It appears as investors are beginning to feel less fearful
since all major indexes ended the week with healthy gains. But not everybody
fared as well last week, the shareholders of Gogo Inc. are probably still
crying. The company has seen its stock plunge almost 46% year to date including
a 25% drop on Monday. The question is why is Gogo bleeding as much as it is and
will the company be able to stop it before it’s too late?
I dissect Gogo’s problems it is important to understand what the company does.
Gogo Inc. is a mid-sized company focused on providing 3G wireless connectivity
to airline passengers while they are flying at 35,000 feet. The idea is
ingenious and is meant to allow customers to use their mobile devices on the
good right, it’s actually every airline passenger’s dream, to be able to access
their tablets and smartphones on the plane, freeing them from the boredom of
travel and liberating them from the curse of paper books. Gogo currently is
partnered up with Aero México, American Airlines, AirTran Airways, Alaska
Airlines, Delta Airlines, Japan Airlines, United Airlines and Virgin America to
deliver wireless 3G connectivity to their passengers.
most recent partner is Air Canada which signed on as a client on April 8th.
Also besides the airlines Gogo has 6,300 business aircraft equipped with
communications services. So why is Gogo’s stock floundering?
answer is because Gogo’s 3G service is expensive, unreliable, slow and not
really good for anything besides sending an email. But that is besides the
point the quality of the service could and will be improved in time and Gogo
appears to have the time as long as the company remains the sole player in this
field. Unfortunately Gogo faces an enormous problem in the form of one of
America’s largest telecom giants, AT&T. The $184.9 billion company
announced just this Monday that it was planning on building a high speed 4G LTE
based, inflight connectivity service in direct competition with Gogo.
second AT&T announced this news shares of Gogo plunged as investors begin
to smell the scent of death on the company, and they may be right. Gogo is
easily dwarfed and outmatched by AT&T in every way;
Cap- $1.1 billion
Revenue- $328.1 million
Profit/Loss- ($145.9 million)
Hand- $266 million
Cap- $184.9 billion
Hand- $3.339 billion
These numbers show a very bleak
picture for Gogo Inc. even more so that AT&T is offering a superior network;
4G compared to Gogo’s 3G. To anybody this would seem to be the end of Gogo, the
once strong growing startup that most recently posted earnings increases of up
to 40% appears to have a stake put through it.
But investors should not write Gogo
off, AT&T also announced that its own in-flight connectivity service will
not be ready until 2015, this gives Gogo about a year to entrench itself and
upgrade its network to get ready to compete. Gogo does have some advantages
over AT&T one of which is that Gogo already has a client base which
includes many of the major airlines. Also Gogo has over a quarter of a billion
dollars of cash on hand which could go to helping upgrade its network and
improve upon it.
Investors also have to consider
that Gogo might be a good acquisition target for another large player entering
this field. So far in 2014 large corporations especially in the technology and telecommunications
industries have been buying up smaller competitors and startups to grow profits
and gain footholds in new fields. With AT&T moving into the inflight
network industry other giants might be interested to and if a rival of
AT&T, such as Verizon with the cash and resources to compete with AT&T
decides to enter the fray it might view Gogo with its network of clients as a
perfect buy to gain the upper hand over AT&T.
Unfortunately this is only my
opinion of a possible scenario and might not happen. It is far more likely that
once AT&T builds its network and opens it for business Gogo will be forced
into bankruptcy within a matter of months.
My advice to Gogo shareholders is
to hold the stock for the time being and see what else develops such as
possibility of a buyout. Whatever the
case Gogo is certainly not the first company to go through this and will not be
the last now all the management of the company could do is prepare, prepare for
either annihilation or survival.
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