Seeking Alpha:
AST SpaceMobile Overview
AST SpaceMobile (NASDAQ:
ASTS) continues to progress toward commercialization, with the launch of its Block 1 satellites now imminent. The company's share price has responded positively to regulatory and technical developments in recent months and this trend could continue, as there are more catalysts on the horizon. The most important near-term development has probably been the large rise in AST's market capitalization, which provides the company more room to raise capital without significantly diluting investors.
I previously suggested that while AST SpaceMobile had enormous promise, uncertainty surrounding its prospects should not be underestimated. AST is pushing technological limits and demand for this type of service is unclear. While the stock continues to move higher, this uncertainty will only really be addressed in 2025 as the first block of satellites comes into commercial operation.
Satellite Launch
AST SpaceMobile received an initial license from the FCC for space-based operations
in early August, meaning the company is now authorized to launch and operate its first 5 commercial satellites. These satellites will
enable non-continuous service across the US, with 5,600+ cells in premium low-band spectrum.
The BlueBird satellites have been completed and are now in Florida undergoing
final preparation for launch. AST has a 7-day launch window in the first half of September. After a few months of in-orbit service activation, AST expects to launch its service for AT&T and Verizon beta test users.
Licensing
AST SpaceMobile's initial license for space-based operations in the US authorizes it to operate using V, F, and UHF frequencies to support its gateway, theater link, and telemetry tracking and control operations. This license will be the AST's primary license for operations in the US over the life of its constellation. AST SpaceMobile also continues to work with the FCC and its partners to apply for upgrades and modifications to this license in support of full-scale commercial operations.
While this is an important development that helps to derisk the company, I think AST SpaceMobile's share price already reflects a very low probability of regulatory or technical issues going forward.
ASIC Production
AST SpaceMobile is developing an ASIC that will support a 10x increase in processing bandwidth per satellite, enabling commercial operations at scale. This initiative appears to be progressing smoothly, with the tape-out phase with TSMC having now been completed.
AST expects to begin using ASICs on its Block 2 satellites, although based on recent commentary, it appears that the company will not allow the ASIC to delay its launch plans. At the moment, AST plans on using FPGAs in the first 4 Block 2 satellites, with subsequent satellites implementing ASICs.
Manufacturing
AST SpaceMobile's focus is now shifting from R&D to scale production of its network. Planning and production of the 17 Block 2 satellites is now underway at the company's manufacturing facilities in Texas. AST is targeting an initial launch of Block 2 satellites in the first quarter of 2025.
AST is also working on vertically integrating around 95% of the subsystems that are built going forward, which should help to reduce costs as the company scales production.
From a manufacturing perspective, AST appears fairly derisked at this point, given the relatively limited number of satellites it plans on manufacturing. Block 2 satellites are substantially larger, though, meaning there is still some residual risk involved in their production, launch, and operation.
Financing
At the end of the second quarter, AST SpaceMobile had $287.6 million in cash. This provides the company with a fairly long runway at its current burn rate, but costs will ramp once AST has successfully demonstrated the operation of its Block 1 satellites and begins scaling its business.
AST SpaceMobile expects adjusted cash operating expenses to total $30-35 million per quarter through the remainder of the year. This guidance does not include an estimated $15 million related to the tape out and initial production of the company's ASICs, though. This will be recognized as an R&D expense as milestones are completed.
CapEx declined in the second quarter due to the completion of Block 1 satellites. AST SpaceMobile has now fully paid for these satellites and total spend did not materially exceed the anticipated $115 million amount. While costs are expected to decline for Block 2 satellites, the design, integration, testing, and launch of satellites and related ground infrastructure remain capital-intensive.
While the company continues to burn cash as it invests in its network, this is being offset by outside investments. AST raised approximately $80 million during the quarter using its at-the-market equity facility. Verizon also recently provided AST SpaceMobile with $100 million, consisting of $65 million of commercial prepayments and $35 million of convertible notes.
AST plans on launching a total of 168 satellites, which could cost as much as $5 billion. At some point in the next few years, cash flow from operations will begin to offset this, but in the meantime, financing is critical. The company has a long list of high-profile investors, including AT&T, Vodafone, Google, American Tower, Rakuten, and Bell Canada. As a result, I don't believe access to capital is an issue, but whether financing harms existing shareholders could still be.
If the company's first 5 satellites work as expected and initial commercial traction is solid, this could underpin a large amount of debt at a reasonable cost, helping to reduce the probability of dilution. AST SpaceMobile has stated that it is working on a financing package from export credit agencies, which would hopefully provide a cost-effective source of long-term debt. AST likely wants to have this type of arrangement in place before it burns through its current cash balance.
Given where the company's share price now sits, it could also be an opportune time for the company to raise capital without significantly diluting existing shareholders. Whether this occurs could be considered indicative of how the company views its current market capitalization relative to its future potential. If AST SpaceMobile tries to avoid an equity raise, it probably indicates that management believes the company is still undervalued. The company stated on its Q2 earnings call that it has no plans to pursue an underwritten public equity offering this year.
ASTS Stock Valuation
After the post-earnings bump, AST's market capitalization now sits at over $8 billion. While there could still be an enormous upside, a reasonably large amount of commercial success is now baked into the share price. AST's value is difficult to assess at this point in time given that there has been no pricing guidance and adoption rates are unknown. AST's margin structure is also unknown, but margins should be high.
The market for mobile wireless services is worth an estimated $1.1 trillion. Satellite capabilities and the competitive positioning of incumbents limit how much of this opportunity a company like AST can realistically capitalize on, though. Over the next eight years, AST SpaceMobile believes that there will be a cumulative $67 billion opportunity in the satellite direct-to-device communications market. In comparison, Lynk believes that its service will offer
MNOs a 40% revenue increase, with $150 billion coming from providing universal connectivity for existing customers and $250 billion from connecting new customers.
Analysts are currently expecting AST's revenue to approach $50 billion within the next decade. I had been thinking that a 50% share of a $50 billion market would represent an extremely good outcome for AST. Given current urbanization trends and the ongoing build-out of ground infrastructure, I have a hard time with more optimistic projections. If the market does end up being this large, it is also likely that competition will be an issue.
Table 1: Analyst Revenue Projections for AST SpaceMobile (Created by author using data from Seeking Alpha)
Telecommunications infrastructure tends to be a natural monopoly, but this only really holds while it is not financially worthwhile for competitors to invest in alternative infrastructure.
AST SpaceMobile has a large patent portfolio which could afford some protection, but it is difficult to see this providing a large barrier to entry long term. AST only spent seven years and $1 billion developing its technology. If there is an opportunity worth tens of billions of dollars, competitors will likely find a way around patents.
The argument against competition seems to rest largely on the assumption that once AST SpaceMobile locks up the larger telcos, it won't be viable for competitors to create a business case that justifies the necessary investment. If AST becomes large enough, I think this argument also becomes questionable, as MNOs could capture a large amount of value by negotiating more favorable terms with a competitor. Even if no competitors end up launching, this may end up limiting AST SpaceMobile's bargaining power with its customers.
Iridium's margins (~40% operating profit margin) are indicative of where AST's margins could end up, but given the fact that incremental revenue will have little associated cost, AST's margins could be much higher if it ends up generating tens of billions of dollars revenue annually.
If analyst projections prove accurate, AST could end up with a several hundred billion USD market capitalization in the next decade. While this is possible, expecting AST to be the largest player in the ecosystem, while only providing a niche service, isn't prudent.
Table 2: Comparable Company Market Capitalization (Created by author using data from Seeking Alpha)
It is interesting to note that while more positive expectations are now embedded in AST's share price, its partners are yet to benefit. Assuming AST does end up realizing an extreme right-tail outcome, Verizon and AT&T would also likely see a significant increase in market capitalization.
Figure 1: US MNO Market Capitalizations (Seeking Alpha)
Conclusion
It would be easy to dismiss AST SpaceMobile as a bubble, but there is still a lot of room for the share price to move in either direction. The large jump in AST's share price post-earnings is presumably in response to the imminent satellite launch and the potential for revenue within the next 6 months. AST SpaceMobile's valuation already prices in far more success than this, though. Technical and initial commercial success is expected, with the upside now more a question of end-user adoption, pricing, and competition.
AST SpaceMobile will need to raise an enormous amount of capital in the future, which is far easier with a high share price. From this perspective, AST has been significantly derisked in recent months. The company believes it has sufficient cash to achieve its near-term goals and start generating revenue. At this point, access to large amounts of reasonably priced debt also becomes a real possibility.
It will likely be several years before the validity of the assumptions underpinning AST's valuation is better understood. In the meantime, positive catalysts and speculation about the company's potential could see the share price continue to move higher. From a risk perspective, any issues with the launch or operation of AST's satellites would likely be extremely damaging at this point. As AST's share price moves higher, the probability of a large equity raise also increases.
This article was written by
Richard Durant
7.6K Followers
