This teaser ad has been running for several weeks now, and the article below was originally published on January 21… but we continue to get lots of questions about it, and the story has changed pretty dramatically in the interim, so I’m re-posting it here for you and have added an update at the end.
There seems to be no limit to the number of different 5G pitches we can absorb… the newsletter pundits of the world have their teeth into this latest telecom trend, and they’re not letting go until they’ve signed up every possible subscriber.
The promise this time is that a small company possesses the “Master Key” technology for 5G, enabling it to solve 5G’s well-known problems (like, the fact that some of the wavelengths used mean the signals can’t get through walls, or even windows or leaves)… and the fella making the promise is E.B. Tucker in ads for Casey’s Strategic Investor ($49, renews at $129/yr).
Here’s a little taste of the ad:
“… giant telecom firms — like T-Mobile and Sprint — have focused their attention on ONE tiny company…
“That owns a powerful new technology…
“That instantly fixes 5G’s glitch…
“And should reward early investors with a windfall.
“My research indicates this tiny firm’s shares could soar 9,700% in the months ahead.”
9,700% is an awful lot, no?
Here’s Tucker’s take on the challenges for 5G, and how this little company can solve them:
“5G’s flaw could slam the brakes on its nationwide roll out.
“That’s why, recently, a key telecom executive made a shocking confession…
“T-Mobile’s Chief Technology Officer let slip:
‘[To get 5G coverage] you’ll need no walls, no windows, no buildings, no trees… and lots of luck’ ….
“… the short waves that 5G Wi-Fi uses to pull off lightning-fast internet…
“They’re not suitable for wide area coverage.
“Right now 5G signals can be blocked by virtually any object…”
So how, dear friends, does this problem get solved? More from Tucker:
“But here’s where the 5G story takes an interesting twist — which could make early investors a fortune.
“One tiny company that’s 1/500th the size of the big telecoms…
“And much less than 1/10th the size of Apple, has emerged with an ingenious solution….Are you getting our free Daily Update
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“It’s a miraculous technology that looks like an ordinary black box…
“That promises to unleash the true power of 5G.
“And take it nationwide — practically overnight.”
So what else do we learn about this company? The ad drops the clue that they have “over 124 patents”, so that’s something.
And we get some hints about the customers they’re already working with:
“As we speak, huge telecoms are already knocking on its door…
“It’s inked multi-million-dollar contracts with T-mobile and Sprint.
“Including major networks in China, U.K, France, Japan, Australia, Russia, and Brazil.”
And we’re told that “its shares trade for less than $10 a pop…”
So what’s the solution here?
“What this tiny company has achieved is incredible.
“Working from the prototype used by the armed forces, they’ve built a new device…
“Powerful enough to transmit high-bandwidth 5G signals…
“To every corner of the country.
“Without littering the landscape with thousands of expensive and unsightly towers and antennas.”
OK, so somehow they’ve fixed the “can only transmit a short distance” problem? How so?
Tucker explains it like this:
“… big telecoms with two choices:
“One: They can build and place tens of millions of cell antennas every few 100 feet.
“Connected by over 1.4 million miles of fiber optic cables…
“Enough to circle the earth 353 times.
“Which — by the way — could take YEARS.
“Or they can simply turn to the tiny firm I’ve discovered… and their “out-of-this-world solution” — which could solve the 5G flaw, with the turn of its master key.”
OK so what is this “master key” technology? Here’s more from the ad that explains some of it… and it’s essentially a satellite solution:
“This firm’s technology can transmit and extend short-range 5G signals…
“Then blanket huge areas with those extended signals for wide coverage and seamless connectivity…
“Using micro satellites that hover above Earth…
“This incredible technology is called: The SKY.
“Once the SKY is launched into orbit…
“It can distribute 5G signals over a wider area where earth-based cells, towers, and cables can’t cover.”
I’m not sure I get the logic here — how does a 5G signal from a satellite do a better job than a 5G signal from a tower? You’ve still got roofs and walls and trees and such in the way, no? Maybe once we’ve identified the answer this will become more clear.
So with that in mind, how about a few more hints? Here you go:
“Gazprom Space Systems (GSS) handpicked this company — in an 18 million deal — to help spread broadband coverage across all of Russia.
“Recently China Satcom selected this company’s ground-breaking technology to provide broadband connection across China.
“And in Peru, the company’s deal is worth $285 million — to provide connectivity support.”
OK, so now the Thinkolator can get us our answer… this is the Israeli company Gilat Satellite Networks (GILT).
So before we go much further, I should note that the stock surged higher over the past week and weekend (markets are open on Sunday in Israel)… and it has nothing to do with Casey Research or E.B. Tucker — there was a rumor that Gilat is in “advanced talks” to be acquired for $579 million by a “major multinational.” Which would be just about $10.50 a share, and the stock has surged to near that price already, despite the fact that this is still really just a rumor and might easily amount to nothing (or, of course, might be just the start of a bidding war if they get lucky).
So for those who bought last week on the Casey tease, you might get a quick 20-30% return if things work out well with this takeover rumor — though, of course, that’s a far cry from 9,700%, and it makes you wonder whether perhaps those dreams of insane riches are a bit out of touch with reality. After all, a company that thinks its going to ride a huge sales surge and be the “key” to 5G’s rollout worldwide doesn’t willingly get into talks to be acquired for a mere 15-35% premium.
Let’s assume that the takeover rumor is just a rumor, and the stock gives up some of those gains in the coming days as Gilat responds to the news… what’s the story with the company, and does it look appealing?
Well, they are well-positioned as a provider of satellite modem technology — they seem to have the lead in mobile broadband options for airlines, for example, and they are the leader in satellite backhaul services for 4G, which might give them a lead in 5G.
This isn’t something that fixes the problems with 5G, though — the problem it might solve is not that you need a lot of 5G antennas on the ground to provide seamless mobile 5G services, that will still be necessary even if they use Gilat’s satellite modems… the problem they can solve is the cost of running fiber networks for backhaul to each of those 5G base antenna base stations.
Or at least, that’s how I understand it after a few minutes perusing Gilat’s website — you can see their investor presentation here (or their 2019 Year in Review article here) which gives a good overview of what they see as their strengths and priorities (satellite broadband and in-flight broadband, in addition to cellular backhaul), and the “cutting-edge device” that he says is the “5G master key” seems very likely to be Gilat’s SkyEdge II-C system, their latest VSAT platform (VSAT is Very Small Aperture Terminal, essentially the “modem” that powers a two-way satellite ground station).
So the solution here, I guess, is that the many local 5G antennas and base stations that will be required to provide seamless millimeter wave connections could get their backhaul access to the network through Gilat’s satellite equipment and, presumably, low earth orbit (LEO) or other non-geostationary satellite constellations (closer to the earth = faster). I can see there being a market for that, as there is clearly a market for mobile broadband in airplanes and for broadband in areas with weak terrestrial telecom networks (like Peru, for example, one of their major customers). It doesn’t sound to me like this is the key for 5G, though, just that it might be a way to make rollout more efficient or inexpensive if the satellite backhaul is cheaper than providing fiber to all of the small cell base stations that will eventually be required.
Which might be a decent business, I don’t know — the company has been improving a bit in the past year or so, with a push from the private equity firms who own more than a third of the stock (and therefore make an eventual “exit”, perhaps through this rumored takeover, seem a bit more likely than would be the case for other small-cap tech names with growth hopes). They do have competitors, most notably the much larger Hughes business owned by Echostar (SATS), but they also have a much better balance sheet than the companies who actually have to pay to launch and maintain satellite networks (GILT sells the technology, they don’t own satellites themselves).
GILT is profitable, with earnings per share of about 31 cents over the past year, but they saw profits decline for about seven years until things started to pick up with their new investors and a new focus on efficiency and profitability in 2018. It would be a bit of a shame if a takeover bid cut off this improvement before it really got underway, but, of course, it could also be that this boost in profitability over the past 18 months or so is not sustainable. I can’t say that I know enough about the business to be sure either way.
So sure, GILT is an interesting idea… and they should be in some key growth segments with the increased availability of mobile broadband and the big investments that SpaceX, Amazon, OneWeb and Telesat are making in new LEO satellite broadband networks, along with probably growing demand for satellite-powered backhaul for both 4G and 5G. That makes it a story worth investigating, particularly given their good balance sheet and recent income statement improvement, but certainly don’t guarantee that GILT will be the key to 5G, or have any chance at mammoth 9,000% returns.
I’ll keep an eye on this one — the lack of a scary balance sheet makes them stand out a bit in the satellite business, and we do seem to be in a pretty big investment phase for satellite communications… though the competition has also made it tough for them to be consistently profitable over the past decade. And, of course, I’m curious to see whether these weekend rumors of a takeover bid amount to anything — I’m not particularly interested in jumping into the stock after those rumors drove it 30% higher in a week, but if things die down a bit I could see myself being intrigued.
That’s just me, though, and what I’m thinking of doing with my money — what matters for you and your money is what you think… so where do you come down on Gilat? Think it will dominate the future of baseband satellite services and mint money, or be taken over at a bigger premium than what’s been rumored this week? Or is this another satellite hopeful that will disappoint when the market turns out to be smaller than all had hoped? Have a different take? Let us know with a comment below.
And your February 7 Update…
Well, now the deal that was a rumor on January 21 has been announced, with the news on January 29 that Gilat has agreed to be acquired by Comtech (CMTL). Assuming the deal goes through, Gilat shareholders will receive $7.18/share in cash and 0.08425 of a Comtech share for each share of Gilat held.
CMTL shares dropped sharply on the news, down 20% or so, so that portion of a Comtech share would be worth about $2.52 at the moment, for a total deal value of $9.70. GILT is trading very close to that at $9.55 or so, down about 8-10% from when I covered this teaser and the initial rumors of an acquisition were circulating.
You can see the presentation they posted about the deal here. Both companies are relatively expensive but believe they’re positioned well in a rapidly growing satellite communications industry, and they expect the deal to be ‘cash accretive’ in the first year, with the debt financing expected to be repaid pretty quickly… their financials are fairly similar, and both companies are profitable, so adding Gilat won’t dramatically improve margins or cash flow at Comtech, but it will help a little bit and there will likely be some cost efficiencies in the first couple years.
The more important rationale is strategic, in that it gives Comtech more international exposure and a stronger position in in-flight data and 5G backhaul offerings, among other things… and they’ll be bigger, so they’ll have a larger and more efficient R&D push, but the combined company will still be fairly small, with a market cap not much over $1 billion, so there’s certainly plenty of room to grow in a growing industry.
Whether it works out or not, I don’t know — Gilat shareholders will vote on the deal in the next few weeks, but almost half of all the shares have already been committed to vote “yes” so a consummation of the deal seems very likely. The new company will be slightly less levered to the 5G backhaul business opportunity than Gilat was, but that wasn’t as big an immediate story as the tease was implying, anyway, it will still be a focused company with what they say will now be more of a leading position in ground infrastructure for satellite networks.
So it may not be the 5G “Master Key” in any real sense, but the combined company will be profitable, pretty reasonably valued, with a manageable debt burden, a small dividend, and a potential to grow pretty nicely if they can maintain their position in the satellite equipment business, which shows some signs of substantial growth in the years to come. There hasn’t recently been dramatic growth, revenue growth for the combined company over the past year would have been in the low single digits, so whether it’s worth paying a decent but not crazy growth premium for the shares really depends on whether you think we’re about to see a jump in satellite communications. Seems like a reasonable bet to me, but I haven’t invested.