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Is Gogo a Buy?

Rick Munarriz, The Motley Fool

Shares of Gogo (NASDAQ: GOGO) are moving higher this week after the company announced preliminary financial results, but this doesn't mean that passengers can unbuckle their seatbelts and move freely around the cabin. The provider of in-flight connectivity still faces some serious headwinds in the future, and its stock continues to trade well off of its all-time and even recent highs.

Gogo shares have recovered nicely since bottoming out in December, up 73% since then. However, the stock would still have to more than double from current levels to establish a fresh 52-week high. Setting all-time highs would be a taller order, as the shares are fetching 87% less than they did when they peaked in late 2013. However, with momentum on its side -- for a change -- and the company in the process of a long overdue upgrade to its fleet, it's worth exploring if it's finally safe to start establishing a position in Gogo. 

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Image source: Getty Images.

Turbulent times 

Gogo sees revenue clocking in between $197 million and $200 million for the first quarter, 14% to 15% below the prior year's results and just below the nearly $202 that analysts were targeting. This may not seem like applause-worthy news, but it does ease concerns that things could've been worse. The financial period ended more than two weeks ago, so the tight top-line range is pretty sure to be accurate by the time that Gogo makes it official when it reports complete quarterly results on the morning of May 9.

The news gets better on the bottom line as the preliminary net loss between $17 million and $20 million that Gogo is pre-announcing for the quarter is a lot less red ink than the $27.4 million it spilled in the first quarter of last year. Gogo's adjusted adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is expected to roughly triple to between $35 million and $38 million for the quarter. 

Investors unaware of the cutthroat nature of providing online connections while airborne may be surprised to see revenue going the wrong way. Isn't surfing the web while surfing the sky becoming more necessary for passengers? Aren't more airlines including connectivity at no additional charge to enhance bookings? All of these trends do favor the providers of broadband connectivity for the aviation industry, but Gogo is no longer the niche darling. There are a lot of players in the field it helped pioneer. 

Gogo's early lead in this niche when connections were spotty and slow as molasses also might be more of a brand liability than an asset. Gogo is working hard to update its fleet with faster connections. It began this year with 1,296 net commercial aircraft outfitted with its 2Ku satellite in-flight connectivity, 477 more than it had a year earlier. The new connections are naturally faster but also more reliable, with 98% availability in the month of December.

There were some initial hiccups to the new platform, as the antennas proved sensitive to de-icing fluid necessary for planes to get through the winter season. However, recent de-icing modifications have licked that problem. Gogo began the year with a backlog of roughly 1,000 2Ku aircraft.

There are some catalysts for growth, but Gogo remains a risky stock. Even when revenue was positive during the fourth quarter of last year it was solely the handiwork of equipment revenue growth. The losses should continue until at least 2022, and Gogo's own guidance calls for a decline in revenue this year. The stock may be riding high over the past four months, but there are headwind pockets that will get in the way of shares returning to the double digits anytime soon. 

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.