Only last week, British Earth observation startup Satellite Vu raised GBP 12.7m for its thermal-imaging satellite constellation, and in the past five months, SpaceX’s satellite internet service Starlink has increased from 1 to over 1.5 million million subscribers.
And the other day tractor manufacturer John Deere announced its plan to connect 1.5 million machines by 2026.
In a stock market perspective, one of the hottest takes on space and satcom has been Iridium Communications (NASDAQ:IRDM), showing a stellar share price performance in the past year.
Iridium is a leading operator of a constellation of 66 cross-linked low-Earth orbit (“LEO”) satellites that provide voice and data communication services, as well as ultra-low bandwidth video to a variety of businesses.
Sturdy growth driving positive estimate revisions
Iridium (IRDM) grew topline by 17% in 2022 and beat analyst revenue estimates by 9% in Q1’23. Now estimate revisions for 2024 are on the rise.
Iridium has 2m billable subscribers, although its commercial IoT arm suffered an 8% YoY decline in ARPU last year. But the rest of subscriber base shows better stability.
The share now trades at a significant premium valuation at 12x forward EV/Sales. But that is a blunt metric, especially considering
i) Company has improved profitability and Forward EV/EBITDA is at a more digestible 20x.
ii) analyst estimates are still on the rise while company is beating forecasters, meaning that forward multiples are likely to come down.
iii) company enjoys a significant moat, difficult to compare with anything on the ground (which is evidenced by the fact that the historical five-year average for EV/Sales is at 10x).
Also, a sturdy focus on cash flow has enabled the company to reduce net debt, now at a healthy 3.9x EBITDA.
Shorts have not yet accumulated, now at 5.2% of outstanding shares.
On the chart it’s showing signs of starting to roll over and lose momentum, but the trend is still supportive, so this could be a good entry point. Volatility is coming down, but volume trend is still on the rise.
Insider holding (10% of outstanding shares) and institutional holding (84%) are both supportive.
We like it for the moat
Most of all we like Iridium for the moat it enjoys in its satellite infrastructure.
Satellite is also associated with high switching costs, and often involve government counterparties, which provides stability.
With a long-term structurally positive view on SatCom, and support from our proprietary Equity Navigator Model, we see this as an attractive entry point into the case. But we’ll keep an extra eye on volume, changes in short interest and price action below USD 55-50.
