More bad press for the satellite industry; this should bode well for us. Here's hoping that our little company will be on analyst's lips in the very near future:
Thursday January 6, 10:34 am Eastern Time
worldlyinvestor.com Sector of the Day
Dangerous to Wish Upon Globalstar
By David H.M. Baker, Columnist
Like Iridium before it, satellite telecommunications firm Globalstar could burn up in the atmosphere.
Almost a year ago, I warned investors about problems in a then-leading satellite telecom company, Iridium (OTC:IRIDQ - news). Late last year the company filed for bankruptcy.
My argument then was that the company's strategy was flawed because the rapid evolution of new technologies undercut its business model.
I now believe that another leading player and arguably the most advanced satellite telecom today, Globalstar (Nasdaq:GSTRF - news), is also destined for trouble.
Indeed, Globalstar has been falling sharply this week after hitting an all-time high on Jan. 3. The stock retreated sharply that day, and fell again yesterday in the wake of a downgrade by Merrill Lynch.
The satellite industry is one of the first sectors to feel the full force of emerging technologies on its business. Globalstar has the most advanced technology of all its peers. Yet new technology will be its undoing.
Too Pricey
The basic problem is that Globalstar's service is too expensive to compete with the terrestrial wireless phone industry. I don't believe there are enough people willing to pay $1.50 per minute for domestic calls -- or $3 per minute for international calls -- and shell out $1,500 per telephone to have global service.
This is especially true when the terrestrial competition over the next 18 months will be charging way less per minute and practically giving the phones away.
These competitors include any of the digital telecommunication players like Sprint PCS (NYSE:PCS - news), Vodafone (NYSE:VOD - news) or wireless data players Winstar (Nasdaq:WCII - news) and Teligent (Nasdaq:TGNT - news), not to mention Internet communications firms like Ibasis (Nasdaq:IBAS - news).
In essence, the new technologies have allowed these companies to leapfrog the entire satellite-based carrier business model.
It's interesting that Globalstar spin doctors are singing virtually the same song as Iridium and ICO Global (Nasdaq ADR:ICOFQ) flacks sang a year ago. Both companies are now near death.
Preposterous Proposal
The recent excitement and run-up in Globalstar's stock price around the announcement that the Federal Communications Commission (FCC) had authorized the sale of satellite phone services to customers in the US is ludicrous.
Who in their right mind is going to pay satellite rates when they can sign up for a local wireless service with superior quality at lower prices? There are only so many people in remote places looking for phone service - certainly not enough to support Globalstar's huge $4 billion investment.
The other consideration here is that the satellites the company is using only last six to 10 years before they have to be replaced. So unlike a terrestrial network that may need periodic upgrades, satellite networks have to be replaced at least every decade.
The other flag the company waves in support of sales is the vast opportunity in developing countries. But I think these potential customers will more likely use the satellite-linked pay phone stations that are popping up instead of a satellite phone.
Wishful Thinking
There is also talk of Globalstar becoming a service wholesaler to the terrestrial telecom providers. I don't see this as a likely outcome either because of cost issues. Again, competitors with undersea fiber networks like Global Crossing (Nasdaq:GBLX - news), Qwest (NYSE:Q - news) or Level 3 (Nasdaq:LVLT - news) will be able to deliver superior service at much lower costs.
This will probably occur over the next 18 months as Ericsson (Nasdaq ADR:ERICY), Nokia (NYSE ADR:NOK) and Motorola (NYSE:MOT - news) develop an integrated digital/analog and data service.
Globalstar has been successful raising money; the company now has 282 million fully diluted shares outstanding. This has resulted in a stratospheric market capitalization, excluding debt, of $13.25 billion. I believe that capital will soon become increasingly difficult to find as investors take a hard look at the company's prospects for profitability.
Burn Baby, Burn
And indeed, those prospects aren't too bright. The company is burning $125 million a quarter, and recently borrowed $400 million on two term loans. The cash burning is especially critical since $250 million of the funds raised through September must be repaid by June 30, 2000. The company is predicting it will break even by the third quarter of 2000; I think it's more likely the Boston Red Sox win the next World Series.
In my mind it's game over for Globalstar. It may take a while for it to crash, but I think a year from now Globalstar's tenuous position will be apparent. The only saving grace would be for it to offer its services at prices competitive with terrestrial carriers, but I doubt its business model could support such a radical pricing scheme.
Sell. And While You're at it ...
Here's my advice: If you own it, sell it and be thankful you got the opportunity to benefit from the recent run up.
By the way, I would also be a seller of Loral (NYSE:LOR - news); they're the primary guarantor of the Globalstar loans. If this satellite telecom falls to earth, it won't bode well for Loral shares either.
David H.M. Baker CFA is an analyst for worldlyinvestor.com and president of Rivendell Capital Management, a private-client money management firm. His twice-weekly column covers stocks that he feels are undervalued relative to their peers.
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Wishing everyone a prosperous and Happy New Year!
Carol |
