Why Starlink Is Not A Threat, But A Boon, To Lumen
Summary
- After the recent pop, Lumen dropped essentially back to pre-GME squeeze levels again making it attractive.
- The stock continues to be discounted for reasons of poor past returns and landline decline, with poor coverage of the stock eliminating price discovery.
- With 5G and work-from-home being important mitigants for the decline of IP transit, there are more reasons to believe that the wireline business model has longevity.
- Starlink and other satellite internet efforts, evidenced by efforts in emerging markets, will serve to connect more people at the periphery of networks, but will not encroach on telcos.
- Advancement in satellite internet could actually turn into a tailwind for Lumen's business.
Lumen Technologies (NYSE:LUMN) continues to be an attractive stock due to its high yield and mitigants to the decline of the IP transit business, upon which Lumen substantially relies. With weak past capital return metrics, Lumen remains substantially under-covered by analysts, and the situation in wireline remains poorly understood and evaluated. More connectivity thanks to 5G, streaming and work-from-home are already clear tailwinds for the business.
Some have pointed to advancement in satellite internet technology, now headed by Starlink (STRLK), as a potential threat to the traditional telcos as it reduces the need for fiber infrastructure. While it's true that satellite internet allows for connectivity without terrestrial infrastructure, it will be mainly of benefit to people on the periphery and will not affect the high return markets where telcos like Lumen build out their projects. Satellite internet will be marginal at first, but it will grow the data flows that will eventually travel through the Lumen infrastructure. With Lumen's infrastructure being the largest in the world, the benefit of further connectivity at any periphery is a boon to the stock, and presents a further point for the buy case.
What Satellite Internet Is and Isn't
I became interested in satellite internet first looking into satellite operators in Europe, which had high yields and where I was researching a SoTP thesis. However, a lucky encounter with an emerging markets entrepreneur working on satellite internet projects helped me re-assess. Ultimately, satellite internet as we would have known it a few years ago was a high latency and low speed internet that cost a lot and only really made sense for the most isolated locations. Companies like Eutelsat (OTCPK:EUTLF) which has a marginal satellite internet business, provides this kind of service.
They are constrained primarily by their satellite assets, which are made for broadcasting and not broadband. Given the massive effort that it takes to launch a satellite, and the impossibility of fundamentally upgrading a satellite that is floating around in orbit, the quality of internet that a company like Eutelsat can provide will not meaningfully change.
New and improved satellites are an option in order to improve internet speeds. The entrepreneur I spoke to was investing in geostationary satellites for emerging market internet services. His satellites would be more appropriately fitted for the purposes of providing internet to large dishes that would provide proximal connectivity, and would be competing with other fiber infrastructure that brings limited data into these isolated places.
The Starlink concept is different. They are using much smaller satellites, about the size of a coffee table, which will float closer to Earth, have less cladding and will probably have to be replaced relatively frequently (15 years or so). But they will likewise be focused on providing actually good internet to isolated places. Beyond Starlink there are further concepts that try to accomplish similar things with low-floating satellites.
A Valuable Marginal Plug Where Lumen is Central
I am confident in the Starlink product, and funding allowing, they will probably accomplish providing a good service. However, they are not a threat to Telcos like Lumen with extensive wireline infrastructure. Lumen benefits from the fact that fiber was developed long before satellite internet had a chance to be a competitive form of internet provision.
Ongoing copper infrastructure upgrades by almost all the European Telcos like BT Group (OTCPK:BTGOF), Orange (ORAN) and Proximus (OTCPK:BGAOF), and extensive fiber buildouts that have already taken place mean that incremental investment to these broad networks is minor compared to the returns. This infrastructure is likely to be long-lasting, as there won't be any wired networks that can ever move data faster than light, and is more than competitive with even prospective satellite internet options on a price performance basis.
Satellite internet will be increasingly relevant at the fringes of networks, and if it can be provided with good price performance, there is no doubt that it will impact the ROIC of projects to extend terrestrial networks into untouched territory. However, it will be at the fringes only. It will never be able to compete where the fiber networks are dense. And with companies like Lumen not outlaying that much capital, and already in possession of the world's largest wireline network, the satellite internet revolution will not pose a threat of any kind to the main appeal of the Lumen business, which is that it is an owner of a valuable, asset-heavy, secularly supported infrastructure.
Conclusion: Not a Threat
Satellite internet will be very relevant in the years to come, both developed markets but more so in emerging markets. However, while satellite internet might have harangued a nascent fiber infrastructure, with fiber investments already having been substantially deployed, wireline has a deep moat against the kind of competition that satellite internet introduces to the market. Overall, satellite internet will be a support to Lumen's business, as any initiative that increases the extent of connectivity and the depth of data flows. It will give people on the fringes access to internet, which will have to pass through central networks substantially owned by Lumen.
Where risks like peering pose a bigger, albeit mitigated threat as discussed ad nauseam in our previous articles, satellite internet, even in the most optimistic scenarios, should be symbiotic and not destructive for Lumen.
This article was written by
The Valkyrie Trading Society is a team of analysts sharing high conviction and obscure developed market ideas that are likely to generate non-correlated and outsized returns in the context of the current economic environment and forces. They are long-only investors.
They lead the investing group Learn more.Analyst’s Disclosure: I am/we are long LUMN. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (56)
Any true satellite experts out there? I just tried to compile a comparison for the competitors. I came up with the below, but not sure whether the numbers I found are a true comparison, apples to apples.
Hughesnet (US/Americas/Brazil/India/some Europe), 1 Terabyte total, 25x3, 6+1(coming)GEO,
Viasat (North America), 500 Mbyte now, maybe 15 Tb like Telesat after LEO launches?, 100Mbps, 5+3GEO 288LEO 2026,
Eutelsat/OneWeb, (above 50 degrees, Europe/Africa), 1.1 Tb, 30-100Mbps, 39GEO, 250/648/7,000 LEO(coming)
Telesat, (Canada/World?) 15 Tb, 15GEO + 298LEO(2024)
Starlink, 50 Terabyte at 12,000 satellites
All this the thoughts of someone who definitely is NOT a satcom expert.
* Sattlite did not work for TV as ATT sold its DirectTV for 1/10 of the purchase price.
Do you believe Satellite will work for Internet, which is interactive, much more dimanding for much more bandwidth and higher speed and latency?
I do not believe it since 90% of Elon Musk's 12,000 satellites will be wasting time flying over the oceans and desert.
“What we’re doing is launching a space-based satellite network that allows any phone — without any modification of hardware, software, apps, nothing — to be able to connect directly to satellites,” AST chairman and CEO Abel Avellan told CNBC.
