Buyside Notes

GOGO – A Monopoly in the Making

Gogo Inc (GOGO)
Stock Price: $22
Diluted shares: 84.2MM
Market cap: $1.85BN
Cash: $266MM
Working capital deficit, ex-cash: $54MM
LT Debt: $236MM
Other Liabilities, not including Deferred Taxes and Lease Incentives: $14.4MM
EV: $1.89BN

One of my secular investment themes is mobility (which I plan on covering in detail in a future note). GOGO is a pure-play on this theme and happens to be a really interesting story in a largely untapped niche. While I am a value investor and generally avoid overpaying, I do make exceptions when I believe a company is in the process of building a monopoly-like position in a large market. GOGO fits this profile which is why I’m a buyer post the 4Q13 earnings drop. Here are my notes:

GOGO brings the mobile internet age to aircraft via 3 products: Gogo Wifi, Gogo Vision, and Gogo Text & Talk. Each of these products could stand on its own; together, they make Gogo the communications nerve center for an aircraft and the undisputed leader in the industry. Some specifics on each product:

Historically, Gogo Wifi has used a network of mobile broadband cellular towers that are beamed up instead of beamed down to deliver internet connectivity to aircraft passengers in the US (known as Air-to-Ground). However, recently Gogo developed a proprietary hybrid technology that combines Gogo’s Air-to-Ground network with the best aspects of existing satellite technologies (known as Ground-to-Orbit). This new Ground-to-Orbit (GTO) technology represents a leapfrogging of standard satellite service capabilities, expanding Gogo’s network capacity 20 fold from 3 megabits per second to 60 mbps (and that 60 mbps will only go up as newer satellites are launched). What Gogo has developed is a low profile antenna with high spectral efficiency and low latency. For consumers, nothing in the market is faster, more efficient or more reliable (for a technical discussion, see here – the video starts at 5:30 and ends at 24:30). For airline partners, Gogo’s GTO means they save tens of thousands of dollars each year in fuel burn versus the larger and heavier antennas on the market today. It’s a win / win. And finally, what this new GTO technology means for Gogo’s shareholders is that Gogo is now ready to begin its worldwide expansion. The network will be ready to launch in 2H14 and the first Gogo customer to commit to the service is Virgin America.

Firsthand Tech Fund (SVVC) – The Hall of Mirrors Trade

Mar 17

Imagine standing at the beginning of a very long hall of mirrors. What you’d see as you looked down the hall is your figure repeated over and over again almost to infinity.

This analogy can be applied to investing: a winning trade that you can repeat over and over is what’s known as the Hall of Mirrors trade.

When you find a Hall of Mirrors trade, you’d better not tell anyone because your profits will soon become someone else’s profits. And this business is tough enough without giving away all of your trade secrets.

But in rare cases, it’s worth pointing out a Hall of Mirrors trade to drive your own returns. Let me explain by way of an example.

Meet Firsthand Technology Value Fund (SVVC).

Company X – Email Me, Then Buy It

Mar 6

I don’t make a habit of writing about small cap companies with very little liquidity given the difficulties of entering and exiting a position, but today I’m making an exception because I believe this Company will grow into a much larger one over the coming years (and therefore eliminate the share liquidity issue). However, given current trading dynamics of the stock, I have kept the Company nameless below. If you’d like to learn more just send me an email at: analyst at this domain.

Company X provides direct investment exposure to one of the world’s fastest growing economies without the risks typically associated with emerging market investment opportunities. This company possesses all the qualities one would look for in a great long-term investment:

A management that is 100% aligned with shareholders. The founder takes no salary, stock options, performance allocation, bonus or anything else. He started the company because he wanted to invest his own money in the country (he has invested the majority of his personal wealth). In total, Management owns 33% of the company and 70% – 80% are owned by roughly 20 people / institutions.
A simple, predictable business model with near zero operational risk. The founder started the company after searching for ways to get early access into one of the world’s biggest secular growth stories. But he couldn’t find anything investible – most of the available opportunities required taking on very large operational or financial risks (mining companies, for example). One area he keyed in on was real estate: it offered very strong leverage to the growth of the economy without any of the operational risks. So he built a company focused on acquiring, constructing and managing real estate in the center of the country’s capital and largest city. He bought in early at discounted prices and put together land packages for current yield and future development. The “future development” part is where the blue sky upside comes from.

Pacific Ethanol (PEIX) Blows It Out

Feb 27

My first public note was on PEIX – you can read it here. Following their blow-out earnings last night (which I fully expected as detailed in the model you can find in that note), the stock has shot up from sub-$4 to over $12, a multi-bagger in just 8 weeks. So today I received a question about what to do with the stock at these levels. My response is simple:

Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the sitting.

– Jesse Livermore

Put a X% trailing stop loss and let it ride (where X is equal to your drawdown tolerance).

Boston Beer (SAM) – Risks Are Building

Feb 26

Four items stood out on the SAM 4Q13 conference call – it’s becoming clear that significant risks to the bull case are emerging:

“Our core shipment volume for the fourth quarter was approximately 941,000 barrels, a 29% increase over the fourth quarter of 2012.”

Buyside Notes: If I average out the volume growth over the last 4 December quarters, I come to an expectation of 961,000 barrels (vs a reported 941,000). This was a miss in my eyes; not good for a stock valued at SAM’s multiple.

“we expect a continued high level of brand investment and capital investment as we pursue growth and innovation. We are prepared to forsake the earnings that may be lost as a result of these investments in the short term as we pursue long term profitable growth. […] We intend to increase investments in adverting promotion and selling expenses by between $34 million and $42 million for the full year of 2014, not including any increases in freight cost for the shipment of beer products to our distributors.”

Buyside Notes: Look for margins to come down. Also not good for a stock valued at SAM’s multiple.

“We are continuing to evaluate 2014 capital expenditures and currently estimate investments of between $160 million and $220 million, which could be significantly higher depending on capital required to meet future growth.”

Buyside Notes: Let’s do a quick look-back on the company’s CapEx guidance:

2Q13: “The Company is increasing its 2014 estimated capital expenditure range to between $100 million and $130 million from $30 million to $50 million.”

3Q13: The Company stated that 2014 CapEx would be “between $140 million and $180 million, an increase in the range from the previously communicated estimate of $100 million to $130 million.”

4Q13: “The Company expects to invest between $160 million and $220 million in 2014”

In just 6 months, the CapEx plan has moved from $40MM to $190MM (midpoints). Isn’t it strange that the Company is having such a hard time planning their capital investments? What does this say about management’s forecasting ability?

Note that in 2013, the Company spent $104MM on capital investments so CapEx will ~double Y/Y. Not good for FCF.

“we amended our line of credit to increase the amount available from $50 million to $150 million and extended the schedule exploration date to March 31, 2019.”

Buyside Notes: CapEx is going to eat up their current cash ($50MM at YE13) and their operating cash flow ($100MM in 2013) and the company will likely be borrowing money in 2014 (they have 0 long term debt at YE13). This isn’t a big deal given the strength of their balance sheet, but on the margin increases risks to shareholders.