Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Gogo (NASDAQ:GOGO) lost roughly 28% of their value today on news (issued after Monday's closing bell) that dominant wireless telecom company AT&T (NYSE:T) would launch a competing in-flight Internet connection service by the end of 2015.
So what: AT&T and Honeywell (NYSE:HON), a major supplier of avionics (the electronics systems used in aircraft and other air- or space-borne systems), will team up to provide 4G LTE service for air travelers by late next year. This will be similar to the airborne Wi-Fi technology Gogo already supplies to the vast majority of commercial aircraft that traverse the United States. Honeywell estimates that its deal with AT&T should result in roughly $1 billion in revenue over the next decade as the partners build out the service. AT&T has declined to project any revenue figures of its own.
Now what: At $100 million per year to Honeywell alone, AT&T's equipment spending would likely outstrip Gogo's expenses -- the latter first exceeded $100 million in trailing 12-month capital expenditures last year, but it was barely two years ago that Gogo was spending less than $50 million a year on capex. AT&T is bound to spend more than $1 billion on Honeywell's equipment to fully kit out airlines with its Wi-Fi offerings, and in the process it may very well ignite an unprecedented price war in the currently noncompetitive in-flight connectivity market.
However, it's worth noting that AT&T's path runs through several regulatory hurdles, which include Gogo's ownership of spectrum licensed for air-to-ground communications and the lag time between application for and approval of new spectrum in the space. AT&T is also entering the space at a time when Gogo is transitioning toward a satellite-based aircraft communications network that would work on international flights and would boast connectivity speeds similar to those offered by land-based high-speed providers (Gogo's existing service is capable of roughly 10 megabits per second of download speed).
Analysts at William Blair believe Gogo is attractively valued today, but investors must keep in mind that the company has never reported a profit or positive free cash flow. Competition from deep-pocketed AT&T is likely to make it harder to push toward profitability in the coming years. Keep an eye on this from the sidelines, but don't choose your in-flight Wi-Fi team just yet.