Boston-based hedge fund The Baupost Group, founded by Seth Klarman (Trades, Portfolio), has had a big position in Viasat Inc. VSAT since 2009. It has recently increased its ownership of this satellite internet provider further.
According to Gurufocus data, Baupost now owns 24.13% of the company's total outstanding shares. This is obviously a long-standing strategic position that the hedge fund places great imporance on.
About Viasat
Viasat builds and operates Geosynchronous Equatorial Orbit (GEO) satellites and ground station infrastructure to provide broadband internet for organizations and people who are not served by terrestrial providers. Key customers include the U.S. government (particularly the defence department), commercial airlines, ships and logistic companies as well as business and home users in remote locations.
Viasat's stock had been flying high till about mid-2019, but since then it has stalled. It seems like the market got concerned by a wall of new impending competition from non-geosynchronous-orbit (NGSO) satellite constellations, including low-Earth-orbit (LEO) and medium-Earth-orbit (MEO) satellites. If current satellite internet proposals become reality, tens of thousands of new active satellites will orbit overhead within ten years. Even if the most ambitious plans do not materialize, it seems clear that satellites will be manufactured and launched on an unprecedented scale. GEO and NGSO satellites have various technical advantages and disadvantages, which is beyond the scope of this article, but in short GEO's have longer life span (10 to 20 years) vs. LEO's (~5 years) but are much more expensive to manufacture and lift into place. Here are some more details on the CosmoBC.com website about the technology.
Viasat has been experiencing rapid growth over the last 10 years. As the chart below shows, revenue, Ebitda and operating cash flow have experienced compound annual growth rates (CAGR) in the mid-teens.
Viasat launched the Viasat-1 satellite in 2011. It had a total broadband capacity of 140 Gigabytes per second (Gbps). Later, Viasat-2 was launched, which had design throughput of 300 Gbps (actual 260 Gbps due to malfunctioning antenna). Viasat-2 also offered a expanded coverage of North America, the Caribbean and the Northern part of South America. Viasat-3 is a set of three satellites set to launch starting in 2021 with a global footprint. Each Viasat-3 satellite is expected to have a throughput capacity of 1000 Gbps.
Viasat has also recently announced that it is planning to launch a constellation of LEO satellites in response to FCC subsidies for Rural Broadband, so it looks like eventually Viasat will be both in the GEO and LEO markets.
Financials
Given that this is a capital intensive business, Viasat is spending heavily on the development of its next-generation system. However, the company continues to generate strong operating cash flows. I expect Capex should start to go down when the Viasat-3 platform is in place. Right now, it is pedal to the metal on making capital expenditures. Cashflow will increase strongly too as Viasat-3 will have global coverage when all three satellites will be in place.
The following is a diagram of Viasat's balance sheet. Overall, it looks healthy with a good balance of debt and equity. Net debt is about three times operating cash flow. The company is growing by balancing debt and equity. Stock dilution is around 5 - 6% a year, which is quite good given revenue is growing more than twice as fast and cash flow are growing three times as fast.
| Long Term Debt As of June 30, 2020 | $ Thousands |
| 2028 Notes | 400,000 |
| 2027 Notes | 600,000 |
| 2025 Notes | 700,000 |
| Revolving Credit Facility | — |
| Ex-Im Credit Facility | 108,087 |
| Finance lease obligations | 62,361 |
| Total debt | 1,870,448 |
| Unamortized discount and debt issuance costs | (25,440) |
| Less: current portion of long-term debt | 29,470 |
| Total long-term debt | 1,815,538 |
Conclusion
From the above, the impression I get is that Viasat must be led by a first-class CEO and management team with a strong understanding of the business. The growth trajectory of the revenues and cash flow shows that this is a good business.
Back in 2017, The Economist published a story titled, "The world's most valuable resource is no longer oil, but data." This has become pretty obvious in 2020 as oil giants flounder while tech rules. Viasat is able to pipe the data to and from places not accessible by terrestrial networks.
Another big opportunity is the rise of the Internet of Things (IoT). As smart devices and sensors proliferate, they will need data connections that companies like Viasat can provide.
With the stock currently near 10-year lows, strong growth in revenues and operating cash flow and a full pipeline of projects now seems to be a good opportunity for those who want to start a position in Viasat for the long term.
Disclosure: The author does not have a position in Viasat shares at the time of writing.
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