Macquarie Says Gogo (GOGO), Global Eagle (ENT) Reaction on Verizon (VZ) News Overdone
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The firm noted today:
- Verizon is aiming to get more into IoT but not this way. Yes, Verizon is aiming to grow its share of IoT (now roughly US$800m/pa) but we think it's unlikely it would use low-band spectrum for such an intensive application as passenger in-flight WiFi. Verizon is more interested in generating revenues from connecting fixed and mobile assets like autos, Unmanned Aerial Vehicles (UAVs) as well as trailers, refrigerated units, etc, in our view. We note the wireless provider already has a partnership with ORBCOMM on using its LTE network for Machine-2-Machine (M2M) applications.
- Don't forget high barriers to entry. We also find it unlikely that Verizon would use its sizable war chest (40Mhz+) of 700Mhz spectrum for a product that would: 1) require an extensive regulatory review by the FAA; 2) have significant marketing and engineering hours; and 3) generate low returns (many providers like Panasonic Avionics and Gogo have negative net income profiles) and extensive cash investments.
- The problem is competition. The space today is hyper-competitive and any inkling of larger, better-funded players entering the space can cripple multiples. For example, start-up SmartSky ruined Gogo's analyst day by announcing its own Air-to-Ground product that uses unlicensed spectrum. However, we don't think Verizon is about to revive AT&T's plan in 2014 for a similar service -- further analysis of the opportunity leads us to believe that the wireless operator will seek returns elsewhere.
Macquarie rates Gogo at Neutral with a price target of $11 and Global Eagle Entertainment at Outperform with a price target of $14.
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