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SpaceX's Starlink (STRLK) satellite service has been activated in Ukraine after the country's ground-based communications infrastructure was severely damaged by the invading force. The broadband service offered by Elon Musk's constellation of satellites using Low Earth Orbit ("LEO") represents a big relief for embattled Ukraine's army officials as it enables them to circumvent antenna-based communications infrastructure operated by mobile network operators.
Now, my objective with this thesis is to realistically highlight the potential of high broadband satellite-based communication in this new world order. This is an area where few companies have invested and apart from Starlink, there is AST SpaceMobile (NASDAQ:ASTS), a publicly listed entity. Starlink, on the other hand, is one of SpaceX's (SPACE) units, a private company valued at a whopping $100 billion in October 2021.
As for ASTS, its stock has evolved at the opposite end of the spectrum and, subsequent to the downside, its market capitalization now stands at only $360 million. However, its shares have enjoyed a 20% upside in the last two weeks, this period coinciding with the Eastern European conflict.
I explore whether this upside is simply due to investors' enthusiasm around satellite communications following Starlink's presence in Ukraine or there is something more concrete. For this purpose, I analyze ASTS's technology.
ASTS's technology
The true reason for ASTS's upside appears linked to the launch of the BlueWalker 3 satellite anytime from March 1 through April 1, 2022, by hitching a ride aboard Elon Musk's SpaceX rocket. The satellite includes a 693-square-foot surface designed to communicate directly with smartphones as per the illustration below.
AST SpaceMobile (static.seekingalpha.com/uploads/sa_presentations/822/76822/original.pdf)
Now, this is the major difference between ASTS and Starlink where subscribers need a terminal that looks like a TV satellite dish a subscriber has to hook on his rooftop. For this purpose, a shipment of Starlink terminals sent by Elon Must has reached Ukrainians on March 1 but had they used ASTS's gear, there would have been no need for additional shipments as users could have used their own mobile phones.
Now, both ASTS and Starlink use low earth satellites and they potentially fill a big gap in the coverage provided by 4G and 5G mobile service providers. The reason is that the expansion of towers like those built by American Tower (AMT) and associated fiber is limited by the availability of electricity and the type of terrain. In other parts of the world, these problems are more acute and there are also regional conflicts that deter TowerCos (tower companies) from expanding their infrastructure which they monetize to service providers for the purpose of implementing cellular networks. This problem is solved by directly connecting to 4G or 5G networks through low orbiting satellites whether people are located in urban or rural areas, natural disaster hot spots, or man-made conflict zones. Again, ASTS's advantage is that people do not have to use specialized equipment.
Exploring further, using space satellites to communicate on the ground is not something new and has been around for many years.
Here, there are companies like Viasat (VSAT) which already had setup systems including satellite phones for communicating in some of the remotest parts of the world. However, these are based on geostationary satellites which are located much further out in space compared to LEO satellites.
There was a time when you had to painstakingly point a small dish antenna in order to obtain a signal strong enough for you to talk through a special bulky phone Thus, these were mostly used for emergencies when someone was lost in a forest. With time, service providers have improved download speeds and these are fast enough to stream Netflix (NFLX) movies but these remain much lower than Starlink's. Thus, as per data from Reviews.net dated January 26, a speed of 10,000 Mbps was obtained for the LEO satellite play while Viasat could only garner 12-100 Mbps. As for HughesNet, it achieved a speed of 25 Mbps.
It must also be mentioned that Starlink's satellites can provide continuous, global coverage at high speeds, but they remain at beta or testing phase. Still, their superior speeds do provide an idea of ASTS's potential.
However, adopting some realism, a lot will depend on launch, proper deployment of the satellite, quality of test data, and eventually, the launch of other Bluewalkers to build up the constellation for worldwide coverage. Hence, the next step is to assess whether the ASTS has the finances.
The finances and business model
The company is not in self-financing mode as it has a funding partnership with Vodafone (VOD), one of the top European mobile service providers. Then it also benefits from the support of AMT and Rakuten (OTCPK:OTCPK:RKUNY), the Japanese disruptive 5G service provider.
These partnerships signify that the company is revenue-generating despite having no customers, but spends a lot for R&D. As per the executives, these costs should eventually come down as they use a standardized procedure for building their space gear. Also, a significant portion of the project consists of nonrecurring items and components specifically associated with the launch of the satellite into space.
Hence, as the project progresses to the completion stage, the costs of revenues should trend lower. Looking for concrete figures, according to the executives, research expenses in the $12.9 million-$15.4 million range (see table below) as incurred during the last two quarters should fall to an average of $9 to $10 million through the end of 2022.
AST SpaceMobile (seekingalpha.com/symbol/ASTS/income-statement#figure_type=quarterly)
As for Engineering services, these increased by $2.2 million during Q3 and will continue to be on the high side with the team growing from 193 to around 300 as the assembly integration and the testing teams prepare for full-scale satellite manufacturing.
This means that the management has already envisaged the transition from research to production satellites and, as such, the anticipation is for incremental CapEx of only $10 to $12 million till project completion, in addition to the $56.7 million already invested in BlueWalker.
The resiliency of the business model in case there are some project delays also needs to be emphasized.
Here, the backing of the three industry strategic partners located in Europe, the U.S., and Asia respectively make a lot of sense given that ASTS's business model is based on revenue share with local carriers. Additionally, the company does not need to seek operating licenses from local regulators as is the case for Starlink, since its strategy is not to compete with them. This strategy to get the buy-in of local plays also enables ASTS not to incur installation costs for ground-based stations which enable interconnection with other networks.
Valuations and key takeaways
Coming back to the market cap comparison with Starlink I made at the beginning, there is a lot of scope for ASTS's share price to rise further when assuming just a $1 billion forward market cap, or one-hundredth of Elon Must's satellite company, which by the way is still private.
Furthermore, ASTS's market capitalization remains half and one-third of peers Globalstar (GSAT) and Viasat respectively as shown in the table below despite its much higher trailing price to sales. The P/S was even higher when I bought the shares of this 5G company which has the capacity to provide ultra-high bandwidth at subscribers' fingertips from any part of the world. That was in September 2021 when the stock was priced at $11.67 and today, despite the 39% downside, I have held to my shares. Two reasons are that ASTS should see better growth through revenue sharing and has less debt compared to peers.
Still, given the amount of work that remains to be done before users are able to see ASTS's icon on their mobile, I view the company as a long-term play but do not exclude a surge to $10 in the short term, which is a support level, and this, after a successful launch in the March-April window. Interestingly, the launch will be done by SpaceX rockets which carry a high success rate of $98.6%.
Comparison with peers (seekingalpha.com/comparison/new/MCxhc3RzLGdzYXQsdnNhdA==)
Pursuing further, I also like that 49.2% of gross margins as for an equipment manufacturer, this shows that the management has been keeping a close eye on factory and supply chain costs, two expenses that need to be controlled especially for the highly-innovative projects where there may be delays.
During this time, the competitive landscape is evolving and, according to some unconfirmed reports, Apple's (NASDAQ:AAPL) iPhone 13 may incorporate a chip enabling smartphone users to use GlobalStar's satellite connectivity. Looking further, Viasat plans to merge with U.K.'s Inmarsat paving the way for better broadband wavelength.
Still, ASTS is better positioned from the strategic viewpoint, and for this purpose, I make an analogy between radar technology and cutting-edge satellite 5G internet.
Radar was invented during the Second World War in order to allow for early detection of enemy planes instead of having to visually spot them through human eyes. Subsequently, the technology found wider usage in the commercial domain and now equips all large flying planes as well as airport towers. Now, the Russian aggression has made the world more uncertain and, with cyberattacks increasingly targeting western infrastructure, I see ASTS's technology being used to complement the shortcomings of vulnerable ground-based antennae systems as a sort of backup system in the event that the primary one is down, just like in Ukraine.
