2021 has been the year of meme stocks and special purpose acquisition companies (SPACs). In this frenzy, a new space company, AST SpaceMobile, Inc. (NASDAQ:ASTS) began trading via a SPAC in April 2021, and has since failed to move much. ASTS stock has a 52-week range of $6.96-$25.37 and its current price of $10.65 as of Oct. 14 shows a lack of momentum.
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AST SpaceMobile has a bold vision and a very promising business plan. It’s official website states, “AST & Science and our global partners are building the first and only space-based cellular broadband network to be accessible by standard smartphones. Called SpaceMobile, this ultra-powerful network is being designed to provide connectivity at 4G/5G speeds everywhere on the planet – on land, at sea and in flight.”
Its business plan is supported by a lot of catalysts. Still, I think ASTS stock is too risky now and too expensive for what’s currently a speculative bet on space exploration. This is because of risks associated with the implementation of its business plan, very high costs, and the timing of generating revenues. It will also probably need several additional rounds of raising cash to support them. So let me elaborate more on my ASTS stock analysis.
A Rocky Start for ASTS Stock
Back in April 2021 when it was reported that ASTS would be coming to the market through a SPAC merger, there wasn’t much buzz about it.
The current market capitalization of AST SpaceMobile is $553.5 million, or 31% of what was supposed to be the equity value of $1.8 billion. Equity value is the total value of a business that is attributable to the shareholders, so this very large difference between it and ASTS stock’s market capitalization can only mean two things: Either the initial valuation reported was too high, or the current market capitalization signals the true fundamentals are not strong enough to justify its high equity value.
I support the latter argument. AST SpaceMobile is a pre-revenue company, with a business plan that is great in theory, but riddled with risk on the path to revenue. And investors now realize that there is a huge difference between planning to do things in business and the actual outcome of those results. While ASTS stock may try to “go to the moon,” Earth’s gravity may ground it with harsh realities.
Business Plan: Smart, Promising and Ambitious, but Will Require More Funding
When AST SpaceMobile went public, management showed a lot of enthusiasm.
“We don’t see the other satellite [low Earth Orbit] constellations like Starlink as a competitor. Actually, we think that is a great thing they are happening, as they lower the cost of launch and they make space more affordable, basically, to the masses,” AST chairman and CEO Abel Avellan said to CNBC.
Avellan also said “It’s a long term opportunity … but it’s a very very large opportunity in a very large addressable market,”
In the investor presentation on September 2021 AST SpaceMobile stated that it is, “Building the first and only space-based cellular broadband network.” They also listed an addressable market of $1 trillion in global wireless services.
They outlined the main advantages of their business model, which are good — the main advantage being the barrier to entry for an ambitious business such as AST Spacemobile’s.
They’ve already completed several binding, mutually exclusive commercial agreements with large, and reputable global wireless companies. If you eliminate competition from a market, then odds are in your favor for dominating and delivering very strong financial performance.
I am skeptical though that the costs and risks to implement this business plan as expected are too high. AST SpaceMobile went public raising less than $500 million in cash. Is that enough to support the increased capital expenditures required to develop this unique space-based cellular broadband network?
Personally, I don’t think so. I believe several future rounds of raising cash will be needed to fully lift this company off the ground (figuratively and literally). This will make stock dilution a factor to weigh on very seriously before investing in this space stock.
No Earnings, No Surprise
The business update for Q2 2021 showed a lot of business momentum related to commercial, organizational and industrialization progress of the business plan. It also showed a surge in operating expenses, doubling to $25.1 million for the second quarter of 2021, compared to $12.1 million in the first quarter of 2021. Capital expenditures also stood at $54.3 million.
The 8-K form for Q2 2021 showed that AST SpaceMobile “Ended the second quarter with cash and cash equivalents of $402.6 million and no financial debt as of June 30, 2021.”
For the six months ended June 30, 2021, net loss attributable to common shareholders rose to $31.5 million, compared to a loss of $9.9 million for the six months ended June 30, 2020.
So until AST SpaceMobile starts generating revenue, there will be increasing losses, cash burn, and rising operating expenses and capital expenditures. I expect this trend to continue.
A Bold Bet on Space
The good news is the company has no debt. The bad news is that current fundamentals are not supportive of ASTS stock’s market capitalization. I have two concerns, first about timing of revenue and second being the magnitude of revenue when it begins to come in. It should be more than enough to generate profits, but this may not happen until 2024- 2025.
For now ASTS stock seems to be very expensive based on no revenue. I would like to see the bold commercialization and industrialization plans bring revenue. Until then the stock is too risky.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.