Gogo Q2 2024: Well Positioned to Soar on Tailwinds (NASDAQ:GOGO)

I am revising my previous analysis of Gogo, Inc. (NASDAQ:GOGO) in light of Q2 2024 earnings and the recent SmartSky closure announcement.

We previously rated Gogo as a strong buy for the following reasons:

• The DCF analysis suggested: a price target of $18.40, up from $8.90 at the time.
• Gogo’s core services business continued to grow quarterly despite expected equipment volatility.
• Demographic trends for private jet ownership have largely been in Gogo’s favor.

Since then, Gogo has continued to decline and is down 16%, while the S&P 500 is up more than 8% over the same time period.

In my view, the market continues to ignore Gogo’s strong long-term fundamentals and growing services business while focusing on the near-term volatility of equipment sales and one-offs. The service business continues to grow and set records and major product launches will follow in the next few months. In addition, demographic trends are creating an increasingly strong tailwind for the business.

While there is downside risk from the Starlink aviation product, the two products do not fully overlap, and another competitor has just gone through de-risking.

Given all of the above, I maintain my Strong Buy rating with a price target of $13.10, a 74% upside from today’s price.

Q2 earnings recap

Gogo reported earnings on Aug. 7, beating revenue by $2.3 million but missing consensus EPS by $0.03.

Most importantly, Gogo set another service revenue record, which is fundamental to my view of the company’s value. Equipment recognition and synchronization will always be volatile, but service revenue provides stability to the business.

Despite revenues being essentially flat, profitability declined due to G&A and other expenses. These are mostly one-off items related to vendor funding issues and SmartSky litigation, not ongoing operating expenses.

Revenue guidance was removed, although profitability guidance was unchanged and driven high, while free cash flow actually increased due to FCC reimbursements offsetting CapEx.

The market reacted negatively to these earnings despite the strength of the core business. It’s true that the numbers on the surface looked tougher this quarter, but stripping out volatility in one-time costs and the timing of equipment revenue, it continues to be a strong and growing business that’s cash flow positive despite heavy investments in growth. .

ASSESSMENT

I’ve updated my ongoing DCF analysis and used more conservative estimates, generating a lower target price range, now that we have a better idea of ​​Starlink’s competitive positioning, as well as the timing of revenue growth and profitability. We made the following basic assumptions in the model:

• Gogo provides lower-level guidance on management’s earnings, profitability and cash flow. This guidance is supported by the competitive landscape and industry growth expectations that I will discuss below
• 12% discount rate based on estimated WACC
• Long-term growth rate of 3%, pulled back by one percentage point from global private aviation growth, as a conservative assumption and assuming costs decrease as revenue shifts away from equipment and toward services.

This analysis generated a price target of $13.10, down from the previous target of $18.40, but still 74% above today’s price.

Wall Street lands in a similar range with a price target of $12.50. Note that Wall Street’s range of $10.00 to $15.50 starts with 32% upside from today’s price.

Insider activity is also a strong signal for the company. There have been no internal sales since December 2023, but more acquisitions and more grants taking place.

Demographic trends strongly favor Gogo

Demographic trends in the private jet industry continue to accelerate in Gogo’s favor. The business jet market in North America alone is expected to grow at a CAGR of over 5%, and Asia Pacific is actually the largest growth market for jets right now.

Furthermore, the penetration of this market is low for in-flight wifi. Industry experts and Gogo’s management team both peg penetration at around 40%. So both market and penetration growth is an opportunity for Gogo.

Beyond the market itself, private jet owners are getting younger, which increases the demand for wifi.

From Q3 2023 revenues, demand was seen as follows:

• Silent Generation – 65% demand
• Baby Boomers – 78%
• Gender X – 87%
• Generation Y – 87%
• Generation Z – 98%

And according to a recent study by Jetcraft, 28 percent of private jet buyers are now under 45, up from 15 percent 10 years ago. This allays concerns about generational changes reducing demand for private jets.

Negative risk

The main downside risk for Gogo is its new in-flight connectivity product Starlink. By both Gogo’s assessment and the independent assessment, there is some overlap between the products, but not complete overlap. Starlink’s product is more expensive and not custom designed for aviation, so it’s heavier and doesn’t fit smaller aircraft well.

Another factor mitigating this risk is that SmartSky, Gogo’s main Air To Ground competitor, shut down last week. While some of the effects of their lawsuit against Gogo are ongoing, all of their former customers have been left without service, which could have accelerated Gogo’s business.

Verdict

Gogo’s strong and growing services business combined with favorable demographic trends have created what I believe is a phenomenal long-term value play. Markets continue to overreact to raw financials without context and it has created a great buying opportunity.

While there are risks to the business from Starlink’s product, Gogo has a lot of space with small jet products that Starlink can’t match and a growing market with low penetration.

I maintain my Strong Buy rating on Gogo with a price target of $13.10.