAT once again. However, there is 150% of potential upside in the stock between here and there. Evaluate the option chain and you will find many possible ways to reap a 100% return.
In other words, I'm still not putting a stake in the ground regarding the value of GSAT's spectrum. As was the case the first time around, my focus is on the risk/reward of GSAT relative to the range of outcomes for its spectrum and the company as a whole. Buying the stock at $0.67 proved to be the right move (even though it took a couple of years longer for Globalstar to not get what it sought from the FCC). In other words, being "right" about the FCC wasn't required to be right on the stock.
The same was true when the stock hit $4.15. GSAT ultimately won approval, but the shares are much lower now.
At present, both bulls and bears need to realize that there's no clear view on how things will turn out for GSAT. The bears make many good points, ranging from filtering issues to wattage issues to financing issues. These are all valid concerns… but have only proven to be concerns to this point.
On the flip side, the bulls also make some great arguments. To me, the bull case best rests in the hands of potential partners/suitors. Though the bears express skepticism, nobody can deny that several industry heavyweights have shown interest in the spectrum. There are also several different use-cases for it. Even if the most valuable uses are invalidated, the spectrum still has value.
In cases like this, one must envision how a company like Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB), or Amazon (NASDAQ:AMZN) could leverage this spectrum. They don't need ARPU. They could deliver loss-leader services to drive strategic initiatives. Who knows why AMZN engaged GSAT for testing?
Further, the need for communications bandwidth continues to grow at a breakneck pace, driven by expanding use-cases (i.e. cloud-based applications, video, Internet of things, etc.).
This is why the debate has been so fierce… because both sides have good points (and enough weak points to give opponents conviction in their resolve). This is why I believe that both sides are suffering from confirmation bias. They can't see that there's a middle ground (as is usually the case).
Accordingly, I believe that neither bulls nor bears can be trusted. Heck, very few of them are actually communications experts (and those who follow me know that my due diligence favor the utilization of industry experts). I've been covering Tech (including communications) since 1994 and have yet to find conclusive proof (from contacts or otherwise) that favors one outcome over the other.
Indeed , I believe that making a "call" on how this will turn out is a mistake. Making money in stocks is not always about picking the ultimate outcome - it's often about calculating the weighted average value of the various outcomes (and buying the stock at attractive levels relative to that value).
The reason for this is simple. If you were always right, you would never be wrong... and nobody is "never wrong." In other words, in situations like this, it's nearly impossible to be sure you are right. Thus, the only logical thing to do is to assess risk/reward (or not get involved at all).
Case in point: Over the past 3 1/2 years, I have been long GSAT for 4 months, short GSAT for 12 months, and neutral for the remaining 2 years.
It's all a function of risk vs. reward. Right now, I believe that the scales are tipped a bit in the bulls' favor… but just a bit. This is why I've written the July $1.50 puts. I'm selling premium against the bears. Give me a share price of $2.50 and I might do the same against the bulls.
For the record, despite being bullish on GSAT's current valuation, I do not buy into management's rhetoric. They have a multi-year record of over-promises and self-promotion. But that doesn't mean that the company/spectrum doesn't have value. This is why I also believe the bears are fighting too hard to make the hyper-bulls understand the basic shortcomings of GSAT's spectrum. They seem to be losing sight of the question of usability and valuation.
Companies including GOOG, FB, Sprint (NYSE:S), Amazon and Microsoft (NASDAQ:MSFT) have all been involved, if only passively, in this saga. In fact, Microsoft went from being a GSAT antagonist to being thanked during management's opening remarks last week.
Clearly, each of these players have ideas. If they saw no value here, they wouldn't be wasting time on a tiny player like Globalstar. There are better things to do.
When thinking about valuation, I like to separate GSAT's controversial spectrum from the rest of its business. Estimates on the spectrum vary widely. However, the rest of the business has a tighter range of possibilities, revolving around $1B or $1.00 per share.
For the spectrum with FCC approval, the $7.9B valuation estimate pushed on the conference call seems outlandish to me. Filtering is one obvious reason. This topic was eloquently addressed by fellow Seeking Alpha contributor, Keubiko:
"There are no fixes to existing devices. They have hardware filters that can't be modified and filter out GSAT's spectrum. This means that, going forward, if someone wants to be able to use any non-GSAT hardware (e.g. iPhone, tablet, Galaxy, etc.) it would require Apple, Samsung, Qualcomm and many others to design hardware SPECIFICALLY for the sliver of GSAT spectrum. Good luck with those discussions. And devices that will be around for the next 5-10 years of lifespan (e.g. the iPhone 8, Wi-Fi routers) won't work on it. This spectrum is considered a "guard band" between Wi-Fi and LTE, so each does not interfere with the other. Because of this wide band, lower cost and lower performance filters can, and have been used in the U.S.
Wi-Fi coexistence will likely remain less challenging in the Americas than in other parts of the world. Most LTE bands used within the region are not immediately adjacent to the 2.4 GHz Wi-Fi spectrum, and therefore most devices will not require high-performance filters to separate LTE and Wi-Fi signals.
Let me know what Tim Cook says when Jay Monroe rings him up and tells him to a) redesign all of their devices to use this sliver of spectrum, and b) put in high cost filters that will increase the cost of an iPhone, because customers that GSAT doesn't have and a network that isn't built will be on the top of Apple's priority list.
With 11.5 MHz of spectrum that was formerly considered a guard band now supposedly in-use, we'll now require Wi-Fi / TLPS/ LTE coexistence filters. How many MHz do the best filters on the planet from Qorvo (NASDAQ:QRVO) and others consume (i.e. how much of that band will be consumed by the filters)?
For the visually-oriented, have a look at this coexistence filter document. On page 2 you can literally see how before it gets to 2483mhz (0.5Mhz below where GSAT's spectrum starts) they start cleaving off the signal in a big way and it's zero well before it gets to where LTE Band 41 starts (2496 - 1Mhz above where GSAT's spectrum ends).
On page 3 you can see they call 2483.5 to 2495mhz (which is GSAT's spectrum), the "FCC Bandedge" and SHOW you how they are cutting it off. If you're going to now offer services in the 11.5Mhz, that means there is only 1Mhz between TLPS and LTE Channel 41. GSAT's presentation confirms this. On page 22, it states '1 MHz guard band'.
I will give a cookie to anyone that can find a filter than can use a guard band this narrow without impacting the adjacent frequencies. Who is going to pay Qorvo and others for the R&D exercise to design these filters? This is no small exercise. Any idea of the volumes these guys require before they lift a finger?"
Great points, right? However, to justify the current share price (and the notion of writing the July $1.50 puts), GSAT's spectrum only needs to be worth $500M (again, assuming the rest of the business is worth $1B or $1 per share). That's 94% below that of the optimists' view…
No doubt, the bears will come out and argue for a $0 valuation. The arguments will be valid. However, that doesn't mean the stock is worth $0. If the bulls can provide equally valid arguments for a $4 valuation, then $2 is the proper equilibrium point until we get more visibility into how this will turn out.
... Which is why I stated in my last article, "Personally, I find myself sitting on neutral ground - neither siding fully with the bulls or bears." But that comment was specific to the company. The stock is a different matter and seems to incorporate much of the bear thesis already. This is why I'm bullish on the shares, though neutral on the debate.
Many are arguing whether GSAT can back up its ambitious rhetoric. However, arguments are not the key to stock investing - calculating valuation is. Sometimes, a DCF analysis is the best method. Sometimes, calculating a weighted-average value of potential outcomes is the way to go. I won't quibble over which would be best to use in this case… just as long as you utilize one.
So, 6-cents or 6-bucks? Neither. It's somewhere in between.
Disclosure: I am/we are short THE GSAT JULY $1.50 PUTS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in this article is for informational and illustrative purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. The opinions expressed in Pipeline Data, LLC publications are the opinions of Mr. Gomes as of the date of publication, and are subject to change without notice and may not be updated. This content may also be published at PipelineDataLLC.com at a prior or later date. All investments carry the risk of loss and the investment strategies discussed by Mr. Gomes entail a high level of risk. Any person considering an investment should perform their own research and consult with an investment professional. Additional trading disclosures can be found in the Important Disclosures section at PipelineDataLLC.com.