Monopolies are not easy to find. From a shareholder point of view, they can be quite lucrative though, since they can offer rates of return that are more than "fair." The difficulty in finding them is that few exist. They dominate their industry and typically have significant barriers to entry that perpetuate their monopolistic existence. Although government typically seeks to destroy or deter monopolies, there are special cases, and that’s where satellite imagery company DigitalGlobe
(NYSE:DGI) fits in.
DigitalGlobe has become a modern-day monopoly. It swamps its competition in terms of size, and its barrier to entry is tremendous: to compete with it, you need a constellation of satellites, which is by no means cheap or logistically easy to do.
It has successfully created this monopoly by attracting the US government as its largest customer. Ostensibly, it sells non-classified satellite imagery to the government, but it's far more likely that DigitalGlobe sells more to the government than just that. In fact, it's quite likely that it sells spy imagery to the US government since its eyes in the sky have far greater resolution capabilities than what is available to commercial customers.
DigitalGlobe consumed its largest competitor earlier this year to become a virtual monopoly. Its birds in the sky take imagery that is finding use in an increasing number of applications; far more than just defense and intelligence
So what about its fundamentals? With a year-over-year 47% revenue growth rate and earnings rate that is even higher, fundamentally it is definitely on the right track. If you look at its charts, it’s the same story over all time frames, as seen in the charts below.
On the daily time frame, Friday witnessed a reasonably good size pullback off the highs. With the rainstorms and flooding in Longmont, CO, last week, and particularly on Thursday and Friday, DigitalGlobe’s Longmont headquarters were likely of concern to investors, and the price pressure a reflection of that concern. If so, then this fast pullback on the short term time frame is most likely an opportunity, not something to fear.
From a neoclassical point of view, the price pullback is nothing more than a retest and regenerate sequence off the July and August highs. Since the retrace happened within six bars of the breakout, it could carry to the lows of the bars being retested. Those price points are $32.65 and $31.30. I believe the higher price point is possible but the latter unlikely on the first retrace.
If we move to the weekly time frame, you can see the bullish behavior as an uninterrupted move $13 to $33 in the past year.
With such a steep move already, is there more to go? Take a look at the monthly chart.
On the monthly chart we can see that the all-time highs are currently under test. That test comes on increasing volume, which likely means that the highs will eventually succumb and higher highs will eventually print.
Now clearly we could see some consolidation at these levels given the steep price rise that has already occurred, but DigitalGlobe virtually monopolizes a market that's only likely to increase, not decrease. When you add in all the other uses for digital imagery that the company is now tapping into with its takeover of GeoEye, longer term this continues to a be a winner and retraces are to be bought -- still.