Many companies went public via mergers with special purpose acquisition companies (SPACs) in 2020 and 2021. These public blank-check companies enabled private companies to avoid the slower and more rigorous initial public offering (IPO) process to hit the markets in a zero-percent interest rate environment that stoked investors' appetites for more speculative investments.
Unfortunately, most of them haven't worked out. Many have since gone bankrupt or trade well below their former highs today.
AST SpaceMobile (ASTS -2.13%) was in that group until shares exploded higher earlier this year. The stock is now approaching $30, a 550% return over the past year.
What changed the game at AST SpaceMobile, and more importantly, can investors still buy the stock today?
Why did the stock take off?
Mobile networks pass signals back and forth through antennas attached to millions of cell towers, small cells, and other infrastructure worldwide. But even today, certain areas, such as remote locations, lack quality network coverage. Satellite internet is becoming a solution. Elon Musk's Starlink has over 6,000 satellites in orbit providing internet service from space.
AST SpaceMobile is building a satellite network capable of cellular service, which would be like putting cell towers in space instead of on ground level. The company achieved 5G voice calls, and download speeds of 14 megabits per second (Mbps) a year ago but faces the costly task of building and launching enough satellites to make its technology commercially feasible.
The stock's explosive rally started in May when AT&T announced a commercial agreement with AST SpaceMobile going until 2030. The company has also received backing (investments and/or commercial contracts) from Verizon Communications, Alphabet, and Vodafone. This backing is a game changer because it shows demand for AST SpaceMobile's technology and gives the company resources to help build its network.
Investors should consider pumping the brakes
AST SpaceMobile successfully launched its first five commercial satellites into orbit in early September. The company has begun building its next 17 satellites and has stated an estimated need for 45 to 60 to provide full-scale text, voice, and data services across the United States. The company will probably take a few years to generate meaningful revenue. Analysts estimate it will generate just $6 million this year and $74 million in 2025.
Meanwhile, the stock now carries an enterprise value of $4 billion. In other words, buying the stock here means paying for revenue that's probably three years away at best. That also leaves no margin of safety to account for competition from Starlink, which has quickly launched over 100 cellular-capable satellites since its first in January, or potential dilution, since AST SpaceMobile will undoubtedly need more cash than it currently has to build its network.
Management filed to sell up to $400 million in stock a few weeks ago, and it wouldn't be a shock to see more shares issued at some point. Selling new shares when the stock is expensive is a wise way to raise cash, but it still dilutes investors and eats away at the stock's investment upside.
Here is the best way to invest in the stock
AST SpaceMobile is a risky stock. The company has several years of building out its network ahead, and there's no telling today exactly how long it will take, how much it will cost, what regulatory hurdles it may encounter, or even what its long-term margins and financials will look like if it all pans out. Will Starlink, which is currently ahead of AST SpaceMobile and has far deeper pockets, pressure margins by offering its network at a lower price?
Telecommunications is already ruthlessly competitive in the United States. The most expensive U.S. telecom carrier stock, T-Mobile, trades at just 3 times sales, implying that AST SpaceMobile, assuming it has a similar financial profile to a wireless carrier, is pricing in over $1 billion in revenue at its current price.
I could be too conservative, but caution can save an investor from big mistakes. If you do believe in AST SpaceMobile or at least want to own the stock, consider buying shares slowly using a dollar-cast averaging strategy. Even if the stock exceeds expectations, it will probably be volatile along the way, and investors who keep some cash handy may be able to buy opportunistically. Don't chase the stock just because it's up big.
