AST SpaceMobile (NASDAQ:ASTS), a business that’s engaged in building a network of low Earth orbit satellites to provide space-based broadband connectivity, has been a major stock market favorite over the past year. Shares are up more than 200 percent in the last 12 months, and the business is quickly moving toward active commercialization. Today, let’s examine whether AST SpaceMobile stock is still a good buy at its current prices.
AST’s Business Model Is So Unique
At its heart, AST’s business model is fairly simple. AST plans to operate as a wholesale service provider, delivering broadband connectivity to consumers’ smartphones through partnerships with existing telecom majors. AST already has partnerships with the likes of Verizon, AT&T and Vodafone, putting it in a strong position to sell its broadband service through massive existing networks. Furthermore, AST has already demonstrated its ability to complete calls through its satellite network to ordinary smartphones.
Once up and running, AST SpaceMobile could fill a major gap in the telecommunications market. Space-based connectivity could massively improve coverage by reducing reliance on traditional cell towers. This could be especially important in emerging markets, as AST has the potential to deliver reliable connectivity through existing cellular devices to areas that may currently have limited coverage.
AST SpaceMobile is also a viable competitor to Elon Musk’s Starlink in the emerging arena of space-based internet connectivity. By working through existing cellular networks and ordinary smartphones, AST has the potential to steal a march on Starlink, which requires costly hardware and has been criticized for its performance. Though it’s quite possible that Starlink could catch up, AST appears to be positioning itself for long-term success as a dominant provider.
AST SpaceMobile’s Promising Potential
At the moment, AST appears to be successfully making the transition from a speculative investment to a viable business. Q2’s report confirmed plans to begin offering service in the United States by the end of this year, with service in the UK, Japan and Canada to follow shortly thereafter in Q1 of next year. With the beginning of US service, AST expects to generate its first significant revenue of between $50 million and $75 million in H2.
While preparing to roll out its service, AST SpaceMobile has also focused on the ongoing buildout of its satellite network. By the end of next year, management expects to have between 45 and 60 satellites in orbit, the launches for which are already fully-funded.
Of particular note for investors are the partnerships that AST SpaceMobile is currently entering into. A partnership with Vi, for instance, paves the way for AST to provide connectivity solutions in India, a massive and rapidly growing market for the telecommunications industry. The business has also secured a total of eight contracts with the US government that may prove critical as sources of reliable early revenue as it enters commercialization.
ASTS has also been able to maintain a strong balance sheet that could prove instrumental in allowing it to successfully build its business. As of the end of Q2, AST had nearly $940 million in cash, cash equivalents and restricted cash on its balance sheet. Long-term debt, meanwhile, totaled only $482.5 million. With the business expected to start generating significant revenue this year and a major upswing in revenue likely next year as its service expands, AST’s debt load appears quite manageable.
Overall, AST’s potential seems quite appealing. With its satellite network now ready to begin providing service and more expansion to come over the next year, AST could become a major part of the telecommunications landscape. Though there are still plenty of uncertainties associated with just how large and how profitable AST could eventually become, there appears to be a long and steep growth runway ahead for the business.
AST’s Sky-High Valuation
Despite its significant potential, AST’s valuation has reached extreme levels. The business has reached a total market cap of $21.6 billion, putting it at about 345 times the midpoint revenue of $62.5 million management projects for H2. Analysts also don’t foresee the business becoming profitable until delivering a projected $866 million in profit in 2027. Though this projection is extremely positive, it still puts ASTS trading at nearly 25 times its expected earnings in two years as a business that has never before turned a profit. As such, any headwinds that slow or diminish its expected growth rate could trigger a significant downgrade in the stock’s valuation.
This dynamic can also be seen in the spread between ASTS’s current price and the price targets offered by analysts. With shares trading at $79.45, the consensus price target of $58.24 would imply a downside of 26.7 percent. Analysts are also evenly split when it comes to rating ASTS, with four rating the stock as a buy and four rating it as a hold.
Put together, these factors suggest that AST SpaceMobile, even with very promising improvements in revenues and earnings ahead, may have become meaningfully overvalued. At today’s prices, management likely has little to no room for missteps, and the market could correct AST’s prices downward substantially in the event of either delays or a macroeconomic downturn that blunts the business’s progress.
Is AST SpaceMobile a Buy Now?
AST SpaceMobile may be a case in which a business with significant long-term prospects may have become overvalued due to excessive, albeit warranted, investor optimism. While there’s little doubt that AST’s services could prove enormously valuable, the stock’s current valuation could introduce too much risk of a downward correction and put extremely high growth demands on the business. It’s also important to recognize that the market has already priced in large amounts of forward growth, potentially limiting the potential for upward pressure on share prices.
On the whole, ASTS may be a good stock to hold at the moment, but the price could be too high for it to be an active buy. Even so, investors may want to keep an eye on the stock and the business for more attractive entry points in the future, as there could be substantial long-term value in ASTS.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.