worldlyinvestor.com
The Latest on Globalstar
By David H.M. Baker
Columnist
01/10/2000 8:30 AM
The response to my recent column on Globalstar (GSTRF: Nasdaq) has been nothing short of remarkable. I must say that the company has some vociferous shareholders and if nothing else they represent a very loyal base of support for this controversial stock.
I am writing this follow-up to answer many of those shareholders to whom I have been unable to respond and to clarify any misunderstanding relating to my viewpoint on the stock.
No Position in Globalstar
I have no position in the stock (long or short) and have no ax to grind with the company. I must say that I have the greatest respect for Bernie Schwartz as he is betting the farm on this company and his unwavering belief in Globalstar is remarkable.
Further, he is one of the few individuals that has been spending his hard earned dollars to increase his ownership of these shares while other large holders and a director have been selling these shares over the past year. (The insider selling certainly raises some serious questions in my mind and absent Schwartz's purchases would be a major negative.)
Potential Demand
I am the first to admit that there are unquestionably many spots in the world that are currently unable to secure wireless that could potentially utilize satellite service. However, I still contend that there are not enough of these users to support the Globalstar business model. All it takes is a little common sense here: How many potential users are on oil rigs or in the Australian outback?
To make a simple point I have set forth below a few calculations that point out what type of demand the company would have to generate to cover its operating costs.
The company is burning $125 million per quarter in interest and operating costs. This does not include capital expenditures. If I assume that the average cost of a call is $2.25 which is based on 50% at local level of $1.50 and 50% at International rate of $3.00, Globalstar would need to generate 55.5 million minutes of calls per quarter or 617,283 minutes per day to just cover the cash burn rate.
If the average customer uses 150 minutes per month (a very aggressive amount) the company would need to have 123,456 customers on day one, just to be at break even.
This may not seem like much when compared to the rapidly expanding base of terrestrial wireless consumers, but it is when you consider the rates.
Achilles Heel
At the time Globalstar was formed I agreed that it was a great idea. However, the executives could never have envisioned the pace of technology development when they formulated the original plan for the company.
The company's Achilles heel is the fact that it has spent vast sums of money (more than $4 billion) developing an infrastructure that I believe may be usurped by many emerging technologies. These new technologies will ultimately threaten the company's fundamental business model by delivering cheaper service to its target user base.
Lastly, satellites do not have an infinite life and must be replaced over time, which represents an ongoing and huge capital investment. That places Globalstar at a distinct competitive disadvantage compared to the terrestrial players.
Competition
I was taken to task for mentioning a number of companies that many readers could not possibly envision as potential competition for Globalstar, because those firms are terrestrial-based providers.
This is exactly my point. The terrestrial providers are the emerging competitors and this is the central thrust of my argument. For Globalstar to be successful in my mind it will need to grab share away from the terrestrial providers, which I believe is a long shot given the pricing of its service.
Like many of my readers, I believe the company will have to evolve into a wholesale model for its service, however the company contends this is currently not a part of their strategy.
If it does in fact move in this direction, companies like Global Crossing (GBLX: Nasdaq), Level 3 (LVLT: Nasdaq) and Qwest (Q: NYSE) will fight for users and offer much better prices. These terrestrial wholesalers will have wireless nodes connected to its fiber nets filling many of the current "gaps" in wireless service.
Risk and Return
The bottom line is that when you make any investment you must gauge the incremental potential return for each incremental level of risk. At Globalstar's current valuation the risk of holding these shares vastly outweigh the potential upside of owning them.
The company's huge market capitalization leaves it very little room for error and this is a major factor considering the riskiness of the business. Unlike most telecom plays, a lot can go wrong that is totally beyond the control of management and is totally unrelated to the fundamental business model.
What I am talking about are malfunctions in the operation of the satellite, launch or other problems, which are not that uncommon. In my mind there are many other opportunities in this market that offer considerably less risk and at least as much upside inherent in Globalstar's shares.
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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