Fool.com: Globalstar Lifts Off to New Heights (News) August 6, 1999

Globalstar Lifts Off to New Heights

August 6, 1999

Shares of global mobile satellite services wannabe Globalstar Telecommunications Ltd. (Nasdaq: GSTRF) rocketed skyward today on reports that an investing newsletter called the Gilder Technology Report predicted investors will "make a killing" in the stock over the next five years. Globalstar majority stakeholder Loral Space & Communications (NYSE: LOR) shot up as well, since it stands to reason that if some Joe Schmo will make a killing on a Globalstar investment, then Loral is positioned to make a killing as well.

While investors must discount the hype factor involved whenever anyone identifies a stock as a "can't miss" opportunity, bullishness in Globalstar is hardly new considering its rise so far this year. The stock went into orbit for a more than 50% year-to-date gain before falling back toward Mother Earth and giving up more than half that gain over the past three weeks. "Buying opportunity" is now on the lips of many investors who are looking to the heavens in their quest for their own individual slice of stock appreciation paradise.

The run-up has been due to collection of factors, including the well-documented financing, subscriber, and system problems that have befallen competitor and first-to-market global mobile telephony player Iridium World Communications (Nasdaq: IRID) this year.

While Iridium succeeded in getting its system up and (somewhat) running, it forgot how important pricing would be in attracting users. With the cost of a phone that will work with Iridium's satellites running at $3,000 before a recent price cut and airtime charges of up to $8 per minute, it's not surprising that the firm has so far signed up only a fraction of the 500,000 to 600,000 users it had expected to have by the end of this year.

As Iridium's experience has proven, the trick to making the global mobile telephony economic model work in practice rather than only in theory is pricing. The companies operating the systems must be able to sign up enough customers to support the billions of dollars of up-front capital costs required to launch satellites into orbit. At the same time, they must also hold access and usage costs low enough to lure away users outside of polar bears and the smattering of oil rig workers and marine vessel captains.

In order to survive, Globalstar and its rivals will need to convert large numbers of wireless users to their system at some point. The earlier this conversion can take place, the better. Like a multi-term politician, Globalstar will always be chasing financing dollars since its birds will only last for seven or eight years before they will need to be replaced. The marginal cost of adding a new user to the operational system will be small, so cash flow from users should help fill the coffers and more than pay for the billions of dollars in fixed assets that will take up permanent residence on the firm's balance sheet. That's the theory, anyway.

Globalstar has the financing it needs to see if this theory will work in practice and should have its system operational this year, hopefully by the end of the third quarter. Pricing for a compatible handset will run $750 plus a $1 to $2 per minute charge for airtime, according to CIBC World Markets. That won't be competitive with the other wireless options out there, and one of the company's biggest near-term challenges will be reducing those expenses to more competitive levels as soon as possible.

Whether a large enough market will buy into the system remains to be seen, but right now the Street is taking the view that if any company can make global mobile telephony work, it will be Globalstar. Investors will want to pay attention as the Globalstar system comes on line in the coming months to see if that prediction is more than just another pie in the sky expectation.

By Brian Graney (TMF Panic)

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