January 3, 2000 Globalstar Twinkles in 2000
By Richard McCaffery (TMF Gibson)
January 3, 2000
Considering the fate of its peers last year, satellite telephone operator
Globalstar's (Nasdaq: GSTRF) 1999 performance is amazing.
It either points to investors' ability to differentiate between Globalstar's
business model and that of ill-fated Iridium (Nasdaq: IRIDQ), or to investors'
hunger for anything with a heartbeat in the telecommunications sector.
After hitting a 52-week high of $49 1/2 December 31 following positive
reports in a Wall Street technology newsletter and receiving regulatory
approval to offer services in the United States, Globalstar took off again in
trading today. It hit a new high of $53 3/4 this morning before settling down
around $47. It has more than doubled in the last year.
Rather than try to figure out what's moving the stock (I have no idea), better
to take a look at why investors are so bullish about its outlook in light of
Iridium's and ICO Global's (Nasdaq: ICOFQ) Chapter 11 bankruptcy
filings.
Established in 1991, Globalstar plans to offer mobile and fixed telephone
services worldwide from a constellation of 48 satellites. The company will act
as wholesaler, selling capacity to local telecom providers in more than 100
countries. Widespread commercial service is expected to begin in early 2000,
and limited trials have been underway for more than a month. It costs about
$1,500 for a Globalstar phone.
In designing its system and setting up a business model, Globalstar took a
smartly different tact than Iridium. First, all the complexity in the Globalstar
system is on the ground, not in the spacecraft, which cuts costs and makes it
easier to fix bugs. This helps the company pass savings on to customers in the
form of lower per-minute charges. When Iridium tried charging $4 to $7 per
minute for calls, which its cost structure demanded, consumers made it clear
they wouldn't ante up. (The company has since reduced costs.) Globalstar, on
the other hand, has worked out agreements with many partners that cap
domestic calls at $1.50 per minute and international calls at $3, according to
research reports.
Globalstar also is casting a wide net for customers, most notably in developing
countries with little terrestrial infrastructure, whereas Iridium focused on the
business traveler and underestimated how the rapid adoption of cellular would
undercut the need for its services.
If satellites can succeed anywhere, it's in underdeveloped areas, where it's a
lot cheaper for providers to blanket a region with satellite spot beams than to
dig up roads and lay fiber.
Robert Kaimowitz, an analyst at ING Barings, said about 280 million people
live outside areas that offer basic telephone services, and between 10% and
15% of these consumers could afford to pay for Globalstar.
Globalstar expects to have 650,000 customers by year end, needs 250,000
to reach operational breakeven, and has a total system capacity of 7.5 million
users.
For investors, the potential to provide phone services to a new generation of
worldwide consumers is the brass ring Globalstar's grabbing for. In essence,
the company, with its army of well-positioned partners and service providers,
represents an attractive way to invest in burgeoning telecom markets in Asia,
Latin America, Africa, and other developing areas.
But it's enormously risky. The company isn't profitable, has little revenue, and
is highly leveraged. The prudent investor should demand super-high returns for
an investment that carries the kind of risk Globalstar shoulders. Despite its
compelling business model, you could argue there are other telecom
investments that provide at least equal upside potential and are already
generating lots of cash, such as Texas Instruments (NYSE: TXN) and
Nokia (NYSE: NOK).
As with any satellite system, Globalstar and its investors spent a boatload
building and deploying spacecraft, forging partnerships with investors and
handset manufacturers, and ramping up for service. Through December 31,
Globalstar estimated system costs at $2.7 billion, plus $490 million for interest
expenses, and $677 million in pre-operating losses. Those costs will likely
continue to rise.
Unless you really like the business or understand the technology, it probably
makes more sense to invest in a satellite infrastructure company rather than a
specific player in this arena. Examples include Hughes Electronics (NYSE:
GMH) and Loral Space & Communications (NYSE: LOR), Globalstar's
leading investor.
Not only are these companies leading satellite manufactures, they're diversified
communications players with interests in signal delivery services, broadband
offerings, ground station equipment and services, and other satellite
applications. |
