Launching Galileo And 5G Products Will Expand Global Aviation Connectivity

Key Takeaways

• Gogo's launch of Galileo and 5G products aims to drive revenue growth driven by strong demand in underpenetrated aviation connectivity markets.
  
• Satcom Direct acquisition enhances global market reach and revenue potential in lucrative segments like heavy jets, supported by strategic international expansion.
  
• Gogo faces financial strain due to delayed products, risky acquisitions, competitive pressures, and government reimbursement challenges.

Catalysts

Provides broadband connectivity services to the aviation industry in the United States and internationally.

• The upcoming launch of Gogo Galileo and 5G products is anticipated to drive growth in the global business aviation connectivity market, which remains highly unpenetrated. This should impact revenue positively as the company expects rapid adoption due to strong customer demand and innovative offerings.
  
• The planned acquisition of Satcom Direct is expected to significantly augment growth by leveraging its installed base and strong sales and service organization outside North America, enhancing revenue potential and expanding market segments served, such as the lucrative heavy jet and MilGov markets.
  
• Increased demand for high bandwidth connectivity, driven by trends such as cloud data storage and video conferencing, positions Gogo’s products, particularly the Galileo and 5G offerings, to meet these needs. This growth in demand is likely to result in higher ARPU and potentially improved margins.
  
• Expansion into international markets through Satcom Direct’s international sales force is set to enhance global reach and revenue streams, providing a robust platform for the integration of the Galileo product, which is expected to accelerate penetration and provide scale advantages.
  
• The strategic focus on AVANCE penetration and upgrades ensures customers can easily transition to new networks or technologies, offering a continuous growth path for revenue and reducing costs associated with network upgrades, potentially improving net margins over time.

Gogo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gogo's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.9% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $90.5 million (and earnings per share of $0.72) by about December 2027, up from $56.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.1x on those 2027 earnings, up from 17.9x today. This future PE is greater than the current PE for the US Wireless Telecom industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Gogo Future Earnings Per Share Growth

Risks

• Gogo's current products are late in their product life cycle, which may negatively impact near-term revenue and market competitiveness as newer offerings from competitors could attract more customers.
  
• The integration and execution risks related to the acquisition of Satcom Direct could impact net margins and free cash flow if synergies are not realized as planned or if operational disruptions occur during the integration process.
  
• The decrease in operating and EBITDA margins due to the Satcom Direct acquisition, despite expected synergies, could deter investors and impact earnings if synergy projections fall short or take longer to realize.
  
• The launch delays and increased costs associated with new product lines like Gogo 5G and Galileo could pressure financials, including net margins and free cash flow, if customer demand shifts or competitor offerings become more appealing.
  
• Government reimbursement shortfalls in the FCC Secured Networks program could impact free cash flow projections in 2025 and 2026 if additional funding isn't secured, leading to increased financial strain.

Valuation

• The analysts have a consensus price target of $12.75 for Gogo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.5, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $546.3 million, earnings will come to $90.5 million, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $8.01, the analyst's price target of $12.75 is 37.2% 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.