In a much-anticipated move, Iridium Communications' (IRDM 0.92%) newest service, CloudConnect, expanded its coverage in late January on a global scale. Iridium, a leading provider in the satellite data and communications sector, expects the service to be a game-changer for the Internet of Things (IoT) industry, as it will allow any partnered IoT device to stay connected to the internet using Iridium's network of satellites.
The goal of the service is to provide better coverage and connectivity of IoT-enabled devices without the need for traditional internet delivery devices like routers or cell towers. This will allow customers in less developed regions or countries to have better access to internet-enabled devices.
Iridium sees the roll-out of CloudConnect globally as a potential revenue booster. But will international companies actually subscribe to the service and make CloudConnect successful on a global scale?
CloudConnect's coverage and backend partnerships are impressive
Iridium Communications is known for its consistent satellite phone coverage across the globe. With its 66 CloudConnect-focused communications satellites orbiting the planet, Iridium expects it can provide internet coverage to over 80% of the world's surface (with optimization efforts still underway to increase that coverage area). The company just finished a $3 billion satellite upgrade program, replacing older communications satellites with Iridium NEXT Satellites.
By using industry-standard techniques like JSON and SQS, Iridium Communications makes it easy for any company to make its products CloudConnect-compatible. Commercial subscribers will also be offered comparatively easy upgrades when changes to communication protocols are needed.
IoT device growth and global reach will affect Iridium
Iridium Communications is projecting significant growth for CloudConnect that will correspond to the expected jump in IoT-capable devices. IoT devices are estimated to be 30.73 billion in 2020. That's up 4.1 billion (13.3%) from 2019's total. The year-over-year growth of IoT devices from 2020 to 2025 is expected to average 19.7%, meaning there will be about 75.4 billion IoT devices around the globe by 2025. A significant portion of those devices will benefit from remote connections like CloudConnect.
Another area where Iridium Communications will see growth is in the number of international subscribers. Since CloudConnect was initially only available in the U.S., many of the current commercial subscribers are located in or near the United States. At the end of the third quarter of 2019, Iridium Communications reported that 767,000 commercial IoT subscribers were using its CloudConnect Platform.
With its global expansion, CloudConnect is positioned to pick up many more companies that serve developing countries. While it is hard to determine a precise number of new subscribers, it is a safe bet to assume that CloudConnect will see significant growth. Subscriber growth should then continue at a respectable rate thanks to the continued growth of IoT devices.
Overall, the growth in IoT devices and international subscribers will push CloudConnect's future performance to new heights. But Iridium will start to feel some pressure from competitors. Smaller companies like ORBCOMM and Globalstar are already competing with Iridium in this area. ORBCOMM specifically is targeting global industrial IoT applications such as machine-to-machine communications. Despite the competition, the average analyst view of Iridium rates it a "buy" with an average price target of $31 a share.
With CloudConnect globally available, is it time to add Iridium to your portfolio? It depends. In the United States, CloudConnect has done quite well. What remains to be seen is just how much more revenue Iridium will gain with the global launch. Initially, there will be a noticeable increase. But can Iridium retain those customers and build a following? Right now, it's too soon to tell.
There is also the fact that Iridium has been burning through cash to get to this point. Iridium has had a negative free cash flow for the past nine years. A globalized CloudConnect will help, but not entirely fix, this free cash flow issue. So investors looking for a company that has sound financials should be aware of this issue.
But Iridium has been lessening the cash burn, which points to a possible upside. If your tolerance for risk is high, then this news could signal a buying opportunity. If you are already an investor, Iridium is definitely a company to hold right now. But buying more shares should be at least partially based on your investment risk preference.