Terrestrial 3D PNT And FCC Progress Will Drive Long Term Upside Potential

Catalysts

About NextNav

NextNav develops advanced 3D positioning, navigation and timing solutions that complement and back up GPS for critical communications, public safety and enterprise applications.

What are the underlying business or industry changes driving this perspective?

• Progress at the FCC toward an NPRM on 5G based 3D PNT in the lower 900 megahertz band, combined with a congressional push to free more spectrum, sets the stage for commercial rights that can unlock new service revenues and crystallize spectrum value on the balance sheet, supporting higher earnings and asset valuations.
• Growing government and carrier focus on national security, public safety and GPS resiliency, reinforced by Department of Transportation programs and Chairman Carr's public support, should accelerate adoption of terrestrial PNT, expanding long term recurring revenue and improving visibility into future cash flows.
• Deep integration of NextNav technology with standard 5G equipment and partners such as Oscilloquartz demonstrates a scalable, low incremental cost deployment model that can leverage existing infrastructure, supporting attractive incremental margins and improved net income as volumes ramp.
• Extension of the AT&T Pinnacle agreement and active use of the vertical location solution by Verizon and Japanese partner MetCom provide reference deployments that can be expanded to full 3D PNT and international markets, broadening the addressable customer base and driving multi year revenue growth.
• Completion of the Telesaurus spectrum acquisition, a debt free capital structure with no maturities until 2028 and significant cash on hand provide runway to commercialize the 900 megahertz asset, enabling the company to convert underrecognized spectrum value into operating revenue and margin expansion without near term dilution pressure.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming NextNav's revenue will decrease by 25.4% annually over the next 3 years.
• Analysts are not forecasting that NextNav will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate NextNav's profit margin will increase from -2772.4% to the average US Software industry of 12.4% in 3 years.
• If NextNav's profit margin were to converge on the industry average, you could expect earnings to reach $285.8 thousand (and earnings per share of $0.0) by about December 2028, up from $-153.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13045.7x on those 2028 earnings, up from -14.1x today. This future PE is greater than the current PE for the US Software industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 2.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.75%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Extended or repeated regulatory delays at the FCC, including the impact of government shutdowns and competing priorities such as the C-band auction, could materially slow issuance of an NPRM and subsequent spectrum commercialization. This could push out monetization of the 900 megahertz asset and weigh on revenue growth and earnings.
• Despite strong positioning rhetoric around national security and GPS resiliency, carriers and government agencies may adopt a multi vendor system of systems approach that dilutes NextNav's share of deployments in favor of alternatives such as Iridium and other satellite or terrestrial solutions. This could limit the company’s ability to scale its platform and constrain long term revenue and net margins.
• Low band spectrum remains highly strategic and in demand from deep pocketed incumbents and new entrants like satellite operators. This could intensify competition for adjacent bands and for carrier partnerships, reducing NextNav's pricing power on its scarce spectrum and pressuring margins and future earnings.
• The business model still depends on converting technical milestones and pilot projects, such as work with AT&T, Verizon, FirstNet, Oscilloquartz and MetCom, into broad commercial rollouts. Any failure to expand beyond niche public safety and vertical location use cases could leave utilization of the spectrum and technology below expectations, limiting recurring revenue visibility and earnings scalability.
• While the company currently highlights a strong liquidity position and reduced debt burden, ongoing operating costs to advance R and D, regulatory engagement and commercialization, combined with uncertainty in timing of large contracts or auctions, could force additional equity or convertible issuance. This could dilute shareholders and cap earnings per share accretion even if absolute earnings improve.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $20.0 for NextNav based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $2.3 million, earnings will come to $285.8 thousand, and it would be trading on a PE ratio of 13045.7x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $16.11, the analyst price target of $20.0 is 19.5% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.