Globalstar (NYSEAMERICAN:GSAT) is a telecommunications company that at first may seem to be attractive as it is a penny stock, it has plenty of daily volume with a lot of liquidity, and has made a substantial return in 2021. GSAT stock is up 346% in 2021.
Could it be a cheap stock now and a top pick in the telecom services industry?
My answer is a big “no,” as the rally of Globalstar in 2021 is not justified. GSAT stock is another example that proves statistics cannot tell the whole truth with accuracy, as with a beta (five-year monthly) of 0.11, shares of Globalstar should have moved almost in tandem with the broader stock market, the return of the S&P 500 index.
This has not been the case, so distortion of statistics has occurred. With a 52-week range of 29 cents – $2.98, GSAT stock is too volatile. A 50% selloff from its 52-week high suggests that major news should be the catalyst and indeed this is the real cause.
I have identified at least three main problems for Globalstar that support my arguments that even at around $1.50 per share the price is too high and is not an attractive stock now.
Reddit Loves GSAT Stock
I am a strong supporter of freedom of speech and expression on social media. My origin, after all, is from the country that gave birth to democracy. But every time I see a stock that has moved too much, as a result of becoming a meme stock I feel strange. GSAT stock in recent months has become popular with the Reddit r/WallStreetBets community. That explains its meteoric rise in the absence of true fundamentals, such as profitability.
Before Sept. 14, 2021, when Apple (NASDAQ:AAPL) released its latest iPhone 13, Globalstar soared on rumors that Apple would announce the new phone would be compatible with satellite communications. When that proved to be just rumor, GSAT stock tumbled. Would satellite connectivity by great news for Globalstar? Most probably yes. But in the stock market, you have to be fully prepared for everything, and business news that proves erroneous chatter is often a reality.
What is interesting though is that apart from these very high expectations for Globalstar, no other key catalyst was present, so the classic phrase “buy the rumor sell the fact” proved to be short-lived, as did any boost for the GSAT stock price.
Globalstar share, for now, have no underlying fundamental catalysts to support it.
Business Model: Not Working Well
The telecommunications company makes its revenue by providing mobile satellite services. Its website touts that “Globalstar is a leading provider of satellite solutions for business and individuals offering customizable Satellite Commercial IoT Solutions, connectivity for mobile and field personnel, fleet asset tracking, equipment monitoring, and enabling business efficiencies beyond cellular.”
Globalstar serves a plethora of industries, such as transportation, government, and public safety, energy, construction. The company says that its advantage is that it “can offer richer and more features to customers, maximize the use of satellite technology for optimal user experience, better mobile satellite service throughput for improved data connectivity delivering clear connections on the ground.”
But does this advantage bring results in terms of revenue growth and profitability? The answer is no. The operating and financial results for Q2 2021 showed as main highlights the following:
- Total revenue of $57.2 million was lower than Q2 2020’s $62.5 million
- Loss from operations increased to $35.2 million compared to Q2 2020’s loss of $29.4 million
- Net loss of $57.7 million compared to a net loss of $62.9 million.
As of 2018 data from MarketWatch shows that Globalstar has been witnessing a slowdown in revenue growth which in 2020 was negative, down 2.45% with reported revenue of $128.49 million. In the past five years, Globalstar only made a profit in 2019 — $15.32 million — and in 2020 the net loss reported was $109.64 million.
I see also a stagnant and very low asset turnover ratio in the past five year which ranges between 0.08 and 0.14, with that high end reported in 2020. Still, even that is too low and shows that Globalstar is weak in the efficient use of its assets to generate revenue. Not a positive fundamental factor.
Debt Level and Valuation
Dave Kagan, CEO of Globalstar stated upon the release of Q2 2021 results, “We also continue to reduce leverage, and I am happy to report that we have less than $50 million of net first lien principal outstanding and we are working to continue to optimize our balance sheet.”
In 2020 Globalstar reduced its long-term debt to $340.32 million from $478.94 million in 2019 but short-term debt and the current portion of long-term debt surged to $60.17 million compared to $1.7 million in 2019.
Globalstar has a cash-to-debt ratio of 0.05, according to GuruFocus. This is too low and I see a major liquidity problem here. That explains why the stock has an Altman Z-score of 0.75, in the distress zone.
Analysts tracked by Yahoo! Finance have an average revenue estimate of $121.71 million for next year. The current market capitalization of $2.71 billion is 21.6x that revenue figure and is too high. Morningstar reports a book value of 27 cents per share for 2020. That means a price/book value ratio of 5.44 which is also too high.
I would like to see Globalstar make sustainable profits, increase its revenue and solve its liquidity problems to repay its debt. It seems very expensive, too. It all adds up to a very high-risk stock for now.
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On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.