The internet has become integrated into the lives of billions of people around the world, but despite its prevalence, many areas are still unconnected. SpaceMobile, soon to be acquired by New Providence Acquisition (NPA), aims to change that. With its satellite technology, it aims to make the internet accessible in every region around the world, potentially unlocking hundreds of billions in value. The company is very speculative, but considering the implications of its technology, as well as the low valuation, I believe it deserves a small allocation to every portfolio.
Source: Google images
The issue and solution
There is an estimated $7T in GDP generated from the use of mobile phones and 4G, and the use of 4G for 5bil active mobile phones each year is estimated to generate $1T in wireless revenue. However, there are over 750mil people with no have no service options and 3.3bil people suffering from inconsistent service when moving between locations.
SpaceMobile is building the first and only space-based cellular broadband network that is accessible by any mobile phone, anywhere in the world. All that a user will require is a traditional handset without any extra hardware or software. The user just has to say yes to a message sent by SpaceMobile to connect, and will get a bill at the end of a month.
Source: SpaceMobile presentation
If the technology works properly, SpaceMobile will quickly become one of the most valuable companies in the world. Again, there are hundreds of millions of people around the world suffering from little or no internet connectivity, and billions of travellers who lose connection when they travel to another country. All of these people would be interested in a solution that provides global connectivity at low prices. US and Europe users only need to pay around $8 per month, while those in 3rd world countries only have to pay $1 per month.
Source: SpaceMobile presentation
SpaceMobile's technology is protected by over 750 patents, and in addition it has mutually exclusive agreements with some of the largest telecom companies in the world, as you will see below. This puts SpaceMobile far ahead of any aspiring startups in this space.
Partners
One of the most compelling reasons why I invested in SpaceMobile is because of its top tier partners. For example, Vodafone (VOD), one of the largest telecommunications provider in the world, is SpaceMobile's closest partner, as it not only invested in SpaceMobile in March 2020 but also agreed to a strategic partnership. In the regions Vodafone operates in, it will offer SpaceMobile to consumers and split revenues 50:50 with SpaceMobile.
While we have been adding deep rural network sites to connect remote communities without any coverage, the lack of power in some areas creates insurmountable obstacles. AST SpaceMobile will ensure that remote communities in many sub-Saharan African countries can have access to the latest digital services
Source: Nick Read, CEO of Vodafone
Japanese e-commerce conglomerate Rakuten (OTCPK:RKUNY) is also an investor and partner in SpaceMobile, and several other telco providers like AT&T (T) and American Tower have either invested in or partnered with SpaceMobile. If the technology has no chance of success, I don't think these partners would be so hasty to invest money into SpaceMobile.
Source: SpaceMobile presentation
I should add that founder Abel Avellan has previously founded EMC Communications, which provided high bandwidth connections over satellite to maritime and hard to reach land markets, so he definitely has the experience needed to create something like SpaceMobile. EMC Communications was eventually sold to Global Eagle (ENT) for $550mil.
Is it feasible?
One common misconception is that SpaceMobile has not shown any proof that its satellites will work once in space. However, the company has already completed the launch of its BlueWalker 1 satellite successfully in April 2019 and has demonstrated the ability to link directly to cellphones from this satellite, which demonstrates its technology actually works.
Bluewalker-1 proved that it could link directly to cellphones, according to SpaceMobile CEO Abel Avellan.
Source: SpaceNews
SpaceMobile plans to launch its next test satellite BlueWalker 3 in late 2021. BlueWalker 3 is expected to be half the size of the final SpaceMobile satellite. If this test goes well, it will be further proof that SpaceMobile's technology is effective, but the true test will not come until 2023.
In late 2022, SpaceMobile will launch 20 satellites for its Phase 1 operations. Phase 1 will cover 1.6bil people around the equatorial region and will start to provide enough revenue to get SpaceMobile to FCF positive. SpaceMobile has already signed several telecom partners to offer its solution in Phase 1.
Source: SpaceMobile presentation
Afterward, SpaceMobile will scale its network to the rest of the world, expanding the number of satellites to 336 gradually. Subscribers are expected to scale up substantially from both the equatorial region and globally.
Source: SpaceMobile presentation
Manufacturing isn't an issue, as SpaceMobile has secured a manufacturing plant in Texas to produce over 100k satellite modules each year. The company has also announced the purchase of a majority interest in satellite manufacturer Nanoavionics, which should provide both launch and manufacturing knowledge.
Source: SpaceMobile
So overall, the technology has been vetted multiple times. New Providence Acquisition chose SpaceMobile from over 400 companies, 50 of which were selected for due diligence (from investor call). SpaceMobile's investors Vodafone and Rakuten invested and signed binding MOUs after seeing the results of the BlueWalker 1 launch. Credibility is important, and these partners really give SpaceMobile a lot of credibility.
Financials and Valuation
SpaceMobile is projecting that 488mil people will subscribe by the end of 2027, generating nearly $10bil in projected revenue. I personally think that considering the low price point and high value provided, as well as the fact that SpaceMobile has partnerships with the top telecom companies around the world, there is a good chance that the company will hit or exceed this target.
Source: SpaceMobile presentation
After launch, the only costs the company would incur is maintenance for the satellites, leading to 90%+ EBITDA margins and strong cash generation. EBITDA is expected to hit nearly $10bil by 2027 and should still show fast growth afterwards.
Source: SpaceMobile presentation
At $13 per share, SpaceMobile is valued at around $1.9bil EV. The merged company will have $430mil in cash, which can completely fund the Phase I launch. SpaceMobile shareholders are subject to a 12-month lockup after deal closing and will own 70% of shares.
Source: SpaceMobile presentation
I believe this entry valuation prices in a very low chance of success. Assuming a valuation of $300bil in 2027, or 30x EBITDA, and a discount rate of 15%, SpaceMobile should be worth $100bil+ today, meaning the current EV is pricing in a success rate of just 2%.
There are several risks investors need to take note of before investing in SpaceMobile. It's possible that for some reason, the technology may not work on larger satellites or it may be more costly than expected. It is also possible that NASA or another government agency could object to the proposal - NASA has said in the past that the satellites could potentially pose a collision risk to A-train satellites. And of course, even if the technology works well, not all consumers may be willing to pay for it. At this point, SpaceMobile is not much more than a very exciting concept backed by credible partners, so I would say this is a very speculative investment.
Conclusion
Overall, very few companies have the potential to change an industry, and even fewer can do so in less than 5 years. SpaceMobile presents a very unique investment opportunity to make wi-fi accessible to billions around the world, yet it somehow still has a very conservative valuation, leaving substantial upside to be captured.
