Does Gogo Have a Chance of Survival?

               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?

                Before 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 plane.

                Sounds 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.

                Gogo’s most recent partner is Air Canada which signed on as a client on April 8^th. Also besides the airlines Gogo has 6,300 business aircraft equipped with communications services. So why is Gogo’s stock floundering?

                The 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.                 

                The 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;

Gogo Inc.

-          Market Cap- $1.1 billion

-          2013 Revenue- $328.1 million

-          2013 Profit/Loss- ($145.9 million)  

-          Cash on Hand- $266 million

AT&T

-          Market Cap- $184.9 billion

-          2013 Revenue- $128.8 billion

-          2013 Profit/Loss- $18.5 billion

-          Cash on 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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