An investor looking to track and emulate the portfolios of hedge funds and individual billionaires could do much worse than follow Dr. Phillip Frost. He’s renowned for his work in the biotech and healthcare space, but far from limits his activity to the sector. Through his private investment firm, Frost Gamma Investments, he’s financed companies in gold mining, communications technology, big data and data analysis, and health and fitness, to name just a few. Here’s a look at his latest exposure – Orbital Tracking Corp (TRKK).
The company is a mobile satellite services company with headquarters in both the U.S. and the U.K. To get an idea of what it does, it’s important to understand the industry in which it operates. There’s a common misconception that cell phones – devices such as Apple Inc.’s (AAPL) iPhone – use orbital satellites to make and receive calls. This isn’t the case. The vast majority of consumer cell phones use radio transmission via a network of cell towers that receive, route and transmit the data associated with whatever form of communication is required. This is relatively cheap, efficient and – most importantly – doesn’t require a signal to leave what is essentially ground level. With this sort of network transmission, however, there are areas or regions from which it’s not possible to communicate with cell towers. Think remote regions such as deserts, mountains or forests. In order to communicate with devices from these regions, satellites are required.
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There are four primary networks of these satellites: Globalstar, Inmarsat, Iridium and Thuraya. Just as with the retail cell network, companies build and retail devices that are compatible with the satellite networks, and retail air time for use on them. Orbital Tracking is one such retailer. Through a range of online storefronts, including its U.S. store Orbital Satcom and its European store Global Telesat, as well as a host of Amazon Inc. (AMZN) storefronts, it retails a range of satellite communication devices and the airtime required for network use.
There are also applications outside standard communication, things like satellite facilitated asset tracking, on which Orbital Tracking is focusing to bolster its handheld device business.
That’s the operational side of things covered. Why is Frost investing in this company now, and what has happened across the last 12 months to suggest it is a growth stock?
In order to answer the first question, we can look at the industry as a whole. The MSS space is growing rapidly, as the necessity to transmit data to and from remote regions increases. Industries like oil and gas exploration, global shipping and mining all demand this necessity, and the growth reflects heightened activity in all these spaces. In 2014, analysts put the global MSS market at $3.45 billion during 2014. By 2019, the same analysts expect this to increase to $5.62 billion annually – a 63% increase across the period.
A look at the global asset tracking market (which is dominated by satellite systems such as that which Orbital Tracking retails) reveals similar high growth expectations. It’s currently growing at a compound growth rate of 20.5%, and analysts expect it to be worth an annual $18.87 billion by the end of this decade. It’s a high growth space, and Frost is looking to take advantage of this growth with this allocation.
Why Orbital Tracking? The company has spent the last year ramping up its operations, and looks set to position itself as one of the leaders in the MSS space going forward. At the end of December 2015, Orbital Tracking reported a $1.1 million raise, through two private placements. Shortly after the raise, the company picked up an approval for listing on the OTCQB marketplace, and began trading on this exchange on Jan. 5. This is important as it should help to create an active market for Orbital Tracking’s shares, as the increased transparency associated with a listing boosts investor confidence.
Financially, the company is in a pretty solid standing. Having said this, as with any high growth company in this sort of expanding sector, there are some liquidity risks. The company recently merged with its now U.K. subsidiary, so to get the full picture of where things stand financially, it’s important to look at both entities’ financials. GTCL is the subsidiary in question, and during 2015, GTCL generated $2.77 million revenues – a 14.2% increase over the same period a year earlier. Orbital’s U.S. operations generated $1.81 million during 2015. A consolidation of the two entities and the company’s various Amazon storefronts puts revenues for 2015 at $3.96 million, a 63% increase on the $2.43 million generated during 2014.
Operating expenses for 2015 came in at $3.1 million, and the combined entity generated a net loss of $2.06 million pre-tax. The latest $1.1 million raise, combined with the revenues expected for 2016, should fund the ongoing operation of the company and the development and manufacture of a new dual tracking system, which Orbital Tracking announced at the end of last month, and that the company expects will hit markets before the end of the year.
What are the risks? The primary risk is rooted in competition. MSS is a crowded space, and while it’s a large, and growing, multi billion-dollar market, it’s going to cost Orbital Tracking time and money to attract these revenues towards its own operations.
A number of pre-negotiated deals with the satellite network providers enable it to offer deep discounts on its airtime rates, which should feed in to increased device sales. However, to maintain its expansion rate, it will need to maintain these discounts, and in turn, cheap air time prices. This is far from guaranteed in an increasingly competitive landscape.
Additionally, the company will require a further capital raise down the line. Its retail operations are relatively cost-light as most of its sales are generated through web based storefronts. To stay competitive, however, constant redevelopment of its core technologies will be necessary. To fund this development Orbital will likely issue shares, and these issues could dilute the holdings of any early stage investors.
Of course, these risks are pretty standard across any high growth technology space, but they must be considered before picking up an exposure.
The takeaway here is that Orbital Tracking is a well-positioned company in an exponential growth sector, with a billionaire backer and a well established, and growing, global customer base. It’s not without its risks, but as a small allocation as part of a wider, diversified portfolio, could be an attractive contender.