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John Engle
John Engle
Articles (332) 

Iridium Faces the Fight of Its Life in the New Era of Satellite Internet, Pt. 2

The company claims to be unfazed by the advent of satellite mega-constellations

June 07, 2019 | About:

Iridium Communications Inc. (NASDAQ:IRDM) has managed to build something akin to this sort of temporary monopoly, thanks to its unique position in the private Low-Earth Orbit (LEO) satellite internet and telecommunications industry. The company’s strong market position has translated into a rather rich share price. It seems as if the market has concluded that nothing can go wrong for Iridium.

Yet, as we discussed in our last entry, the company is facing a wave of new would-be competitors that aim to carve out big pieces of the LEO satellite internet business for themselves.

Can Iridium withstand the deluge of fresh competition from OneWeb, SpaceX and Amazon.com Inc. (NASDAQ:AMZN) and still come out on top? The company’s management certainly seems to think so.

Investing in the NEXT generation

Iridium’s confidence stems in part from its technology. The company has hardly been sitting still since the 1990s when the 66-satellite constellation first launched. Indeed, it has made extensive strategic investments in upgrading its satellite constellation in recent years. This effort, dubbed Iridium NEXT, began in 2010 and has an all-in price-tag of $3 billion. That is a pretty massive investment, but its fruits are already beginning to show. Iridium has expanded its broadband and narrowband services, which, combined with coverage expansion, represent significant avenues for growth.

According to Iridium’s management, the sophisticated, integrated satellite network that has arisen from the Iridium NEXT improvements represents a sustainable competitive advantage. Indeed, this point was featured prominently in CEO Matthew Desch’s recent presentation at the William Blair Growth Stock Conference:

“Our satellite constellation provides a superior and differentiated experience for customers with true global coverage," he said.

Meshing the world together

According to Iridium, a key feature of its technological edge is the interlinkages between its satellites:

“A unique Low-Earth Orbit (LEO) constellation sets Iridium apart ... Cross-linked and overlapping ‘mesh’ architecture delivers superior availability, efficiency and reliability.”

The mesh architecture, which is already operational for the Iridium constellation, has been the envy of many in the industry. Both OneWeb and SpaceX originally planned to build interlinkages across their respective satellite constellations, but troubles have arisen. With costs ballooning, OneWeb has outright abandoned interlinks, while SpaceX has launched dozens of supposedly functional Starlink satellites that also lack the ability to mesh.

Iridium’s ability to interlink its satellites may seem like a minor issue, but its true importance cannot be overstated. Without interlinks, even large LEO satellite constellations can suffer increased latency, while managing the network will require extensive ground resources.

Why can’t we be friends

While our focus thus far has been on the rise of LEO satellite competition, it is important to recognize that Iridium does not appear to be particularly worried about the “mega-constellations” being developed the likes of SpaceX and Amazon, in public at anyway. Indeed, the company’s William Blair Growth Stock Conference presentation asserted that these putative satellite internet services will actually be complementary, not a threat. This sentiment was also evident in the April comments of Iridium Senior Vice President Bryan Hartin:

“We were in LEO before LEO was cool. Today you have these megaconstellations like what SpaceX and OneWeb have planned. And we welcome them. We don’t view ourselves as competitors, but as complementary.”

Changing lanes

OneWeb, SpaceX, Amazon et al are trying, according to their own stated aims, to do something quite different from what Iridium has been doing to date: delivering low-cost, high-speed satellite internet connectivity to millions (or even billions) of individual consumers. With that in mind, it is unsurprising that Iridium would feel confident in its own market position.

But that is not the end of the matter by any stretch of the imagination. Indeed, new players that might appear to be complementary businesses at first could well attempt to carve off some of Iridium’s stable service contracts later on. This risk could become especially prevalent if these new entrants’ hoped-for consumer satellite internet market fails to materialize. After all, that has been the case whenever it was tried in the past.

Complementary or not, Iridium would be wise to watch its back under such conditions.

Verdict

Iridium is a bit of an odd duck, as an investment. Clearly, it has made significant accretive investments that ought to translate to its bottom line. Yet the risk of meaningful competition, especially from a company with deep pockets such as those sported by Amazon and Jeff Bezos, could well result in a problem for the incumbent a few years down the line.

For now, Iridium appears to be pretty safe. Even so, it is hard to believe in any long investment thesis at this valuation.

Disclosure: No positions.

Read more here: 

Charlie Munger on Intellectual Development and Common Sense 

Iridium Faces the Fight of Its Life in the New Era of Satellite Internet, Pt. 1 

David Einhorn Gets His Mojo Back 

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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