SUBSPAC

In A Galaxy Of It’s Own…

The Rundown (7/03/21)

Hello Friends,

There’s a lot of talk of the Billionaire space race this week (Sorry Bezos). This week we’re covering one of the coolest new public companies in the space industry. Enter AST SpaceMobile––the company that’s looking into using space satellites to provide mobile broadband coverage across the world.

AST SpaceMobile is The Only Space-Based Network in the Market

To get to global coverage, the route is not through cell phone towers but through satellites orbiting Earth. Ultimately, the company wants to build a network which democratizes broadband coverage around the globe. To do so, the company is racing to build infrastructure in space, which would provide broadband service directly to a mobile phone. 

A Huge Global Market 

When it comes to the global stage, over 51% of the global population lacks access to mobile broadband. For SpaceMobile, the key is closing the gap by extending the coverage to more locations in the planet. Management has identified that there are over 750 million people in countries where there’s no services offered and another 3 billion where there is no internet connectivity.

There are also other gaps including people at remote locations like the sea or high altitude areas. Even in an area with higher connectivity, communication networks may be knocked out in the event of a disaster. But with space based networks, the company’s satellites will allow users to access the network when they leave the coverage of another service. 

The terrestrial network hands off the service to the satellites, which beam thousands of cells of service to Earth. To the phone, the signal will seem like its coming from any other cell tower. To delivery the best experience, the company is working with cell service providers including AT&T, Vodafone, Rakuten and American Tower.

The company plans to rollout service initially in 49 counties located near the Earth’s equator and reaching a target demographic of over $1.6 billion. The company will use the money from its SPAC merger to fund the first of 20 networks.


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Strategic Partnerships Driving Expansion 

SpaceMobile will be sold to customers of existing mobile networks, with a revenue split of 50/50. This enables telecom operators to create new subscription plans to customers which would offer a seamless experience between a traditional service and a satellite connection.

Beyond the company’s revenue model, it has over 750 patents with financial backing from Samsung, Next and Vodafone. 

The company also has a commercial agreement with Vodafone, AT&T and Rakuten, which gives the company access to over 1.27 billion existing customers.

These partnerships can be beneficial in densely populated areas in India and Africa where customers have limited access to reliable connectivity. The first Phase of deployment also targets these regions with the greatest connectivity. 

Substantial Growth and High Margins 

Post the SPAC merger, the company has been infused with $541 million in cash. For the first phase of development, the company expects to burn through $500 million in cash, leaving it with little liquidity for the next phase of development. The company expects the latter phase launches to cost a total of $1.7 billion.

With development of phase two to be completed two years after the launch of phase one, the company isn’t expected to generate the necessary funds for the expansion. Using the company’s financial projections, AST won’t be in a position to generate the necessary free cash flow to fund the expansion in the timeframe and may need to fund the capital expenditure through a mix of debt and equity. 

The company is expected to see rapid adoption through the existing customer base with its partnerships. With a forward looking customer acquisition strategy and access to over 1.3 billion pre-existing customers, it is fair to say that adoption rates are expected to grow in high double digits and revenue growth projected to grow 15x between 2023 and 2025. With its first movers advantage, the company is expected to eventually hit $10 billion in revenues by 2027. 

Another key advantage with AST is its low pricing strategy, with average revenue per user (ARPU) in developing markets being as low as $1 per month. This along with the company’s flexible pricing strategy, will maximise user adoption, especially in countries where the median income is low. The company also expects to have high EBITDA margins of over 90% in the future, thanks to declining satellite costs and a low operating cost model.

First Movers Advantage

The key to AST’s valuation going forward, will depend on the company’s ability to deliver subscriber growth to existing partner telecoms and to generate cash flow from the business to build out the next phase of expansion.

Based on the company’s superior margins and high growth, the company is displaying a substantially cheaper valuation compared to competitors. 

AST’s competitors include Iridium, which is the leader in satellite communication and other telecom operators like T-Mobile and Verizon.

The company projects that, based on its first full year of earnings in 2024, it trades at an EV/EBITDA multiple of 1.4x. This is reasonable considering Iridium trades at a multiple of 14.1x, while carriers like T-Mobile and Verizon trade at 8.3x and 7.3x respectively. 

The valuation multiple could be even lower considering that the company’s revenues are conservative. For instance, the company’s projections are based on assuming just 0.9% subscriber penetration and a monthly ARPU of $2.02. The company’s projected revenues of $1 billion also represent just 0.1% of the current $1 trillion wireless services market. This indicates that there is plenty of room for the stock to grow from the current levels, based on its current valuation and revenue projections in the future. 

Conclusion

AST SpaceMobile has the potential to massively disrupt the telecom space and provide access to the network infrastructure to millions of customers worldwide. The beauty of the company’s business model is that it doesn’t compete with existing networks, but rather complements the service by providing coverage in hard to access areas. AST has also formed key strategic partnerships with industry leading firms like Samsung, Vodafone and AT&T. The company’s low-cost operating model in addition to its high margins ensures that the current valuations are also quite reasonable.

While there may be short term challenges, including additional capital raised to fund the planned expansion, the company’s high growth rate and operating cash flows will lead to a self-sustaining model in 2027. While Satellite Phones have come and gone before, AST aims to make every phone on the planet have access to satellite networks. Looking at the company’s innovative technology and the strong leadership, it may just be able to pull off its ambitious plans.  

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