The rumors are true, Kerrisdale Capital is short Globalstar, Inc. (NYSEMKT:GSAT), claiming the $3 billion company is actually worthless because its satellite business is losing money and the spectrum that investors are banking on for new Wi-FI services is worthless. But it seems that last week’s rumor gave investors enough time to decide where they stand on GSAT because the stock price has held its ground since Kerrisdale released its thesis (down 1.66% as of this writing).
Kerrisdale sees major problems with Globalstar, Inc. (GSAT)’s TLPS
“Over the twelve months ended June 30, 2014, GSAT generated just $88 million of revenue, $15 million of adjusted EBITDA, and negative $95 million of operating income,” Kerrisdale writes in its short thesis. “Since emerging from bankruptcy in 2004, it has racked up cumulative operating losses of $463 million, increased its share count by a factor of 13, been de-listed from the NASDAQ in 2012, defaulted on its debt in 2013, and put itself on a path to violate its financial covenants again in the near future.”
Of course investors already know all this, the long thesis on Globalstar, Inc. (NYSEMKT:GSAT) is that by converting the spectrum it has licensed for satellite use into new Wi-FI services the company will be able to turn those numbers around, and this is exactly what Kerrisdale is trying to raise doubts about.
“In a world that already has three free, unlicensed channels in the 2.4GHz band and an additional 22 in the 5GHz band, the notion that one more channel, hypothetically accessible to only a circumscribed subset of users, could be worth many billions of dollars has elicited chuckles of ridicule and disbelief from every Wi-Fi engineer we could find,” Kerrisdale writes.
Without wading into the technical details (though if you’re going to take a position on Globalstar, Inc. (NYSEMKT:GSAT), you’ll need to dig in), Kerrisdale’s thesis boils down to a couple of key arguments.
First, they say that with 25 free Wi-FI channels already available for use, the addition of one more for-profit channel will be irrelevant in most situations. Its Terrestrial Low Power Service (TLPS) is supposed to help with congestion, but Kerrisdale doesn’t see this as a real problem in normal scenarios, and argues that in extreme cases like the Super Bowl engineers have proven that cutting edge Wi-FI tech can still perform well. Since TLPS is restricted to use about 400x less wattage than cell towers creating a large-scale network would require far more access points to be built, each of which would have a smaller coverage area. Finally, Kerrisdale says that enabling devices to use GSAT’s TLPS would be difficult and require participation from other industry players, stallign implementation.
“The company’s terrestrial spectrum will never generate enough value to come close to justifying its ludicrous valuation; most likely, it will never generate any value at all,” writes Kerrisdale.
Kerrisdale’s Globalstar, Inc. (NYSEMKT:GSAT) short thesis boils down to engineering
One good thing about this short thesis is that it should play out fairly quickly one way or the other. Unlike accusations of fraud or some other form of malfeasance, Kerrisdale Capital is saying that Globalstar, Inc.’s (NYSEMKT:GSAT) business plan doesn’t make sense from a technical perspective. We won’t pretend to have the requisite expertise to call it one way or the other, and we expect there to be some amount of dueling experts in the coming days, but at least there’s no hidden information involved. Either GSAT’s spectrum holds promise to solve future Wi-FI congestion or it doesn’t, and anyone with a good handle on the engineering behind the debate has a great opportunity to jump one way or the other while the rest of us figure it out.