Viasat's Multi-Billion Dollar Opportunity

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About: Viasat, Inc. (VSAT), Includes: SATS
by: StockBaller
Summary

Viasat has experienced strong growth in all three segments, for four consecutive quarters.

Connecting areas outside of the USA to satellite internet represents a major opportunity.

Viasat is ideally placed to capitalise on this market.

Viasat, Inc. (VSAT) is a Californian provider of high-speed satellite broadband services and secure networking systems across commercial and military markets. Within just the past couple months, the stock has achieved a major multiple year breakout, enjoying year-to-date gains of approximately 50% as of the time of writing:

In this article, I will briefly explain the reasons behind this move (primarily strong earnings and expansion in all three segments of the business), and more interestingly, its potential to capitalise on one of the biggest challenges in the coming decade: how to connect the next billion people to the internet. I will also briefly cover the future risks in VSAT as well as its current valuation compared to its closest competitor.

Strong Earnings and Expansion In All Segments

VSAT's third-quarter fiscal year 2019 results were a major surprise to most analysts, reporting earnings per share of $0.12 versus a loss of $0.03 for the same period last year, and revenues of $555 million versus revenues of $382 million in the same period last year. That marks the fourth consecutive quarter in which VSAT has beat consensus earnings per share estimates. Net loss for the quarter was correspondingly sharply down (decreasing $14.2 million or 58% year-over-year), and adjusted EBITDA for the quarter ($109 million) was up 93% year-over-year.

Breaking down what can be attributed to VSAT's strong results, all three segments of VSAT's business (satellite services, commercial networks and government systems) showed major growth: of note in particular is the growth experienced in VSAT's in-flight connectivity equipment, which, as of VSAT's latest earnings report, was present in 1,123 aircraft (a 25% increase from just the prior quarter) across several major airlines. VSAT also enjoyed substantial growth within their fixed broadband services as the average revenue per user saw a further increase to 14% year-over-year (although the number of US subscribers remained mostly unchanged). Within the commercial networks segment, revenues were up a huge 129% from the prior year, with more commercial aircraft also installing VSAT's in-flight connectivity equipment. Within VSAT's third segment (government systems), growth was also substantial, with revenues increasing 38% year-over-year and operating profit increasing 68% year-over-year, and higher than ever government segment awards ($909 million year-to-date, higher than the entire fiscal year of 2018).

Connecting The Next Billion People To The Internet

One of the most exciting challenges in recent times has been how to connect more people all over the world to the internet via a global network of satellites, even those in poverty-stricken or extremely remote areas. As a well established provider of satellite internet to customers in rural areas, this is a topic of interest to VSAT. We have already seen several billionaire entrepreneurs announce their intention to tackle this problem, including Elon Musk (via SpaceX and its “Starlink” satellites), Jeff Bezos (via Blue Origin, which plans over 3,000 satellites) and Richard Branson together with Japanese billionaire Masayoshi Son via OneWeb. That's in addition to numerous startups with relatively limited funding, including Swarm Technologies, Astrocast and Space Global. The emergence of these startups follows several extremely bullish predictions regarding the potential of the satellite broadband industry in the coming decades, as technological advances and lower costs make it more and more feasible to connect the world via satellites. One such report by Morgan Stanley postulates revenue generated by the global space industry to increase to over $1 trillion by 2040, up from roughly $350 billion now – with an estimate of satellite internet representing 50 to 70% of that.

VSAT's Current Efforts To Expand Outside The US

Very recently, VSAT has announced several advances to expand its network to various areas outside of its established area within the continental US. These include providing satellite internet to Puerto Rico and the US Virgin Islands, Mexico (in February 2019 in a collaboration with Facebook (NASDAQ:FB)) and most recently, Brazil (both through providing 3,000 public schools with satellite internet in conjunction with a Brazilian government initiative, and partnering with a Brazilian company Ruralweb to bring internet to communities and cities not served by any other service).

While VSAT has not officially announced anything so ambitious as aiming to connect the whole world via satellite internet, it seems highly likely that VSAT will continue to expand in certain overseas areas in a similar spirit to the aforementioned ventures. VSAT's CEO, Mark Dankberg, commented the following (in regards to a partnership with Facebook to provide satellite internet to Mexico):

"Enabling the next four billion internet users to come online is one of the grand challenges of our time - and participating in that is also one of the most exciting and rewarding opportunities of the mobile internet era. Rural communities, especially in emerging markets, are often the hardest to serve economically, yet are a vivid example of how Viasat's innovative space communication systems can bring broadband communication services to the places that need it most, at the lowest bandwidth costs.”

Future Risks

While there is significant potential upside for VSAT as it expands to offer satellite internet in new areas, one must bear in mind the high possibility of one of its many competitors gaining the primary market share, as well as the risks involved in their primary business in the US. VSAT relies on government contracts as a large portion of its revenue, and any significant disruption or deterioration of their relationship with the US government would have a major affect on its business.

Valuation

In determining whether VSAT is fairly valued, it is best to compare it to its closest competitors. VSAT's main and only real publicly traded competitor in its core business of providing satellite internet to the US may be considered HughesNet, a subsidiary of EchoStar (SATS). At under $4 billion versus the roughly $5.5 billion market cap of VSAT, SATS has a significantly lower market cap than VSAT, yet at very comparable revenues in their latest quarter (consolidated revenues of $531 million); moreover, SATS is in a comparably healthy financial position to VSAT. With that in mind, it it not clear that VSAT is better valued than SATS.

Potential Outlook

Given VSAT's rich experience in providing satellite internet, their existing infrastructure and four quarters of strong consecutive growth, I believe VSAT is in an enviable position to capitalise on the opportunity to connect rural and impoverished areas outside of the US to high speed satellite internet, and there is every indication that this is within their plans. That represents an appealing potential investment over the long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.