How Impressive Are Gogo's Growing Installations, Really?

In-flight broadband service provider Gogo (GOGO -0.36%) just reported that it has achieved more than 1,500 total installations. Share prices rose as much as 10.7% on the news, and Gogo's stock closed the day at a 9% gain.

But how game changing was this announcement, really? Let's have a closer look at Gogo's broadband-installation progress.

Gogo's installations, by the numbers

The last update came in January 2019, when Gogo said that it had installed its broadband systems in more than 1,300 commercial aircraft. Before that, the company announced 200 instances of its newer 2Ku technology way back in the summer of 2017.

Gogo tends to speak of installation totals in broad terms in each earnings report, so we don't have a lot of hard data to analyze between these press-release-worthy jumps.

Over the period outlined in this table, Gogo grew its trailing revenues by 31%. Trailing earnings before interest, taxes, depreciation, and amortization (EBITDA) profits bounced around between $41 million and $97 million, while both earnings and free cash flows stayed negative.

You have to spend money now to make money later. System installations are a costly but necessary step toward allowing Gogo to provide broadband services for years to come.

Why Ku and Ku2 upgrades matter

To be clear, Gogo didn't start from absolute zero in 2017. The satellite-based 2Ku systems discussed above provide a much faster internet service than the older Ku technology, lifting the airplane's total bandwidth from 15 to 70 megabits per second (Mbps). Further improvements should lift that capacity to 100 Mbps and beyond over the next couple of years. The Ka network system, which was the gold standard before Ku came along in 2014, maxed out at roughly 3 Mbps.

Those bandwidth buckets are shared by the passengers on each aircraft, so you can't expect every smartphone on a 400-seat jumbo jet to experience smooth Fortnite gaming or Netflix streams at the same time. Netflix requires something like half a megabit per second in order to stream a usable video, and your tablet needs 5 Mbps in order to show a high-definition stream. We're still a long way away from hosting in-flight online video conferences, even on a smaller airliner with less than 200 seats.

Even the 2Ku systems will eventually become stepping stones toward even faster standards. Gogo needs to run through this cycle of technology upgrades, followed by rising profits, once every few years.

Right now, 2Ku is king. Come back in five years, and you'll see Gogo rushing to replace it with a faster system.

Image source: Getty Images.

Cyclical pain

All of this is to say that Gogo is nearing the end of this particular network upgrade cycle. The backlog of roughly 850 orders is holding steady as incoming orders are roughly equal to the company's installation efforts, but even that life-extending effect will subside in due time.

Gogo is looking at tower-based 5G technologies for the next leap forward, expected to start operations in 2021 -- but only over land in key markets like the U.S. and Canada. Long-haul flights will still have to connect to a satellite, and updated radio bands and technologies are a bit further beyond the horizon on that front.

So 1,500 airliners is a nice, round number, but still just a small slice of the total market. According to real-time flight tracker Flightradar24, there are about 17,000 commercial airliners aloft as we speak. Most of them still don't have any broadband service. Many never will offer that service, but Gogo is most certainly staring down an epic addressable market of broadband-less airliners.

What does this mean for investors?

Meanwhile, investors have focused on the company's short-term costs more than its long-term business prospects. Gogo's share price has fallen 59% in two years and the stock is trading at the bargain-basement ratio of 0.6 times trailing sales.

In my eyes, Gogo is a misunderstood long-term growth stock that currently sits in the expensive end of a multiyear business cycle. It's a strong buy for patient investors as the costs-to-profits cycle is poised to turn upward in 2020.