Future IoT Prospects Will Emerge Although Tariffs Trigger Satellite Challenges

Key Takeaways

• Geopolitical uncertainties and U.S. trade policies might hamper revenue growth due to increased costs and pressure on government contracts.
  
• Rising competition, especially from new players like Starlink, challenges market share, potentially affecting service revenue growth despite strong niche positioning.
  
• Tariffs, competition, policy changes, and market dynamics threaten Iridium's costs, market share, government revenues, and IoT subscriber growth.

Catalysts

Provides mobile voice and data communications services and products to businesses, the United States and international governments, non-governmental organizations, and consumers worldwide.

• The current U.S. trade policies, with a minimum tariff of 10% on imports from Thailand, could add approximately $3 million in costs, affecting operational EBITDA negatively. If tariffs increase to a proposed 36%, costs could rise by $6 million to $7 million, impacting earnings due to increased operational expenses.
  
• There is uncertainty in the geopolitical environment that could affect contracts and funding from the U.S. government and other international entities, which might put downward pressure on revenue growth from government contracts and related segments.
  
• The shift of certain partners to new retail models within IoT may lead to structural deactivations, potentially affecting subscriber growth metrics even though revenue remains unaffected under fixed contracts, which could lead to stagnant or slower-than-expected growth in reported revenue from IoT services.
  
• An increase in tariffs might lead to a potential increase in equipment costs, yet the company's decision not to pass these costs to customers could impact equipment revenue and margins if adjustments are necessary in pricing strategies.
  
• The satellite industry is dealing with increased competition from new players like Starlink, which could threaten market share and lead to lower-than-expected growth in service revenue from traditional segments like maritime where competition is growing, despite Iridium's niche in safety services like GMDSS.

Iridium Communications Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Iridium Communications compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Iridium Communications's revenue will grow by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 14.7% today to 10.9% in 3 years time.
• The bearish analysts expect earnings to reach $103.0 million (and earnings per share of $0.97) by about May 2028, down from $123.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, up from 22.6x today. This future PE is greater than the current PE for the US Telecom industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Iridium Communications Future Earnings Per Share Growth

Risks

• Iridium faces risks from the newly announced tariffs on equipment imports, which could lead to increased costs and reduced operational EBITDA. If tariffs rise to the originally proposed levels, costs could increase substantially, potentially pushing the company outside its EBITDA guidance for the year, impacting net margins.
  
• The reliance on third-party logistics partners and changes in U.S. trade policy introduce uncertainties that may affect Iridium's bottom line if not mitigated effectively, which could lead to volatility in their earnings.
  
• Increasing competition, particularly from Starlink and other new entrants in the satellite communications market, poses a threat to Iridium's market share, especially within certain product lines like maritime broadband, potentially impacting revenues.
  
• Changes in U.S. government spending priorities and international geopolitical shifts could result in reduced funding for satellite communication services, which may affect Iridium's government service revenue, a significant part of their overall income.
  
• Structural subscriber deactivations related to shifts in an IoT partner's retail plans could affect subscriber growth figures and introduce volatility in IoT revenue, which could impact long-term revenue stability.

Valuation

• The assumed bearish price target for Iridium Communications is $32.26, which represents one standard deviation below the consensus price target of $38.62. This valuation is based on what can be assumed as the expectations of Iridium Communications's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $47.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $945.1 million, earnings will come to $103.0 million, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $25.77, the bearish analyst price target of $32.26 is 20.1% higher. Despite analysts expecting the underlying buisness 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.