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As the telecom industry settles into its first real price war in decades, some investors are nostalgic for the time when there was no significant competition and carriers had a captive audience. Well, there is one company forging new ground, but at 20,000 feet above sea level.
Strong target market, value proposition, and differentiation
Gogo (NASDAQ: GOGO ) provides Internet connectivity solutions to commercial airline passengers. The company started out providing voice service via handsets built into the seat backs, but has since expanded to offer Internet and mobile phone data and voice. The company is at the crossroads of a stabilizing industry, where it offers a new revenue source from a uniquely competitive position. Because Gogo aggressively built out a network of land-based towers, it got its foot in the door with the airlines.
This initial network offered a 3.1-megabit-per-second channel that was sometimes shared between multiple planes. Those network speeds wouldn't be capable of streaming movies, but big enough to send email or text your spouse when Chicago is snowed in again and you'll miss dinner, and maybe even breakfast.
Network acts as a wide moat
The key here is that the network is already built out. Unlike a Facebook or a Yahoo!, which can become a household name one feature at a time, Gogo is a national telecom. Telecom carriers don't have the luxury of scaling into a business -- they have to wire the whole region or there is no product. Since Gogo is marketing to airlines that traverse the whole country, they cant wire just one state or region and launch a service. It's all or nothing. This was a huge hurdle, but now that it's been accomplished, it's a huge competitive advantage, as it would be very difficult for a new company to try to enter the industry and compete effectively.
Lightly penetrated market
While the commercial airline market remains the core, in the near term the business fleet is the real opportunity. The cost to wire planes is approximately $10,000 per plane, but there is also a monthly fee for the service. To date, Gogo has wired 2,000 of the 20,000 fleet, leaving a tremendous near-term growth opportunity.
Ground floor opportunity
It's rare to get in on the ground floor of a technology company. As companies like Facebook and Twitter hit the market with valuations in the tens-of-billions, it's just too expensive to chase after them. Gogo is just starting to see growth accelerate in the market for business jets, and recent deal wins with Japan Air and Aeromexico are helping the company break into the international market. The company's $2 billion valuation is relatively low compared with other technology and telecom companies.
Pros are getting onboard
Professional investors see the opportunity and are starting to jump on board. On Friday, March 7, SAC announced a 5.1% passive position in the company. This is a new stake in the company by an investor known for its comprehensive due diligence. As its product line expands, market share increases, and earnings turn positive, I would expect other smart money firms to start appearing on the list of Gogo's institutional owners.
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