A very similar teaser ad to this one ran almost every day through the first half of 2020, and I first wrote a story explaining it back in January of 2020… but it’s back, and we continue to get lots of questions about it, so let’s dig in and explain what’s going on — especially for new readers.

When I first heard the “presentation” from Dave Forest a few weeks ago, I thought I was going a little bit crazy — it sounded so familiar. He was walking on the street in Denver, Colorado, showing off how fast a download of Gone With The Wind could flow to his 5G Samsung phone thanks to the strong new 5G network available there… and then pointing out the “fatal flaw” of 5G by going into a building and completely losing his 5G signal.

I know we see these came kinds of themes often, but that sounded really familiar. And for good reason — E.B. Tucker left Casey Research in the second half of last year, so he was no longer available to promote the Strategic Investor newsletter… but the marketers no doubt noticed that the teaser ad with E.B. walking around Colorado and pointing out those 5G flaws, and promising a solution, worked really well. So they recreated it, even more slavishly word-for-word than a Hollywood remake, and now Dave Forest is in an ad doing exactly the same thing. Technically on a different street in Denver, but still pitching the same theme (and downloading the same Gone With The Wind movie to his phone). If you look at the transcript of this month’s ad and the transcript of Tucker’s ad in January of 2020, they’re word for word identical. When an ad works, they keep using it — even if they have to rebuild it from scratch.

So what’s the idea? Is it still the same one they teased 18 months ago? I kinda bet it is, but let’s dig in to make sure… and if so, that stock has changed quite a bit in the interim as well, so maybe we’ll learn something.

The promise 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, as I noted, Dave Forest, still in ads for Casey’s Strategic Investor (the price remains the same, too — $49, renews at $129/yr).

Here’s a little taste of the ad:

“A tech snag has brought America’s 5G rollout to a screeching halt.

“But one tiny $10 company has come up with a novel solution…

“And it could show you substantial gains.”

Here’s Forest’s (formerly 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 the ad:

“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 more than 1,000 times smaller than Apple, has emerged with an ingenious solution….

“It’s a miraculous technology that looks like an ordinary black box…

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“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 “you can get involved in its shares today for around $10” … so far so good, that’s all still extremely similar (and in most cases identical) to the pitch from a year and a half ago.

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?

Firest 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, still, the Israeli company Gilat Satellite Networks (GILT). This Casey newsletter started teasing the stock in January of 2020 with that previous version of the ad, before a remake with a different actor was required, and it was around $8 at the time — it surged to about $10 on news of their pending merger with Comtech (CMTL), at which point I put on a little merger arbitrage position, and then after COVID hit and everyone panicked a bit, partly because a lot of Gilat’s business was in supplying broadband connectivity to airplanes (which, if we recall, were not flying), Comtech pulled out of the deal and Gilat shares languished… until the wild “Space Stock” excitement drove up all things satellite-related early this year, juiced in part by some continued pitches from newsletters and by SpaceX’s unrelated Starlink launches (Lou Basenese has been teasing this one for about six months now, too), and the shares soared to $20 before collapsing back down again. So yes, it’s near $10 again now, after a wild round trip down to $5, up to $20, back to $10. Makes your heat spin a little.

So what’s the story now?

Well, Gilat is still 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. Their focus now has shifted somewhat because of the collapse and now restart of commercial aviation post-pandemic — in-flight broadband is now, they say, shifting to a free service that travelers expect, just as travel is going up again, and that should substantially fuel their rebound in revenues from that segment… though “cellular backhaul”, which is what Forest means with that “master key” business, is also growing, and also an area where Gilat has very strong market share (80% in 4G, they say).

That “cutting-edge device” that Forest 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). And they do also make the point that the huge surge in satellite spending is increasing the market for their products, including the possibility that they could get orders for power amplifiers from at least one of the low earth orbit (LEO) operators. They also get revenue from more boring stuff, operating satellite broadband and local networks in some parts of Russia and Peru and the like (they spent a lot winning a broadband contract in Peru, for example, and how expect recurring revenue of $50 million a year from that business).

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, which is why that’s 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, but COVID certainly threw them for a loop — the company had been improving a bit in 2019, with a push from the private equity firms who own more than a third of the stock. They do have competitors, most notably the much larger Hughes business owned by Echostar (SATS), and soon probably from the LEO operators like Starlink or Telesat, who might be both customers (for equipment) and competitors (for service to airlines or rural areas), 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 was profitable pre-COVID, 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.

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 still makes it a story worth considering, particularly given their good balance sheet and recent income statement improvement, but that certainly doesn’t guarantee that GILT will be the key to 5G, or have any chance at mammoth returns.

The collapse of their in-flight connectivity (IFC) business last year clearly did a ton of damage, at a really inopportune time as the company was just starting to get its act together — revenue was down 37% in 2020, though if you just glance at the bottom line it looks like they had a really solid year, with earnings staying stable. You can ignore that, it was a bad year — the bottom line numbers just look good because they got a $70 million “breakup fee” from Comtech when they pulled out of the merger deal in the fourth quarter. That was good in that it meant they didn’t burn much cash, but it doesn’t mean anything when we’re talking about their earnings prospects.

And what are those prospects? Well, nobody knows for sure, of course, and there isn’t really any analyst coverage of Gilat (it’s still quite small), but the odds are pretty good that 2021 will be much better than 2020… and probably not quite as good as 2019, but if business explodes higher in the next couple quarters, particularly with demand from airline customers, and they get a few new orders for ground station equipment as 5G investment continues to pick back up, well, they might surprise us and get all the way back to those 2019 numbers, giving them something of a post-pandemic “reset” as they try to get back on track.

Odds of success? I don’t know. I haven’t gotten back into the stock after dabbling in the merger arbitrage last year — if we think of them as being able to get back to 2019 numbers (revenue of about $250 million, earnings per share as high as 65 cents), particularly if the airline traffic picks up and their revenues from Peru don’t disappoint, and re-establish some decent level of growth, it is at least possible to make a decent argument for the shares. At $10, that would be about 15X earnings and 2-3X revenues.

The company is very small, and it has been very small (and often disappointing for investors) for a very long time. In the decades following the dot com boom (yes, they went public in time to benefit from that, soaring from a $300 million valuation at their IPO in 1998 to a $3 billion valuation at the peak in 2000 before collapsing almost to zero in the aftermath), and even in just the past 15 years it has traded with an extremely wide range of valuations, with market caps as low as $100 million and as high as a billion (briefly, in March) as different parts of their business have ebbed and flowed but as the business, in general, has completely failed to generate any consistent profits or revenue growth. (I don’t want to rub it in, and the two companies have almost nothing in common, but you know who went public at very close to the same time, at roughly the same valuation? Amazon.com. Returns since then? 100% for GILT, 500% for the S&P 500, 100,000% for AMZN.)

So yes, it’s a more appealing company now than it was for many years from 2005-2015 or so, but it’s hard to say what’s “fair” at this point. The current valuation is, at least, probably a rational starting point for a slow-growth stock that might have some potential to surprise us as it bounces back from the pandemic, and hopefully either gets acquired by a stronger satellite services company (or at least doesn’t lose its market position as satellite broadband becomes more ubiquitous). They’ve been announcing a string of small contract wins, and one “strategic agreement” worth “tens of millions” with an unnamed government corporation in “Asia Pacific”, they seem optimistic about this year’s recovery, and I imagine investors will be watching the next earnings report closely to see how the numbers changed with air traffic recovering… it will be a bit of wait, though, that next report will come out in about six weeks (it was delayed to 8/31 last year, but that was because of the Comtech deal — 8/6 was the date in 2019).

I’m not buying shares, but if you have some patience and tolerance for risk, and want to bet on what they think is a strong recovery coming, it’s certainly possible that it could be a reasonable value here.

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 someday? Or is this another satellite hopeful that will disappoint when the market turns out to be smaller than all had hoped, competition comes in, or investors realize that this “master key” stuff is a little silly? Have a different take? Let us know with a comment below.