Viasat: Enabling Free Internet in the Skies (NASDAQ:VSAT)

Unless you’re an outlier out of touch with technology, a surfer looking for the next wave, or active duty military, chances are you keep your smartphone within easy reach so you can scroll your screen for the latest news, a video or a quick chat.

Now, think about boarding a four-hour flight without internet and having to pore over a few pre-selected movies.

Under these conditions, it is not surprising that Viasat (NASDAQ:VSAT) has been bagging contracts related to WiFi terminals, which have helped boost sales in a 24% in its second quarter of fiscal year 2022 (Q2) which ended in September. However, as shown in the chart below, the stock has suffered more than $10 or more than twenty% since the company reported financial results in the second week of November.

This decrease could represent an opportunity and this thesis aims to evaluate an investment in Viasat considering the macroeconomic obstacles and the problems related to the supply chain.

I start with the positioning of the company in the airline industry where it competes with Elon Musk’s Starlink (STRKK) satellite network that is part of SpaceX (SPACE). There are also others like HughesNet, a wholly owned subsidiary of EchoStar (SAT).

Winning airline contracts amid competition

For Delta airlines (DALL), Provide free wireless Internet service for your passengers is equivalent to gaining a competitive advantage over some competitors like Southwest Airlines (light) and American Airlines (AAL). Now, Delta already offers free internet to frequent flyers (Delta SkyMiles members), but has extended the service to everyone who boards its Airbus A321, 737-900ER and 757-200 aircraft. For those who do not wish to become members but wish to take advantage of the Internet service, a number of $5 needs to be paid. Further, AAL, whose planes are also equipped with viasat gear also plans to extend its free Wi-Fi offer to all passengers.

In these circumstances, there are opportunities for Viasat to take advantage of competition in the airline industry as stakeholders aim to make the Internet freely available in the skies around the world.

Shifting to a more cautious tone, there are also fears that the domestic market is becoming saturated and more competitive as well with Elon Musk’s SpaceX poised to play a role. major role in the IFC (inflight communications) market. It has already signed an agreement with Hawaiian Airlines (SAY OH) and JSX Airlines for this purpose.

Now, knowing Elon Musk’s ability to have revolutionized fields such as automobiles with Tesla (TSLA), rocket launches and satellite communications with Starlink, it is logical that investors should not be too enthusiastic about Viasat, but excessive pessimism is not justified either.

Viasat in the midst of industry consolidation

The reason is that we are still far from a scenario where SpaceX gets market share from Viasat, which already has a large installed base for IFC as the incumbent. Additionally, subject to regulatory approvals, your $7.3 billion the merger with UK-based Inmarsat will reduce the mobile satellite communications services industry from three major players to two, including that of Luxembourg Intelsat. Now, the latter bought Gogo’s (GOGO) commercial aviation business back in August 2020 as part of the latter’s Covid-driven restructuring. Gogo now focuses on 5G and commercial aviation in more of what can be called a niche market style.

Therefore, this is an industry that is consolidating.

It’s also one where most of the focus is on SpaceX’s ability to provide global coverage with the FCC giving it the go-ahead for launch. 7,500 satellites in low-Earth orbit, despite Viasat’s objection. But, there are doubts as to the quality, namely the 350Mbps the speed per plane that Starlink claims to provide considering that on an airplane there are many users located in a concentrated location as opposed to satellite-based home Internet where users are more dispersed. So this should be more of a case where airlines will first look at SpaceX’s ability to deliver on its promises, before committing.

In addition, with the launch of the three ViaSat-3 communication satellites to cover the Americas, EMEA and the Asia Pacific region, the company will increase the bandwidth (internet speed), but at a reasonable price in terms of “the best bandwidth economics in the industry”.

Therefore, as airlines expand their free WiFi coverage around the world while considering cost dynamics, Viasat is expected to win more contracts like the one exemplified in China Sichuan Airlines for your A320 aircraft. This time, the Viasat terminal installed on the aircraft will be connected to Chinese Satcom’s Ka-band satellite network to provide IFC service including video streaming, web browsing, messaging, etc.

These contracts should generate a sustained revenue stream, but it is also important to assess how the company will perform when concerns about the economic slowdown become recession risks in the first half of 2023.

Revenue and order book

The company omitted revenue and profit expectations in the second quarter, while lowering its expectations for fiscal 2023 as its aviation customers get fewer aircraft deliveries from manufacturers, which in turn is affected by the issues of Supply Chain. This should have an adverse impact on Viasat’s revenues, and the additional costs generated by inflation that will be incurred in production and delivery will also weigh on earnings.

Shifting to a positive tone, the company can be confident in its Government Systems segment which, while not necessarily experiencing the same level of growth as Commercial Networks, is profitable and raised in $15.4 million of the operating profit in the last reported quarter, as shown below.

Further, driven by IFC equipment deliveries and terrestrial antenna systems, revenue from the commercial network segment, which includes airlines, is generating better revenue growth than government systems and services. satellite.

An important factor to consider during economic downturns for this communications equipment business is the visibility of future revenue, in the form of $2.37 billion backlog financed at the end of September, which included $1.1 billion on new orders. This order book represents more than 80% of fiscal year 2022 revenue and may, to some extent, cushion Viasat’s finances in the event of acute turmoil such as those seen during the Covid lockdowns.

Furthermore, by inquiring into the balance sheetthe sale of Link16 to H3 Harris for $2 billion should reduce the debt that was in $2.88 billion (net cash) in the second quarter (end of September). This sale should prove timely to reduce debt related to the Inmarsat acquisition, which is currently under scrutiny by UK regulators.

Cash flow and valuations

Now, the company has improved its cash from operations on both an annual and quarterly basis. But its capital expenditures remain high, mainly due to the Viasat-3 launch, which explains why its free cash flow is negative. In this sense, according to management, this should change after the launch of Viasat-3 for the EMEA region, which is expected for the summer of 2023, shortly after that of the Americas in the first quarter. Therefore, there are chances that the FCF will turn positive in 2023.

Therefore, for a value investor interested in free cash flow metrics, it may be preferable to take a wait-and-see stance. On the other hand, for someone looking for a devalued Stocks based on several metrics, including price operating cash flow multiple of 4.74x, which is 73% below valuation for the IT sector (table below), may be the right time to buy.

With a 20% up adjustment, I get a target of $38 (31.74 x 1.2) based on the current share price of $31.74.

To support my bullish stance, the stock could also benefit from momentum factors, as the Falcon rocket that will launch its satellites into space has a Awesome recorded audio. Also, the expectation is for additional contracts, both new and upgrades, as Viasat increases its fleet of active aircraft by approximately 500 for the remainder of this fiscal year. To put things in perspective, airlines serving the Internet needs of passengers should grow the market for in-flight Wi-Fi services by a 12.5% only from 2022 to 2023.

Conclusion with Microsoft’s Deal and Caution

The bright picture I’ve painted above could be tainted by deteriorating macroeconomics, but remember that Viasat dumps an order book plus a profitable government business, too. In addition, the company is involved in satellite Internet for rural areas where the cost of laying fiber and even installing antennas for mobile coverage is prohibitively expensive. In this case, the company has signed a agreement with Microsoft (NASDAQ: MSFT) to cover a total of 10 million people in Africa and the world by 2025. This number is almost 17 times the 590K subscribers Viasat had for its home internet service in 2021, and the fact that it was chosen by the software giant over competitors gives credit to the company’s technology.

Therefore, should there be launch delays, as is often the case with these kinds of projects, supply chain issues that mean fewer planes are equipped with Wi-Fi terminals, or some airlines limit their enthusiasm to offer Free internet in the skies as a result of the rise of COVID-19. numbers in China, the company can rely on its rural satellite internet to fuel long-term growth. However, in the short to medium term, expect the stock to suffer depending on how adverse news hits the market.

Finally, the $38 price target may seem low given the opportunities, but we must not forget that we are facing highly volatile market conditions where it is best to be cautious. Along the same lines, in the event that there is no rise due to some delay in the Viasat-3 launch in the first quarter, it may be better to sell the stock in order to limit losses.