Gogo (NASDAQ:GOGO) shares have been hit hard, falling 37% over the past year. The share price decline reflects numerous investor concerns, including: flat revenue in 2023, further delay in plans to deploy 5G connectivity, competition concerns from Starlink, and a patent lawsuit brought against Gogo by SmartSky.
While these concerns temper my enthusiasm, I have made a small allocation to Gogo shares as I believe the market is overlooking its many positive characteristics. These include: dominant market position, high switching costs, potential for rapid revenue and free cash flow growth on the back of a 5G upgrade cycle and increased WiFi penetration on private jets. Further, while Gogo shares don’t seem cheap on current numbers, if the company is able to execute its 5G rollout and stave off competition, Gogo could generate $2/share in FCF looking out to 2027 which suggests shares could triple.
Multiple delays in rolling out 5G service. A 5G rollout is important for Gogo as it would help to stave off competition from Starlink (discussed below) and will be an important driver of ARPU increases going forward. Initially Gogo expected to launch its 5G service in 2H22. This was pushed back to 2023 but after further delays, Gogo is now guiding to 2H24. Timing has been pushed back as Gogo has encountered difficulty due to a design error in chips needed to provide 5G service. There is no guarantee that this issue will be resolved in a timely fashion and it is fair to believe we could see further delays.
- Starlink has entered the business via LEO (low earth orbit) satellites. Up until now, the only competition to Gogo has come from GEO satellites (slower, much more expensive, only suitable for large jets). Starlink’s low earth orbit satellites have the potential to be a more formidable competitor offering lower latency/faster download speeds and possibly a more competitive price (though still expected to be at a 100-200% premium to the monthly cost of Gogo’s 5G service). The other advantage of Starlink’s LEO model is that it can provide WiFi service at very low altitudes/for the full flight duration (whereas Gogo’s solution typically requires the plane to have reached 3,000+ feet). As shown below, Starlink is now available for the largest private jets:
Note that while Gogo has ~85% market share for the US private jet market overall, it has a lower share among large, long-range private jets which typically use a tail-mounted GEO satellite. Like GEO satellites, Starlink will provide global coverage. Flexjet, a provider of fractional jet ownership, announced that it will be installing Starlink on its Gulfstream G650s and expects to install the service on additional large jet airframes as the equipment receives certification from the FAA.
While it seems likely that Starlink will penetrate the top end of the market , at this stage Starlink does not have a solution for smaller jets (as we sit today Starlink’s product can only serve large jets which are less than 20% of the total market). Gogo’s solution doesn’t require a tail-mounted solution (heavy) and instead is placed on the underbelly of the jet. To be competitive in the smaller jet segment, Starlink will have to develop (and installers will need to get certification- described below in ‘Pros’ section) for antennae which fit these jets. It is expected that this process will take a minimum of 18 months which buys Gogo time for its 5G rollout.
- Gogo is being sued by nascent operator SmartSky for patent infringement. SmartSky, which was formed in 2014, has been trying to launch a network for the past decade but has not gained any meaningful traction in the marketplace. While Gogo has not yet rolled out its 5G network, SmartSky has sued the company on the expectation that Gogo’s 5G network will infringe on SmartSky’s patents. For its part Gogo has said that it does not believe its 5G product will infringe on any valid SmartSky patent. In 2023, SmartSky lost its motion for a preliminary injunction against Gogo. The trial is likely to begin in 2025. While further discussion is beyond the scope of this piece, interested readers can find a more in-depth discussion of the potential merits of SmartSky’s claims here. Ultimately if Gogo is found to be in violation of SmartSky’s patents, I expect we will see some sort of royalty paid to SmartSky (these arrangements typically call for a couple percent of revenue).
What I like about Gogo
- Dominant market position with an estimated 85% share of the North American private jet fleet.
- There should be strong underlying growth in the market for connectivity services for private jets. Currently less than 35% of private jets have in-flight communications available. This is a function of jet age (average jet is over 20 years old and came into service before this product was really available). The majority of new private jets delivered into service come equipped with Gogo service.
- High switching costs – it costs a total of roughly $300,000 to install (30-40% equipment w/ remainder being labor/installation cost) an antennae and power system to facilitate in-flight communications. In addition, installation requires 2 weeks to 1 month of downtime whereby the plane is out of service. Practically speaking this has meant that jets are only fitted for in-flight communication when they are already ‘in the shop’ (typically for their 5-6 year maintenance/certification). IF Gogo can get its 5G service up and running ahead of Starlink increasing the breadth of planes it serves, high switching costs mean that Gogo should have every opportunity to retain its customers.
- Regulatory barriers arise from the requirement that the installation for each jet model have an STC (supplemental type certificate issued by the FAA) which takes about 6-12 months. STC’s are typically obtained by installers. Gogo has a relationship with 120 installers throughout the US who have been installing & profiting from the company for many years. Starlink needs to build these relationships in order to move into the market.
- 5G upgrade cycle will drive meaningful increases in ARPU. 5G is expected to price at a 20% premium to Gogo’s current 4G offering while still being ~50% less expensive than Starlink’s product.
- Gogo has partnered with OneWeb to provide a LEO competitor to Starlink which will open up markets beyond North America.
- Gogo is highly profitable (~35% operating margins), requires limited capital expenditures and generates ample free cash flow.
- Gogo management expects the company to grow its top line at a 17% CAGR for the next several years driven primarily by increased penetration of in-flight communications on private jets as well as higher ARPU from 5G. While there will be some incremental spend in 2024 associated with the 5G rollout, capital expenditures should remain below $20 million annually beyond 2025. Should Gogo achieve its revenue targets, the company could generate in excess of $800 million in 2027 revenue and nearly $2 per share in free cash flow per share. Were Gogo to achieve its targets and trade for 15x 2027 Free cash flow, shares could triple. 15x is not a demanding multiple for a company with a dominant market position and a recurring revenue business model.
If Gogo successfully rolls out its 5G product in the next 12 months, I expect the stock to soar. Of course, I will look back and say ‘I should have had a much bigger position in this stock’ as I believe that successful delivery of this network will competitively insulate Gogo from the Starlink threat and position the company for revenue and free cash flow growth for years to come.
On the other hand, Gogo is ~2 years behind schedule here and it seems far from certain that 5G is delivered in 2H24. Failure to bring 5G to market in a timely fashion puts Gogo at risk of losing out to Starlink (assuming that Starlink is interested and able to configure a product to meet the 85% of the market which cannot be served by its tail-mounted solution).
Given this uncertainty I have made a small allocation to Gogo shares and continue to monitor the situation.