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Tech Stocks: To Gogo or Not to Gogo?


The long-term story for this in-flight Internet access company is actually pretty attractive.

Ahead of the Gogo Inc. (NASDAQ:GOGO) earnings report, the long side of this beaten-down stock seems pretty compelling.

Last Monday evening, AT&T (NYSE:T) announced it would enter the in-flight internet access business. It will use its ground-based cell network to beam LTE-type speed to planes flying overhead. The news crushed the shares of Gogo, the current leading provider of in-flight internet access. Now, I don't want to underestimate the type of competition AT&T can put up against a much smaller company such as Gogo, but at a certain price point -- like where Gogo trades right now -- it seems like a whole lot of bad news is priced into Gogo's stock, and some of this bad news sounds a lot worse than it's likely to be. Here are some facts to consider:

  • Gogo has approximately 2,300 of the 4,000 airplanes operating in North America under exclusive contracts; another 1,000 planes belong to existing competitors. The contracts are for 10 years, and the earliest expires in 2018.
  • Gogo's current service isn't very high quality, and Gogo knows it; that's why it's upgrading planes with its ATG-4 technology, which can deliver speeds of about 10Mbs, three times the current bandwidth. About half of the planes it services will be upgraded by the end of 2014, and most of the rest by the end of 2015.
  • AT&T LTE service won't roll out until the end of 2015.  LTE generally delivers speeds of 9-20MBs, but many techies doubt it can reach the higher end of the bandwidth when the planes are flying over areas sparsely covered by cell towers. So the delta in quality of service between ATG-4 and LTE isn't likely to be very notable. This is important, because should there be a vast difference between the quality of the two services, air carriers might have an argument for early termination of Gogo's contracts
  • By the time AT&T's service comes online, about 50% of Gogo's revenues will be derived from Business Aviation, i.e. noncommercial planes. It's unclear whether AT&T will want to tackle this space given that the total addressable market -- relative to a company of AT&T's size -- may not justify the capital investment required to equip the planes.
  • Gogo is well ahead of AT&T in its rollout of a satellite coverage system that beams Internet access to international flights, especially over large bodies of water. There's little in AT&T's current footprint that gives it a competitive advantage in the international market, which consists of approximately 13,000 planes and makes up the mother lode of the remaining business opportunity. Only 2,000 of these planes are under contract, 332 to Gogo; the rest are up for grabs.
So while Gogo suffered badly from the headline risk of AT&T's competition, the reality is that Gogo occupies the driver seat for now. A more imminent concern is that, to remain in that driver seat, Gogo might have to/want to accelerate its nexgen technology deployment, which means more capex sooner. If that's the case, it may have to raise more capital either in the form of debt and/or equity.

As I suggested at the outset, a lot of these concerns seem abundantly priced into Gogo's stock. Even with some level competition, this space is hardly crowded, and the notion that there's only room for one provider has been a poor argument to bet on when similar circumstances have cropped up in other industries. Does anyone remember the drumbeat of the demise of Akamai (NASDAQ;AKAM) when AT&T announced a major splash in the content delivery network area? That's right -- a few short years later, the mighty AT&T packed it in and is now sending its clients to AKAM.

Gogo reports earnings on May 12 before the open. Any kind of even borderline good news and/or discussion by the company of how it intends to face up to AT&T, combined with 23% of the float already short could create a very tradable spike in the price. At least that's the message of the options market where implied volatility in the May expiration (at 99%) is at some of the highest levels ever.

I'm not suggesting to go crazy on this name, but the long-side risk/reward -- if only for a trade -- seems rather compelling.

Twitter: @FZucchi


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Author holds position in Gogo.
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