Valuable Satellite Assets Will Make Viasat a Long-Term Winner

Viasat (NASDAQ:VSAT) is satellite technology company that primarily provides bandwidth and internet services. These high-speed broadband services are targeted toward consumers, corporations and airlines. The company behind VSAT stock also provides connectivity systems to commercial networks. It’s third segment is government related in which VSAT produces secure government communication systems.

Viasat satellites are defined as geostationary, or GEO. This means they orbit at approximately 22,000 miles above the earth. As a result, they provide a very expansive coverage area as compared to low-Earth orbit, or LEO, satellites which operate only 300 to 600 miles above Earth.

The trade-off is greater latency, meaning the distance a satellite beams it signal may affect realized broadband speeds to the end-user on earth. More on that later.

VSAT Stock and the Satellites

The company currently has three satellites that are each in geostationary orbit, with plans to launch three more.

Here’s a look at its current fleet:

• WildBlue-1 was launched in 2007, a older satellite that Viasat bought in 2009. This satellite provides limited coverage at below optimal download speeds.

• Viasat-1 was launched in 2011 and was considered technologically advanced at the time. Total capacity increased dramatically from that of the WildBlue satellite.

• Viasat-2 was launched in 2017 and is a key operating asset for the company today. Viasat-2 has almost twice the bandwidth of its predecessor and covers a large portion of the population in the Western hemisphere.

Viasat-3 is the company’s next generation of satellites and consists of three units. This in theory gives Viasat almost complete global coverage by adding most of Europe and the Asia-Pacific region.

The new generation satellites will have eight times the capacity of the existing fleet when they launch in Q1 2022.

A Growth Engine

In-flight connectivity (IFC) is a fast growing revenue stream for Viasat. At the end 2020, the company counted 1,500 commercial airplanes as customers for its onboard internet service for passengers.

Market share is believed to be around 30%.

In the past 12 months, Viasat signed deals with Delta (NYSE:DAL), KLM (OCTMKTS:KLMR), and TMC private jets.

There are approximately 26,000 commercial aircraft in the world today and is expected to grow to 35,000 over the next 10 years.

Merrill Lynch is positive on this segment and recently stated:

“IFC rebound clearly benefitting ViaSat given strong share ViaSat has seen a strong increased in the number of aircraft with ViaSat IFC activated in the period, with c.1400 out of the 1550 total installed fleet active in the period, an 84% increase YoY, and a 9% sequential increase. We expect this to continue to show sequential improvement through 2022, with growth in new installations also growing. The ramp of the Delta Air Lines contract will be a key contributor for FY22.”

LEO vs GEO

The argument on which satellite orbit is better and which will win the satellite broadband game has been debated in the investment community and internet chat rooms for many years.

LEO may have advantages in terms of latency and smaller satellite launches. But is it a good business model?

An LEO system, such as SpaceX’s Starlink, could eventually require anywhere from 30,000 to 42,000 satellites to obtain global coverage. That’s the same global coverage that Viasat can achieve with six satellite units. The expected useful life of a LEO unit is low at only two or three years. In comparison, a larger, more efficient GEO satellite can last 15 years.

Further, with the abundance of the satellites in low-earth orbit from Starlink and others, space pollution is becoming a reality. Collisions are a real risk for LEO satellites. VSAT is the environmentally friendly solution due to the low number of satellites needed and their high-altitude positioning.

VSAT Stock Performance

Viasat reported strong growth in the quarter ending June 30, 2021, with revenues up 25% and EBITDA up 52%.

The commercial network segment grew revenues 36% year-over-year as they benefited from the strong pandemic recovery in the in-flight connectivity market for airlines.

Meanwhile, the company provided a mid-term outlook of 20% average revenue growth 2021 to 2023, and mid-teens adjusted EBITDA over the same period.

The company will be in investment mode for the next two to three years with capital expenditures of around $1 billion for 2022 and 2023. This creates high levels of depreciation and masks current GAAP earnings per share and future earnings potential.

But for patient investors, when the investment spending dies down and free cash flow ramps up in several years, VSAT stock could be a multi-bagger. The forthcoming high-margin, high ROC, recurring revenue model will provide a massive increase in earnings that will be strongly reflected in the stock at some point.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.