MorningWord 11/22/13: As the bull market keeps chugging along, making new all time highs on what feels like a daily basis, I keep coming across companies with public market capitalizations that border on absurdity. Yesterday in this space I highlighted the 3D printing stocks, with its poster-boy, DDD sporting a $7 billion market cap with expected sales of $500 million this year and $650 million next. In today’s edition of “single stock bubble watch” I am gonna hit GOGO, the provider of inflight wifi. By recent IPO standards, the stock’s 80% gains since its June IPO are fairly tame, yet the company has a $2.5 billion market cap with expected sales this year of $320 million. I know, I know, using valuation as a primary input on high-growth, new-to-market companies is a fool’s errand in a market like this, but it should at the very least serve as a sort of guidepost to help gauge the level of exuberance that exists in the current investment environment.
The chart since its IPO in June is actually quite fascinating, as it is apparent that it was a failed deal from its opening print, spending most of its existence underwater until just recently (red line representing IPO price).
SO why the recent enthusiasm? Back on Nov 11th the company issued an outlook that was above their prior revenue guidance despite printing a larger than expected loss in the quarter ended. But stories like this are about the future, not the past, and the company saw average revenue per Wi-Fi user increase 7.7% year over year, a trend that is likely to go up given the FCC’s and the FAA’s change of heart on the use of electronic devices on planes, which as of yesterday reports could include voice calls.
This story will be one to watch fairly closely. While they apparently have first move advantage in the space, they only had 2011 planes equipped with Wi-Fi internet access as of Sept. 30th. There is a ton of room for growth.
Investors appear to be just a tad skeptical though, as 55% of the float is short and of the 5 Wall Street analysts that cover it, only one has a buy, 2 have hold and 2 sells. Now, the short interest number is a bit misleading, as the float is only 9.1 million shares, vs. 84.1 million shares outstanding in total, with 5 million shares short. The top 2 holders own 62% of the company, which leaves a greatly reduced float for traders.
The company is not expected to be profitable until 2016 (some optimists say late 2015). Perhaps most concerning, very few private companies have been able to offer profitable products or services related to commercial flying for a sustainable period of time. Airlines can attest to that. GOGO could be the exception, but the current rally feels more like a squeeze rather than a long-term investment on a game-changing company.