Gogo, a leading aircraft communications service provider for airline industry, has risen 20% in the last week after posting Q2 results in line with expectations and floating rumors about a potential Verizon (VZ) buyout. Though this is all speculation for the time, does Gogo warrant a $1.5B valuation as a standalone company?
According to Gogo management, the company has about a 77% market share in communication for commercial aviation in North America and 60+% for business aviation. This would make Gogo market leaders in the early stage aviation communication sector and an attractive target for telecommunication companies like Verizon.
For their latest quarter, Gogo announced record quarterly revenues of $99.5M, up 25% YoY. So far in 2014, the company has experienced revenue gains 30% higher than the first six months of 2013, so the growth is being realized. Gogo has reported an adjusted EBITDA figure of $8.4M in 1H 2014, up 27% from the 2013 number. However, due to the depreciation of infrastructure, Gogo has reported operating losses of roughly $20M for the first half of 2013 & 2014.
Looking ahead, Gogo expects total revenues of $400-$422M for 2014. The company, though, guided that EBITDA will be coming in at the lower end of the $8-$18M range. This essentially implies that 2H 2014 will bring EBITDA figure close to $0 as a result of international investment.
Below is a comparison for Gogo before and after the latest run up.
Top line traction is expected to continue with Gogo as the company expands internationally. Gogo is projecting 2014 to show 25% growth over the prior year. As a result, sales multiples are not as absurd as the ones that include earnings. Due to the higher costs to install and implement their technology, the company will struggle with bottom line in the short term.
For investors willing to wait several years, Gogo may prove to be well worth the wait. Until this implementation process is over, EBITDA multiples in the triple digits are not a relevant measure. This, of course, assumes that the rumors with Verizon do not proceed.
As a standalone company, Gogo should be considered an attractive opportunity if it falls back to $15 levels. At current levels, investors may benefit in the case that the buyout speculation falls through. However, if not, the gains from the rumor may be short lived.