Gogo Stock: Overvalued And Near Its 52-Week High (NASDAQ:GOGO)

Airplane with problems : Concept - Blurred motion.

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Gogo Inc. (NASDAQ:GOGO) is the world’s largest provider of in-flight internet service and provides customizable entertainment services for the aviation market. The company believes that it can continue to provide a WIFI at home-like experience that provides the best connectivity even inside the plane. Allowing people to connect with friends, family and even workmates while onboard, this seems to be more in demand, especially with the ongoing Russia and Ukraine crisis where flights are taking much longer than usual because of the airspace restriction imposed by both countries. GOGO appears to be benefiting from this, as they have increased their paid subscribers for their in-flight entertainment service, Gogo Vision, this year in 2021 compared to last year.

The company had an outstanding revenue of $335.7 million, growing 24.47% when compared to its last year’s figure. It manages to deleverage its balance sheet, providing less stress to its future net income. GOGO’s net income entered into a positive territory of $155.1 million, owing to its tax benefit of $187.2 million in fiscal 2021. It managed to improve its margins, customer base and strong 5G partnerships. However, with the expectation of a complete recovery of the aviation market from the pandemic within the next 2 to 3 years, GOGO’s valuation seems to be overvalued compared to its current revenue forecast. A potential pullback may help ease its current valuation risk and improve its current risk-reward ratio. Despite its continued deleverage, its credit ratings remain highly speculative according to Moody’s rating of B2. At today’s price, Gogo is unattractive due to concerns about the sustainability of its top line, liquidity risk, and overvaluation. Investors and traders should wait for a pullback before waiting for a long position.

Strong General Aviation Market

According to management, GOGO is well-positioned to service the strong demand in the aircraft market. According to the management, the company is currently servicing a growing aircraft market of 24,100, up 23,800 from last year. It also boasted a continued growth in its air to ground aircraft online to 6,400, up 10.8% from last year, thanks to the continued shift towards everything being connected and tailwinds from increased data consumption by consumers. GOGO’s addressable market is still under-penetrated, as the management stated in their Q4 earnings call that they are talking about a “200,000 aircraft aviation market.”

Is GOGO Really Improving?

After the selling of its Commercial Aviation operation, it is noticeable how its total assets dropped. There is a significant decrease in its total net PP&E of 73% to $134.7 million, down from $511.9 million in 2019, as well as to its depreciation and amortization expense that helped improve its operating margin of 36%. However, looking at its current gross margin of 69.6% compared to its 3 year average of 68.8%, there is a slower improvement compared to the growth of its operating margin.

The company showed outstanding growth in its ATG aircraft operation and strong implementation from its AVANCE platform. However, looking at its satellite-based services, GOGO somehow failed to address this issue. As of Dec, 2021, it provided satellite services on 4,600 aircrafts, down from 4,700 last year. In 2018, its Satellite service contributed 15% of its total revenue compared to today’s 3% contribution. In my opinion, with no update on this, GOGO is somehow missing an opportunity towards the growing satellite service market.

First Positive Bottom Line

As of this writing, GOGO reported their first positive bottom line amounting to $152.7 million and positive normalized net income of $33.3 million. However, this turnaround comes at a more expensive multiple that makes the company unattractive.

GOGO: Consensus Revenue Estimates

GOGO: Consensus Revenue Estimates (SeekingAlpha.com)

Ignoring the declining forecast for 2025, experts expect a forward P/S ratio of 2.30x in 2024. This makes it extremely cheap when compared to its current trailing P/S ratio of 6.03x; however, taking its industry’s median of 1.18x and its 3-year P/S average of 1.81x, it is still comparatively expensive. By looking at its trailing P/E ratio of 15.34x and forward P/E ratio of 33.36x, it tells the same sentiment towards investors that GOGO is expensive as of today. With the boosts from the pandemic and continued shift towards connectivity, I believe GOGO can beat its 2024 target, with the expectation of increasing their capacity, as reassured by management in the following quote.

Fortunately, Gogo has the capacity to meet this demand. Since offloading mainline commercial airline fleet several years ago, we have freed up a lot of capacity in our network. And project that we can accommodate roughly triple number of aircraft we have in our network today. Source: Q4 2021 Earnings Call

Fly High or an Emergency Landing?

GOGO: 5 Yr DCF Model

GOGO: 5 Yr DCF Model (Data from SeekingAlpha. Prepared by InvestOhTrader)

GOGO: 5 Yr DCF Model

GOGO: 5 Yr DCF Model (Data from SeekingAlpha. Prepared by InvestOhTrader)

Despite being generous on my assumptions and using a higher selected multiple than its industry’s multiple and historical averages with a 10% discount rate, I came up with a -4% downside potential as of today’s price.

GOGO: 5 Yr DCF Model

GOGO: 5 Yr DCF Model (Prepared by InvestOhTrader)

Using the analyst’s forecasted revenue and the management’s outlook as a starting point for my DCF model, while ignoring the unfavorable 2025 and instead of projecting a flat growth until 2026, results in a 22.29% CAGR over the forecasted period; this is higher than the management outlook. This target, in my opinion, is far too optimistic, as it assumes that they have increased their capacity and are continuing to capitalize on the rapidly improving 5G system, as mentioned below.

We will complete the other 143 towers at a rapid pace throughout the first-half of ’22. Last week, we announced that the Gogo 5G aircraft antenna has received STC and Parts manufacturer approval or PMA from the FAA. Receipt of PMA is an important milestone as it essentially means that the FAA has green lighted the mass production of our 5G radio antennas ahead of our 5G deployment. Source: Q4 2021 Earnings Call

I forecasted its operating margin to grow to 38.6% and its conservative tax rate growing to 24.4% at the end of the model. This assumption is pretty much conservative as the management expects not to incur meaningful tax payment.

As of December 31, 2021, Gogo had $689 million in federal net operating losses. With our substantial NOL position, we do not expect to pay meaningful cash taxes for an extended period of time. Source: Q4 2021 Earnings Call

To sum it up, a growing cash flow in accordance with the management outlook still won’t provide a better risk-reward for potential investors. However, a shift in its net working capital pattern on its next future report may be a significant factor to improve my expectation on this stock.

Near 52-Week High, Potential Bull Exhaustion

GOGO: Weekly Chart

GOGO: Weekly Chart (TradingView.com)

GOGO is currently trading on an upwards channel and near its 52-week high. I can’t see any reason for the stock to rally further but if it does, a short above $22 will be a great short entry. Its simple moving average tells bears not to over commit as it still indicates strong bullish sentiment which short-sellers should put into consideration. The stock is trading at a high short interest of 37.09% and only 900,000 shares available to be shorted with 0.60% borrowing fee. Buying a put option rather than selling this stock may help mitigate the risk of being short-squeezed.

Conclusion

The strong outlook provided by the management seems to be already priced in and despite being too optimistic on my DCF model, GOGO currently doesn’t give a good risk-reward ratio. GOGO’s slowing satellite service, its pending lawsuit due to alleged patent infringement, a speculative credit rating, and a potential exhausted bullish price action makes this stock a good counter-trend play.

Thank you for reading!

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