Can Gogo Inc (NASDAQ:GOGO) Improve Your Portfolio Returns?

If you are a shareholder in Gogo Inc’s (NASDAQ:GOGO), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of GOGO. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.

Different characteristics of a stock expose it to various levels of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

Check out our latest analysis for Gogo

What does GOGO’s beta value mean?

Gogo’s five-year beta of 1.44 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, GOGO can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

NasdaqGS:GOGO Income Statement Export August 3rd 18
NasdaqGS:GOGO Income Statement Export August 3rd 18

Does GOGO’s size and industry impact the expected beta?

A market capitalisation of US$313.22m puts GOGO in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, GOGO’s industry, internet, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with GOGO’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is GOGO’s cost structure indicative of a high beta?

An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine GOGO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, GOGO appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of GOGO indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This is consistent with is current beta value which also indicates high volatility.

What this means for you:

You could benefit from higher returns from GOGO during times of economic growth. Its higher fixed cost isn’t a major concern given margins are covered with high consumer demand. Though, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. In order to fully understand whether GOGO is a good investment for you, we also need to consider important company-specific fundamentals such as Gogo’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for GOGO’s future growth? Take a look at our free research report of analyst consensus for GOGO’s outlook.
  2. Past Track Record: Has GOGO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GOGO’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.