Summary:

Gogo and its inflight broadband service went public last week. At the time of the offering it was valued at about $1.5 billion, but today it is valued at $1.2 billion despite having a near monopoly on U.S. inflight broadband.

howgogoworks

If you are like me, then you have more than likely used Gogo inflight broadband on a flight from San Francisco to New York (or someplace else) and cursed all the way. We all know the service is going to be slow, but like a junkies looking for their next high, we all happily fork over a lot of money to get slower-than-dialup speeds.

bbc-inflightAnd that is precisely why last week Gogo Inc. was able to raise $187 million in funds from the public markets. It sold about 11 million shares at $17 a share and that valued the company at shade over $1.46 billion. By the time markets closed today, the company’s stock was slowing down — it is now trading at $15.41 per share and its market capitalization is down to about $1.2 billion.

Gogo had filed to go public in September 2011 but decided to put the offering on hold and raised $200 million from private investors. Of course, it ended up going public on June 21 — a day when the S&P 500 fell 2.5 percent and the NASDAQ dropped 2.3 percent. The company, which offers service in 1,900 planes, had sales of $233.5 million in 2012 (vs $160.2 million in 2011) and hasn’t made a dime. It lost $32.7 million in 2012 and has about $130 million in debt. Even with over 80 percent of the market, the company’s average users bring in about $9.74 a year.

Yahoo Finance, June 24

Yahoo Finance, June 24

Business Week’s Justin Bachman postulates that Gogo’s problem is that it is expensive and no one uses it. Sorry, Justin, did you actually mean “no one can use it?” Bachman is right when he says that it is expensive, but a lot of people use it. And because a lot use it, the service degrades quickly, and well, then no one can use it.

That said, the biggest worry for the company (and its investors) is that of leverage in its business model. It has gross margins of around 50 percent and it is running a capital intensive business. As a company it depends on wireless providers for network connectivity and airlines for its ability to add (and upgrade) infrastructure. Most importantly, the value of Gogo is truly realized when the flight is around 5-to-6 hours like, say, from San Francisco to New York. On those flights, the network gets filled up fast.

With challenges like this, it isn’t much of a surprise the stock market is cagey about this stock.

Last year my colleague Stacey Higginbotham, after getting sick and tired of hearing my tirades about inflight broadband, ended up writing an explainer (just to shut me up) — Why your in-flight WiFi is slow and expensive. That said, there is hope for better broadband speeds when flying in a metal tube at 500 miles per hour. Qualcomm wants to build a super-broadband grid. Even Federal Communications Commission (FCC) is looking at ways to free up spectrum for better broadband in the sky.

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