This Near Monopoly Can Still Double The Size Of Its Business

StreetAuthority Network

It's happened to all of us.

We're running down an airport corridor, sweating like a stevedore and hoping like hell we make the flight. We fly down the concourse and arrive at the gate just as the ground crew is beginning to close the door.

Huffing and puffing, we make it down the jetway, into the plane and to our seat.

Whew.

We reach into our pocket and extract our cellphone. But before you can say "Words With Friends," the flight attendants sternly instruct us to stow all electronic devices. Unable to check in with a loved one waiting on us, we're held incommunicado until we land.

It doesn't have to be this way. And it's not going to be this way much longer.

Rules about the use of cellphones and other electronic devices are currently under review by federal regulators. The Wall Street Journal reports:

"The Federal Aviation Administration is expected to relax the ban on using some types of personal-electronic devices at low altitudes, allowing passengers leeway during taxiing and even takeoffs and landings. The new rules would likely mean an end to familiar admonitions to turn off and stow all electronic devices. Details are still being debated. Still, the [move] reflects a consensus that the existing rules, essentially unchanged since the 1960s, have been overtaken by dramatic changes in technology."

The news was heralded as long overdue by millions of fliers, who contend that the rules are outdated. Soon, observers say, most electronic devices, even cellphones, will be used on board during flight.

The Journal's article was published June 21. The same day a new company hit the Street... Shares of Gogo (GOGO), a company that provides in-flight Internet connectivity, began trading.

Gogo is a true game-changer. This company's technology curve isn't going to be drawn over decades... I expect it to take off in a matter of months. It will look more like a vertical line on a chart.

Please take careful note: I'm not saying Gogo "will be" or "might be" a game-changer. I'm saying "is." Present tense.

The company has already succeeded in bringing the Internet to air travel. Gogo brings the mobile Internet to the sky. In fact, just two days before the IPO, I personally used Gogo on a flight to Minnesota.

Here's how the company describes its market position in its prospectus:

"Gogo is the world's leading provider of in-flight connectivity. We have the largest number of online aircraft in service and are a pioneer in wireless digital entertainment and other services in the commercial and business aviation markets. ... We enable our commercial airline partners to differentiate their service offerings, increase passenger satisfaction and unlock new revenue streams."

I've come up with three key points that I think make the case for Gogo to rise significantly from current prices...

1. Revenue is on the rise. Gogo's top line rose 146.7% from 2010 to 2012. Annualizing this year's first-quarter results gives us a reasonable 2013 revenue estimate of $283 million, a year-over-year gain of 21%. That computes to a compound annual growth rate of 44%.

I am comfortable projecting 20% growth in the top line for this company for the next three years. That puts revenue in the $490 million range by year-end 2016. Why so confident? The income statement shows us two good reasons:

2. Pricing is on the rise. Gogo has managed to increase its per-session fee by 55.6% without losing customers. In fact...

3. Volume is on the rise. In 2010, 4.7% of the people who took flights on Gogo-equipped aircraft shelled out for Internet access (37 million passengers so far, according to the company's most recent count.) Now, the "take rate" is up to 6.2%.

Room for Growth
I'm from the "trust, but verify" school. So I made a list of Gogo's announced airline clients and researched their respective aircraft fleets. I came up with a total of just over 1,800 planes. Gogo says 1,878 at year-end 2013 with a few more as of the end of April, according to the prospectus. These numbers are close enough for me to have confidence: Airlines have several thousand planes on order, and new jets go into service fairly regularly.

In other words, Gogo has the chance, just in North America, to add another couple thousand planes to its market.

That's more than twice what it has now, and that is just in North America.

Priced to Buy?
Gogo is here. It's already a true game-changer. Founded in 1991 to bring phone service to the skies, it's now providing data to millions of fliers. I think its network will continue to expand, both in capacity and speed (quality) and in fleet count (quantity). This is a very appealing position to be in, especially when turning a profit appears to be so close.

However, this IPO was poorly priced. Its underwriters shot for the high end, and they missed. Shares have fallen as low as the $10 range since they debuted at $16. Today, they are in the $10 to $11 range.

Gogo still has a lot of hurdles and may take a few years to reach its full potential, but I wouldn't be surprised to see it become one of my best-performing picks of 2013.

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