Flexible Millimeter Wave Use Will Unlock Mobile Opportunities

Key Takeaways

• TERAGO's strategic mid-market focus and reduced churn anticipate future revenue growth, bolstered by improved account revenues and spectral assets.
  
• Enhanced operational and financial results, including EBITDA growth and increased cash flow, suggest stronger net margins and earnings potential.
  
• Uncertainty in regulatory decisions and slow revenue growth raise concerns about TeraGo's profitability and competitive positioning in the telecom market.

Catalysts

Provides connectivity services for businesses primarily in Canada.

• TERAGO’s strategic focus on the mid-market and lower enterprise businesses, along with reduced customer churn and a 5.2% growth in average revenue per account, is expected to drive future revenue growth.
  
• Possession of 91% of the millimeter wave spectrum positions TERAGO advantageously for potential regulatory changes allowing flexible use, unlocking new revenue streams through mobile services.
  
• Operational improvements, including better deal-level economics, reduced operating expenditures, and a 16.9% rise in adjusted EBITDA, suggest potential improvements in net margins.
  
• A significant improvement in backlog, with $112,000 in monthly recurring revenue compared to $65,000 in the previous year, indicates future revenue growth potential.
  
• A strong cash flow increase, with $5 million generated from operations compared to $523,000 in the previous year, may contribute to better net margins and earnings due to optimized business operations.

TeraGo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TeraGo's revenue will grow by 4.1% annually over the next 3 years.
• Analysts are not forecasting that TeraGo will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate TeraGo's profit margin will increase from -50.7% to the average CA Telecom industry of 9.3% in 3 years.
• If TeraGo's profit margin were to converge on the industry average, you could expect earnings to reach CA$2.7 million (and earnings per share of CA$0.14) by about April 2028, up from CA$-13.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from -1.8x today. This future PE is greater than the current PE for the CA Telecom industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

TeraGo Future Earnings Per Share Growth

Risks

• The anticipated decision by ISED regarding the repurposing of the lower 26 gigahertz band for flexible use remains uncertain, potentially delaying or altering market opportunities, impacting future revenue growth from new offerings.
  
• The marginal increase in total revenue from $26.05 million to $26.16 million in 2024 suggests slow revenue growth, not meeting possible investor expectations for significant expansion.
  
• Continuous net losses, with a net loss of $13.2 million in 2024 compared to $13.1 million in 2023, may raise concerns regarding TERAGO's path to profitability, impacting overall financial outlook.
  
• The company’s substantial reliance on governmental and regulatory decisions (e.g., spectrum license renewals and adjustments) can introduce uncertainties and risks, potentially affecting future earnings stability.
  
• Canada's lag behind other countries in utilizing the millimeter wave spectrum for mobile, alongside possible competitive pressures from larger telecoms, could hinder rapid revenue expansion and negatively impact net margins.

Valuation

• The analysts have a consensus price target of CA$2.6 for TeraGo based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$29.5 million, earnings will come to CA$2.7 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of CA$1.18, the analyst price target of CA$2.6 is 54.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.