Some Wall Street analysts insist AST SpaceMobile (ASTS 1.69%) is a winner despite having no earnings.
AST's first-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) were negative $42.42 million. The cash flow statement for the same period listed negative $53.12 million in free cash flow.
It's no surprise when new and relatively young growth companies fail to turn a profit in their first few years. These companies invest their revenue into growing their businesses.
So, how can you properly evaluate an up-and-coming company with no earnings like AST?
A price-to-sales ratio that could be intimidating
When you're analyzing a company that doesn't have earnings, you can't use the usual price-to-earnings (P/E) metric. Instead, look at the price-to-sales (P/S) ratio. The P/S is the company's market capitalization divided by sales over the trailing 12 months. The sales in price-to-sales is revenue, which a functioning business will have despite negative earnings. Generally speaking, the lower the P/S, the better.
AST's P/S works out to about 1,266, which is massive. The average among telecom services companies is 1.07.
So, why are experts advising the purchase of AST stock if the P/S ratio is so far from optimal? Because they see the potential for tremendous growth.
The average prediction for the next 12 months -- from three analysts -- is a price of over $11, a 130% increase from Friday's closing price.
AST has big partners and a possible technological edge
One reason for optimism is the fact that AST's key business partner is industry giant AT&T.
AT&T and AST reached an agreement this month for AST to provide satellite-based communication services to AT&T customers. The contract lasts until 2030. The agreement is similar to the arrangement that rival Starlink, a subsidiary of Elon Musk's SpaceX, has with T-Mobile.
AT&T has also been a financial backer of AST, investing $155 million in January along with Alphabet and Vodafone. The partnerships paid off last year when Vodafone used an AST satellite to complete the first 5G call with a regular cellphone.
Satellite-based calls have long been possible, but used expensive specialty phones. For satellite phone calls to become a reality for the average person, the industry needs technology that allows satellites to receive and send signals understood by ordinary mobile phones. All competitors in this arena are working on similar software, but AST may have a slight technological lead.
Notable challenge ahead
AST has only one satellite in orbit, with plans to launch an additional five during the summer. However, a handful of satellites isn't enough to provide around-the-clock availability. There will be periods throughout the day when there's no satellite in range to complete a call.
AST estimates that reliable continuous service will require 45-60 satellites. According to The Register, AST plans to ramp up production to launch as many as six satellites monthly in 2025. In contrast, Starlink has already deployed a constellation of communication satellites.
It's only a buy for growth investors
Analysts may be bullish on AST, but that doesn't mean you should automatically reach for your wallet. AST has a long way to go before it can hope to deliver on the promise of its technology.
Gambling on a company built around new technology could prove worthwhile if you've got time to wait out downswings. On the other hand, if you will need your money in the medium term, AST may be too much of a risk. Want some help assessing your risk tolerance? Check out our rundown.
