AST SpaceMobile Stock: Progress Towards Commercialization

Shares of AST SpaceMobile (NASDAQ:ASTS) took off Monday morning following news that the company’s test satellite, BlueWalker 3, was in orbit and unfurled. But this strong performance wasn’t to last and shares ended the day trading for $7.99 apiece. Following this significant announcement, price volatility, and the company’s earnings call, I wanted to provide readers with an update after my deep dive into AST was published in July.

BlueWalker 3

After BlueWalker 3 was successfully launched into orbit on September 10, investors had been patiently waiting on an update from AST regarding the status of the satellite. Monday’s announcement was exactly that.

To people without much understanding of the satellite industry or AST’s core technology, the significance of BlueWalker 3 successfully unfurling may not be immediately obvious. But, as explained by AST’s CEO, Abel Avellan, on the company’s Q3 earnings call, the company’s satellites are now substantially lower-risk. The unfurling mechanism itself, which is a critical component of being able to launch a 690-square-foot satellite array, is now a validated procedure, as is the ability for the satellite to operate in the orbital window it was designed to operate in.

Because the conditions of space are impossible to recreate on earth, many of these procedures and mechanisms are prone to fail upon initial testing. By succeeding on all fronts, including having the satellite travel at 70,000 mph (approximately 4x faster than the natural orbital speed), AST has substantially de-risked its hardware. One could even argue that, with basic radio frequency calculations indicating that AST’s satellites are powerful enough to achieve 5G connectivity, the company’s hardware risk at this point is quite minimal.

It may seem a bit early to make such a significant claim but, reviewing the information that is publicly available, I do think it’s a fair statement to make. BlueWalker 1 and 2 were able to validate the ability of AST to establish a connection between a standard cell phone and a satellite and, as noted earlier, the power of BlueWalker 3, and future BlueBird satellites, appears more than sufficient to establish a 5G connection. The last great challenge, that AST had yet to verify, was the ability for the satellite to design as expected in space. This has now been accomplished.

AST SpaceMobile’s Next Steps

While it’s great to have peace of mind on the company’s satellite architecture and operation, I don’t believe that was the greatest risk that investors faced. Rather, as I discussed in my previous article, my greatest concern at the moment is the company’s ability to process frequencies at significant scale and integrate into its partners’ LTE networks through virtual LTE processing. While AST can’t do much to test scale until the constellation is up and running, BlueWalker 3 is preparing to complete testing procedures with a number of AST’s partners.

In May, AST announced that the Federal Communications Commission (“FCC”) had granted an experimental license to AST to test its direct-to-phone connectivity in Texas and Hawaii. This testing will be carried out with the company’s U.S. partner, AT&T (T). At the same time, AST will conduct testing with Rakuten in Japan, Vodafone in Europe and Africa, and its other MNO partners to test its 5G service in every continent.

As virtual radio access networks (“vRANs”) continue to grow in popularity, especially in 5G networks, the general technology risk of AST being able to virtually integrate into partner LTE networks continues to fall. To be completely honest, I’m not sure AST would’ve been able to pull off this backend processing, which is critical to the service, without the rapid growth of vRANs. One of AST’s closest partners, Rakuten (OTCPK:RKUNY), is a leading developer of vRAN solutions.

Moving past the technical, virtual, aspects of AST’s planned operations, let’s take a look at how development of the physical backbone of AST’s network is progressing. Currently, AST expects to launch its first five BlueBird satellites by the end of 2023. It has already begun the manufacturing process of these satellites, including acquiring most of the materials needed to assemble the satellites. 2023 will also include the set up of ground infrastructure needed to connect to AST’s partners’ terrestrial networks.

For the following year, 2024, focus will be on ramping satellite production to an output of six satellites per month. The company aims to reach this goal by the end of 2024, aided by its second manufacturing facility. AST has already invested $50 million into the facility, aptly named “Site 2”, with just $5 million still needed to complete it.

Should AST reach its goal of manufacturing six satellites per month by the end of 2024, it will be able to manufacture its entire 110-satellite constellation before the end of 2026. Though, with limited launch availability and the multi-month process of bringing an orbital satellite into operation, the company may not have a fully operational constellation until 2027. Assuming everything goes to plan.

With five satellites expected to be launched by the end of 2023, AST looks to be on track to begin monetizing its constellation by the end of 2024 with a further 15 satellites. A further 58 satellites after the first 20 would provide global coverage, allowing AST to open monetization capabilities even further.

Barclays estimates that, after launching its first 20 satellites, AST will be able to generate $60 million in revenue. The following year, after unlocking global coverage, total revenue is projected to jump to $276 and, by the time 2028 rolls around, revenue will be $1.296 billion with EBITDA of $1.191 billion.

I’ve adjusted the estimates from Barclays to more closely align with updated guidance on launch timing and I selected the Barclays report because, as discussed previously, it contains one of the more pessimistic revenue outlooks. Following this estimate, and applying a P/E of 20 to support strong growth, the company’s value would be $23.82 billion in 2028. Currently, it trades at a value of 1.38 billion.

This 17x upside doesn’t even take into consideration prolonged growth opportunities which, according to Barclays’ forecasts, could present annual EBITDA of $5.476 billion for AST by 2032. Using a P/E of 20 again would imply a value of $110 billion, presenting 79x upside from today’s price. Now, any 10-year forecast will invite a number of uncertainties that prevent it from being terribly reliable, but it’s worth including to provide some color on the long-term potential of AST.

General Risks

But, as we know, things don’t often go to plan. This is especially true in the space-launch business, where any number of things could force multi-month delays. As such, investors should brace for the inevitability that things will not go to plan and, as such, full operation may not come as quickly as hoped.

Furthermore, as hinted to above, there remain significant technology risks that AST has yet to be able to test. As noted in my previous article, the proprietary nature of the technology prevents any in-depth due diligence from third-party sources, which only adds to the risk here. As such, keep in mind that, despite strong validation of the physical components of AST’s satellites, there is still high risk.

Even as AST continues to de-risk its core technology suite, the company’s financing risk remains ever-present. Operating expenses, which are primarily driven by R&D expenditures, are expected to remain in the high 30 million range for the next two quarters, falling to the low 30 million range in subsequent quarters. Capital expenditures are expected to remain around $12 million for the next four quarters, which includes the construction cost of the first five BlueBird satellites.

With $199.5 million in cash at the end of Q3, AST has just enough to support another 12 months of operation without raising more capital. Though, this assumes that the company doesn’t exceed its expected capital costs which, in this inflationary environment, isn’t really a safe assumption. Even if the company does manage to stay on target with its expenses, it would most likely elect to raise some funds before its cash balance falls below $10 million.

Regardless, it’s clear that AST will need to raise far more capital if it is to stand a chance of succeeding. In that vein, AST’s CFO, Sean Wallace, stated in the earnings call that the company may look to accelerate its business plan should it be presented with attractive financing terms. This would primarily relate to R&D efforts for future BlueBird designs, which could translate to a faster ramping period.

To limit risk, the first five satellites have been designed following almost exactly the same principles as the BlueWalker 3 satellite. However, future satellites will be designed with cost, power, and efficiency improvements. By expediting the R&D process, AST would be able to begin ramping production sooner than it may have otherwise expected.

Regardless, for the company’s first 20 satellites, AST continues to expect a per-satellite cost of ~$16 million, which totals $320 million. So investors should expect to face further dilution as AST works to finance its constellation construction. However, as discussed in my previous article, AST will also likely target the FCC’s 5G Fund for Rural America.

The $8 billion fund aims to subsidize 5G broadband development in areas that would otherwise be unlikely to receive any. The 2021 Senate Appropriations Bill expanded upon this, opening direct-to-phone satellite networks as potential support recipients. While investors shouldn’t consider this financing avenue to be done and dusted, it is an exciting prospect as a cheap source of capital.

Investor Takeaway

The substantial trading volatility following AST’s big announcement on Monday was a bit surprising, especially as the company ultimately ended the day down almost 10%. However, it does appear that the announcement had already been priced in to some extent. Shares rose over 20% in trading on November 11th, with some investors and astronomers pointing to the satellite’s orbital brightness and change in orbital pattern as evidence that BlueWalker 3 had unfurled.

With volume on the 11th almost a full 2.5x greater than the three-month average, I think it’s somewhat fair to assume that this had something to do with the lackluster reaction when the news was confirmed on the 14th. Alright, mystery solved. What else should investors be looking out for?

For most of the next year, not too much. Aside from the potential of AST to release some of its BlueWalker 3 connectivity data, which isn’t a guarantee, there won’t really be much else to update on. This news lull could present some downward momentum, which is something investors should be prepared for.

The final thing I’d like to note in this update is an interesting piece that came from a line of questions from Caleb Henry, an analyst from Quilty Analytics. AST SpaceMobile is considering switching its initial 20-satellite deployment from an equatorial orbit to an inclined orbit, altering the company’s initial target markets. I would expect the new target to be either Japan or the United States.

Because AST may be able to access the $8 billion 5G Fund for Rural America if it targeted the United States, I do feel that this is the more likely target if the company does ultimately decide to move away from the equator for initial deployment. Once the first 20 satellites are in operation, the company becomes almost completely de-risked and would have access to cheaper financing options. As such, obtaining cheap, and substantial, financing through the 5G Fund for Rural America at this early stage would be incredibly valuable and would spare investors significant dilution.

This is quite speculative, so please do treat it as such, but I do think it’s worth considering the motivation behind this potential change. If the change is indeed motivated by potential access to the 5G Fund for Rural America, I would expect that the company would reaffirm its original plan should it be unable to secure financing for its first 20 satellites.