I’ve gotten a few questions about the new “True Alpha” pitch from Charles Mizrahi that uses “David and Goliath” imagery, so we’re checking that one out today… mostly because the idea of this firm having “a virtual monopoly on the future of 5G and IoT” piqued my interest.
Mizrahi’s letter extols his past success in picking stocks that have a “secret weapon” (that’s where the David and Goliath stuff comes in), and he particularly reiterates his successful pick of Huntington Ingalls (HII) a decade or so ago — I can confirm that he was touting that stock at the time, since he also teased it and I wrote about it in 2012, and it was a very successful pick coming out of the federal budget crises of the time (Mizrahi was writing a different letter at the time, for a different publisher).
Does that mean this next idea will be a big winner, too? I have no idea. Certainly not all of his picks are excellent (if you want some buzzkill, he touted Fairfax Financial for years and that hasn’t gone anywhere, though I also own shares, and he touted bluebird bio near its peak). But I’m willing to check it out.
So what’s the big idea? Well, the newsletter he’s pitching these days is his Alpha Investor Report, which will run you $79 (it’s also a little sneaky in that they provide a “trial” of Matt Badiali’s Real Wealth Strategist for free, but will autorenew both Real Wealth Strategist and Alpha Investor Report at $97/yr if you do nothing… so your $79 could quickly become $194/yr).
And the tease about being a key part of future 5G and IoT trends, which he says tally up to a $19 trillion industry, comes from the fact that they operate a constellation of satellites… so that’s going to narrow down our field of candidates very quickly. Here’s a bit from the ad:
“You see, despite all the hubbub about 5G and IoT, much of it won’t be possible unless these areas can communicate the data through these dead zones.
“And while goliaths like AT&T, Verizon and Sprint battle it out in the cities, there is only one company that can cover the sea, air and countryside.
“A small, 450-person company based in Virginia.”
So what does this company do that’s so special? More from Mizrahi:
“It starts with its secret weapon … low earth orbit satellites….
“… these particular satellites have a unique configuration that gives them global coverage.
“This Virginia-based company is the only company in the word that makes these satellites … and they have 27 patents protecting their technology.”
So he says that this capacity for data coverage means that the $3 billion company has a “virtual monopoly” — and that they have also recently become more agile (which is again part of the “David and Goliath” bit — they have the secret weapon, the satellites are their slingshot, but they’re also small and quick to change strategies).
More on this company:
“More than a decade ago, the Department of Defense made up 99% of this company’s revenue.
“But today, despite it doing more for them than ever before, the DOD only represent 25% of their business….
“Because this company has been agile enough to use their satellite technology to partner with over 400 companies.”
He says that revenue has grown 588%, with the implication that this is over 10 years… but that the stock has risen only 87%. And it’s led by a “visionary” CEO… from the ad:
“A CEO with a vision so clear, it bordered on the prophetic.
“It can be summed up in one word … ‘everywhere.’
“He wants to be the communications company that delivers data to every inch of earth.
“To reach everywhere, the company invested $3 billion to establish a constellation of 66 cross-linked low earth orbit satellites that would provide ‘coverage to 100% of the Earth’s surface, including across oceans, airways, and polar regions.'”
And then, finally, we get the urgency that is required for any successful teaser ad — the reason you have to subscribe NOW or miss the boat…
“Which brings me to the urgency of this message. The reason you will want to buy this stock as soon as possible.
“This small, Virginia-based company just inked the deal of a lifetime.
“It is now Amazon’s exclusive satellite provider for its cloud-based services.
“This move will make Amazon the first and only wireless cloud-based solutions company with 100% global coverage.”
He says this will help Amazon boost its cloud business to $331 billion (from $26 billion) in the next two years. $26 billion was the number for Amazon’s 2018 revenue at Amazon Web Services, though expecting a 10X growth in that over a couple years seems foolish… particularly if your expectation is built just on the ability to reach customers who are not currently linked to the web because you’ve got global satellite coverage. But we’ll just tuck that little bit of skepticism away in the back of our minds for the moment… ready for some results?
Thinkolator sez that this is Iridium Communications (IRDM), the satellite company that used to be known mostly as a niche sat-phone provider for remote areas and military applications, and which has spent the past thirty years in a very long-cycle Yo-Yo.
Most recently, they emerged from bankruptcy in 2002, came back to the public markets as they merged with a SPAC in 2009, then didn’t do much for about eight years until they burst out of the doldrums starting about two years ago, with a jump in revenue and the launch of their new satellite constellation. There’s an interesting older story about the history of Iridium here from Air & Space, I won’t go into the details, but it was essentially a company built for a need that no longer existed (global phone connectivity) by the time its service was ready (and, of course, it’s a satellite company… so they spent billions just to do their initial launches and get started before they realized few people needed the service).
And now they believe they have a new purpose in global data connectivity. Iridium upgraded its satellite fleet over the past five years or so with Iridium Next, which basically replaced the existing constellation one satellite at a time (completed about a year ago with their final SpaceX launch), and they think their low-earth orbit L-band offers the best combination of reliability and speed for some industries that need global data coverage — like shippers, airlines, agriculture firms and others who stray far from wireless coverage areas.
The world of satellite communications is changing pretty quickly now, with OneWeb and Amazon and others trying to launch their own constellations of low earth orbit (LEO) satellites to provide data coverage — though they aren’t all necessarily in competition. As I understand it, the L band where Intelsat operates can provide easier coverage than the Ku or Ka bands used by the new satellite networks, mostly because it can work with wider bands and requires less specific targeting and can use smaller antennas. (Maybe you know the satellite world better than I and can clarify that, if so please use the friendly comment box below.) OneWeb and Iridium, in fact, are trying to develop a combined service.
And yes, Iridium did recently announce that CloudConnect, their IoT global coverage offering, did go live on Amazon Web Services this year — that was a few months later than expected, but it wasn’t a surprise (they’ve been talking about it for about a year and a half).
They’ve also been cleaning up their balance sheet, replacing the $1.8 billion French export bank loan that let them launch this latest constellation of satellites with a new $1.45 billion term loan, so they describe themselves as being really at an inflection point when their cash flow can support a rational balance sheet and more “regular” sources of debt capital. They are still very levered, though, like pretty much any satellite company will be — they have $3+ billion worth of equipment circling the earth, supported by about one billion in shareholder equity and two billion in debt. That means they don’t have a lot of flexibility if business dries up, as then found with their bankruptcy 20 years ago, but if business picks up, as they expect with their focus on providing global IoT coverage and higher-speed connectivity for aircraft and ships, then that leverage should provide some rapidly growing cash flow.
It’s definitely worth reading through the transcript of their last earnings call, and I’ll be very curious to see what they say about developments when they report next in a few weeks (on February 25, before the market open). Right now, the few analysts who cover IRDM expect annual revenue growth of 5-7% and cash flow growth of closer to 10%, with the first real profits maybe coming in 2022 or 2023 as margins pretty steadily improve… but there are only four or five analysts, and this story is changing pretty quickly so I wouldn’t count on those too much (three years ago, they would have predicted that IRDM would be making $1 a share in profit by 2019 as the new constellation, which, to be fair, was delayed a bit, began generating revenue). It would not be shocking if Iridium “surprised” on those numbers, given their enthusiasm on the last earnings call, but I don’t have any idea what they’ll say on their next call in three weeks.
And while the Department of Defense is no longer the bankroller of last resort for Iridium or the only customer, they are certainly still a big customer — Iridium just awarded a $738.5 million DoD contract to provide “unlimited satellite services” for seven years, so that provides a nice foundation of predictable revenue.
I confess to being somewhat interested in this one, particularly now that they’ve refinanced their debt and seem to have a reasonable likelihood of beating the limited analyst growth estimates… but it’s still probably going to take them a long time to grow into their cost structure, and I don’t really have a handle on how much demand there is for their services outside of their core business of the shipowners and airlines that can clearly use their new and upgraded safety and communication systems (though it seems that breaking into the Inmarsat monopoly for maritime safety was a big driver of the stock in the Spring of 2018).
Satellite investments inspire worry because of the huge up-front costs and the fears of obsolescence, but it looks like their new constellation is now finally ready, and they’re selling their services more aggressively. My guess would be that it will work out well for patient shareholders here, given the high cash flow margins and the stickiness of their biggest customers, but that the huge surge in the past year or so also means expectations are high and it wouldn’t be surprising if they continue to have big 15-25% swings that rattle investors… and technology changes pretty fast, so I certainly can’t promise that L-band satellite data transmission will be a service that’s in heavy demand in five or ten years.
Which is where I’ll leave you — the stock has certainly reacted strongly to the finalization of the new NEXT constellation a year ago, and to their optimism about the demand among airlines, maritime customers and, now, global IoT networks… whether it all is going to play out well for investors, and how quickly we’ll know, that’s a call you’ll have to make. It is, after all, your money. Please do let us know what you think with a comment below.
Disclosure: Among the companies mentioned above, I am invested in Amazon. I will not buy or sell any of the stocks covered for at least three days, per Stock Gumshoe’s trading rules.