Since Donald Trump’s pledge to send American astronauts to Mars during his inaugural address, investors have been scouring space-focused companies for up-and-coming buying opportunities. One of the names on this list of startup companies is AST SpaceMobile (NASDAQ:ASTS), a satellite company that plans to expand broadband internet coverage with its own network of satellites.
Despite surging interest in space stocks, ASTS has sold off significantly from its highest point. In August of last year, shares of the company reached a record of $38.60. Since then, they have lost almost half of their value.
Is AST SpaceMobile a buy on this dip, what has caused the correction, and what does the future look like for this fledgling satellite company?
What Is AST SpaceMobile’s Business Model?
AST’s basic business model is the provision of communications satellites to cellular companies. The company’s satellites feature large surface areas that can deliver internet access to cell phones and other connected mobile devices on a large-scale basis.
Operating in low-earth orbit keeps the latency rates on the satellites low. If successful, the company has the potential to become an important provider of internet telecommunications services worldwide.
AST SpaceMobile’s Performance and Prospects
In Q3 2024, the launch of AST SpaceMobile’s first five BlueBird satellites were successful. They are being prepared to provide beta service to AT&T and Verizon, a key test for AST’s business. The company was also able to secure launch agreements for a further 60 satellites that will go into space throughout 2025 and 2026.
AST SpaceMobile is also cultivating government contracts in hopes of providing its services to both public and private entities. In Q3, the company secured three government contracts and was selected as a prime contractor by the Space Development Agency. With the US government’s renewed interest in space projects, federal contracts are likely to eventually become an important component of AST’s business.
Lack of revenues remains a concern with management reporting just $1.1 million in revenue in Q3 and only $2.5 million for the first nine months of 2024 combined.
While AST SpaceMobile is clearly putting key infrastructure in place to eventually generate meaningful revenue, the fact that it’s still delivering such low sales numbers after being publicly traded for multiple years raises concerns about the timeline for revenues and eventual earnings.
With that said, the suite of agreements that the company has managed to put together with major cell service companies and the US government is promising. AST itself estimates its total addressable market at over 3 billion people worldwide who aren’t subscribed to cellular broadband services due to coverage gaps or lack of service.
Why Is AST SpaceMobile Stock Dropping?
Share dilution and ongoing losses have led to AST SpaceMobile stock dropping by 50% from 52-week highs.
While AST SpaceMobile shows some promise, the shares are by no means for the faint of heart. One of the main drawbacks with owning ASTS right now is the strong potential for share dilution. Recently, shares of the stock plunged on news that the company was issuing about $400 million in senior convertible notes, which can be converted by the holder into new shares of stock.
The convertible note issue in January was the latest step in a trend of dilution that has put significant downward pressure on AST’s prices. The number of ASTS shares has been increasing at double-digit year-over-year rates in every quarter since early 2023. This dilution is, in part, responsible for just how much value the shares have lost since their peak.
AST SpaceMobile’s need to raise funding by diluting its shares ties into its other major risk, namely its steep losses. While the company briefly achieved quarterly profitability in 2021 and nearly broke even on a trailing 12-month basis by mid-2022, the trend ever since has been sharply downward. In the last 12 reported months, for instance, the company has lost $297 million.
With net income on the decline and management scrambling to raise funds by issuing shares and convertible notes, there appears to be a significant risk to investors. Current shareholders who have had their ASTS stock for any substantial length of time have already seen their ownership stakes fall dramatically. Investors looking to buy in today, meanwhile, run the risk of seeing the same trends play out going forward.
What About AST SpaceMobile’s Valuation?
In spite of the concerns outlined above, significant opportunity down the line may make AST SpaceMobile seem like a risk worth taking. Unfortunately, the stock’s valuation is still extremely high. Shares trade at 13.1x book value and a lack of current revenue or earnings.
It is worth noting that ASTS has an average analyst target price of $35.04, implying more than 70 percent upside from its current price of $20.14. This average, however, is based on just three analyst forecasts and may not represent more bearish views of the company’s prospects.
So, Is AST SpaceMobile a Buy?
The idea of creating a satellite broadband service that can effectively provide internet connectivity to unserved areas is likely a valuable one. AST SpaceMobile has taken the first steps necessary to make its business model a reality, and the next two years are likely to see a significant expansion of its satellite network. If all goes well, it’s entirely possible that AST SpaceMobile could become a successful company.
With that said, the stock currently carries a number of risks and unknowns that reduce its appeal. First and foremost among these is AST’s consistent habit of diluting its shares. Neither current nor prospective shareholders can credibly tell when or how much more their shares could be diluted as the company continues to put its infrastructure together. This alone creates a substantial risk.
This problem is compounded by both a high valuation and the lack of a clear timeline for when the company could begin generating meaningful financial results. Right now, the stock looks quite speculative and could continue to chalk up more losses for its shareholders. As such, AST simply appears too uncertain to be a buy until the company’s trajectory and fair value become clearer.
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