Globalstar (NYSE:GSAT), the satellite services company, reported positive results for Q3 2023. The stock appears to be bouncing higher from a support level. However, the valuation is high and the company struggles to be profitable. I'll analyze the company and look at multiple factors to determine whether the stock looks worthwhile for investors.
Globalstar operates as a global provider of satellite communications equipment & services for safety, emergency situations, recreational use, and other use cases. The company offers mobile communication devices known as SPOT X, SPOT Gen4, and SPOT Trace that transmit messages while tracking the device location. These products are used to track rail cars & trailers and are used to monitor utility meters, oil & gas assets, marine assets, and small satellite transmitter modules.
Most of these applications are included in the Internet of Things [IoT] market which is expected to grow at about 13.6% annually to reach $2.2 trillion by 2028 on a global basis. Another source, Fortune Business Insights is projecting the IoT market to grow at about 26% annually to reach over $3.3 trillion by 2030. This is likely to provide a strong tailwind for Globalstar's products through the remainder of the 2020s.
Highlights From the Q3 2023 Earnings Report
Overall, Globalstar achieved positive results in Q3 2023. The company achieved a 53% increase in total revenue to about $58 million in Q3 2023 over Q3 2022. This was driven by a 61% increase in Services Revenue. Globalstar benefitted from higher wholesale service revenue in Q3. The revenue increase was attributed primarily to the launch of services in late 2022, the construction of more satellites, and to improvements in gateway sites.
The company also achieved a 17% gain in Commercial IoT Services revenue. This was attributed to an increase in subscribers and ARPU (average revenue per unit). However, this gain was offset from less average Duplex and SPOT subscribers due to inventory shortages and back orders.
The good news is that SPOT products have returned to normal production levels, contributing to an increase in revenue for 2023.
The company also achieved a 40% increase in Subscriber Equipment sales, but that was a result of production challenges in Q3 2022.
One of Globalstar's challenges is that the company had negative net income from 2020 to present. The company only had two profitable years (2015 & 2019) where it achieved positive net income since 2013.
Globalstar's Q3 resulted in a net loss of $6.2 million vs. a net loss of $204 million from Q3 2022. Despite the loss, that was a significant improvement of 97% over the same quarter last year. The company achieved this through a positive operating income of $2 million in Q3 2023 vs. a loss from operations of $187 million from Q3 2022. The large gain in operating income was primarily from a non-cash impairment charge of $175 million from Q3 2022. If this charge was taken out of the equation, the loss from operations from Q3 2022 would have been about $12 million. So, that was still a significant improvement in operating income in Q3 2023, going from a negative $12 million to a positive $2 million.
Another positive is that Globalstar achieved a 134% increase in adjusted EBITDA to a positive $91.6 million for the first 3 quarters of 2023 as compared to the Q1 through Q3 2022. This achievement was a result of higher revenue which was offset a bit from higher operating expenses.
Globalstar gave the following future guidance: The company estimates that revenue will be 45% to 55% higher for the full year of 2023 over 2022. This would place revenue in the $215 million to $230 million range. Globalstar also estimated that the adjusted EBITDA margin would be 55% for 2023 as compared to 39% from 2022. These would be significant improvements if they are achieved. The increase in adjusted EBITDA margin could get Globalstar closer to achieve positive net income.
What's Behind Globalstar's Net Losses?
Overall, I felt that Globalstar's Q3 2023 earnings report was positive. The company made significant gains in revenue, adjusted EBITDA, and operating income. However, Globalstar still winds up with net losses. So, what is behind these losses?
I analyzed the income statement and found the outlier. In Q3 2023, Globalstar's positive operating income was offset by $3.9 million in interest expenses and $4.1 million in foreign currency losses. These losses are what led to the net loss of $6.1 million for Q3.
Globalstar also had a loss of $10.4 million from the extinguishment of debt during Q1 of this year which led to the net loss of $9.6 million for the first three quarters of 2023. It appears that Globalstar has interest expenses and foreign currency losses consistently which is preventing the company from achieving positive net income even when operating income is positive.
I will also point out that Globalstar typically has operating losses. This occurred from 2013 through 2022. It was only recently in 2023 where the company achieved positive operating income.
What Improved in 2023?
The key gains that Globalstar achieved in 2023 as compared to previous years was a higher gross margin, lower SG&A expenses, and lower depreciation/amortization. Globalstar increased gross margin from 56% in 2022 to 69% over the trailing 12 months. This led to gross profit of about $148 million for the trailing 12 month period as compared to just $83.5 million in 2022.
As a percentage of revenue SG&A expenses decreased from 30.7% in 2022 down to 24.6% TTM. Depreciation & Amortization fell from 63% of revenue in 2022 to 41% TTM.
If Globalstar can keep making strides in lowering the cost of revenue and decreasing SG&A, then the company would be in a better position of achieving positive operating income and eventually positive net income. However, interest expenses and foreign currency losses continue to remain high leading to net losses. Therefore, potential investors should watch to see if Globalstar can overcome this challenge.
The Issue With Valuation
Since the company is not profitable, I will use the price/sales ratio to analyze the valuation. Globalstar is trading with a high price/sales of 11 as compared to the sector median of 1. Globalstar is also trading significantly higher than the Telecom Services industry's price/sales of 1.15.
Since the company tends to achieve positive EBITDA, I will also use EV/EBITDA to cross-check the valuation. Globalstar is trading with a trailing EV/EBITDA of 31.5 vs. the sector median of 8.9 and a forward EV/EBITDA of 23 vs. the sector median of 8. Either way I look at it, Globalstar looks too expensive from a valuation standpoint.
It is possible that investors might give the company a pass on the current valuation since revenue and the EBITDA margin are expected to increase. Investors could be anticipating that these potential gains will eventually overcome the net losses that Globalstar has been plagued with.
Technical Perspective
The daily chart above shows GSAT in a multi-month consolidation after the stock made a significant run from about $1 to $1.65 from August into September. The MACD and RSI indicators have just been chopping around without showing any clear new trends yet.
It appears that the stock is waiting for the next catalyst. The Q3 earnings report came and went and the stock didn't move significantly either way. So, investors may need more positive news to move the stock above the $1.20 to $1.40 range. Of course, any significant negative news could drive the stock below this range.
Balance Sheet
Globalstar's balance sheet has a few bright spots, but there are also some weaknesses. As of the end of Q3 2023, Globalstar had $64 million in cash & equivalents and $307 million in long-term debt. The company has 1.3x more current liabilities than current assets. I don't like the high amount of debt as compared to cash and I would rather see current liabilities lower than current assets. The company could have an issue paying off its short-term debt with more current liabilities than current assets. The standout items for current liabilities include $66 million in accrued satellite construction costs and $58 million in deferred net revenue.
On the positive side, Globalstar has 2.7x more total assets than total liabilities for total equity of $383 million. In addition to $307 million in long-term debt, Globalstar also has $29.5 million in operating lease liabilities, $2 million in non-current deferred net revenue, and $3.9 million in other non-current liabilities. The higher ratio of total assets to total liabilities puts the company in a good position to handle long-term debt.
The Bottom Line on Globalstar
Overall, I will have to rate Globalstar as a hold. The valuation is too high and doesn't create an attractive entry point. While the company does appear to be making positive progress on growing revenue and EBITDA, Globalstar still struggles to achieve positive net income. I would rather wait to see how the company performs for a few more quarters before changing my rating. Investors should watch to see continued strong revenue growth and higher margins for Globalstar to achieve positive net income. That could be what gets the stock moving higher in the future.
David Zanoni
David focuses on growth & momentum stocks that are reasonably priced and likely to outperform the market over the long-term. He is a long term investor of quality stocks and uses options for strategy. David told investors to buy in March 2009 at the bottom of the financial crisis. The S&P 500 increased 367% and the Nasdaq increased 685% from 2009 through 2019. He wants to help make people money by investing in high-quality growth stocks.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The article is for informational purposes only (not a solicitation or recommendation to buy or sell stocks). David is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
