Satellite Communications: a Revolution or a Speculation?
For the past decade or so, the global space economy has grown at a rate of 6 to 8 percent compounded annually. Currently, it is about $348 billion and is expected to reach $1 trillion in the 2040s. Satellite communications (SATCOM) is the largest market in the global space industry. According to a report by Space Industry Association’s, published in 2018, the market for satellite communications services is at $126.5 billion.
The SATCOM industry has attracted many savvy investors. Since the future path of the industry is still unclear and full of regulatory uncertainties, it seems that many investors are taking a cautious and speculative approach, which may explain the high volatility of some SATCOM stocks over the past twelve months.
It is not difficult to see why investors find SATCOM an attractive investment opportunity. The economics of SATCOM companies are in a way similar to software companies – a high initial fixed cost and low operating costs, allowing for potential high-profit margins. Intelsat, a SATCOM services provider, reported an EBITDA margin of 78%. Its competitors reported similar margins. SATCOM also provides a solution to bridging the digital divide, which presents a huge business opportunity. Mobile network operators cover only less than 10 percent of the market due to economic constraints – the revenues generated in rural areas do not always cover the cost of building a cell tower.
Moreover, this technology brings huge benefits to governments and militaries. SATCOM provides a robust and extensive communications system that is needed for them to receive information and take action at anytime and anywhere, especially amidst the political uncertainties and volatility facing us in 2018. An estimated 73 percent of SATCOM in the U.S. is provided by commercial providers, according to the U.S. Army’s own SATCOM System Expert.
Intelsat is one of the first and largest SATCOM providers, with its stocks trading on the New York Stock Exchange. 2018 was a great year to hold Intelsat stocks: the price per share has grown from $3.64 at the start of the year to $27.93 as of 28 November 2018, representing a 667% return. However, in mid-October, the stock prices started a rapid decline.
Intelsat’s stock prices started to drop two weeks before it released its Q3 results. One potential explanation is that political uncertainties led to a lower confidence level among investors. The trade war between the U.S. and China could cause a rise in the cost of productions. In addition, satellites are subject to international regulations, which presents more uncertainty as the rules aren’t yet established since the SATCOM industry is just emerging. Lastly, the industry isn’t one that is likely to tolerate a large number of players. Although Intelsat is one of the more mature and largest SATCOM providers, any delay in development and progress is a great advantage for the competitors.
Despite the above-mentioned concerns, there isn’t a substantive reason that could justify a 30% stock price decline, especially when the company had just successfully launched two satellites and largely improved its debt position. It’s possible that investors have seen enough growth in Intelsat stocks and simply decided that it’s a good time to pull out and move on to other growth stocks.
Intelsat’s Q3 results show that the company is still well on track, despite reporting a loss, most of which was attributed to the early retirement of debt. The company’s stock prices recovered partially in the immediate aftermath of the release of the report. Intelsat could still prove to be a great long-term investment, for those with patience and willingness to stay through periods of price volatility, which is likely driven largely by market speculators.