Portfolio Update: Our Latest Thinking on AST SpaceMobile

An Update on AST SpaceMobile 
(as of 11/20/2024)

AST had a tremendous third quarter with the stock price appreciating 125% reflecting positive fundamental developments and a change in investor sentiment. At the end of the quarter, AST had an 11.0% portfolio weighting, making it our largest position. With these material changes, and portfolio risk management in mind, we think it is important to update you on our latest thinking about the investment.

We last added shares of AST in December 2023 (taking it from about a 2% position to about a 3% position). At the time, we characterized the investment as a “special situation,” writing:

“It does not meet our typical compounder criteria, but our significant proprietary research leads us to believe that it has a compelling risk-return profile. While there remains a risk of complete capital loss, this is more than offset by the increasingly real potential of 20x, 30x, or 50x upside.”

Today, we still characterize this investment as a special situation, but we no longer see potential for a complete capital loss. We believe recent developments including 1. technical/operational progress, 2. funding/strategic partner progress, and 3. regulatory progress has substantially reduced the risk profile of the investment, while increasing the probability of our upside scenario playing out. Even though shares have appreciated significantly, we view the risk-return profile as highly favorable and find AST among the most compelling investment opportunities we see today.

Below, we provide some detail on the developments cited earlier, as well as our latest thinking on AST’s emerging competitive moat and upcoming milestones.

1. Technical/Operational Progress

On September 12, AST launched its first five commercial satellites (BlueBirds 1-5) into low Earth orbit on a SpaceX Falcon 9 rocket, on October 25, the company announced that it had successfully unfolded all BlueBirds from their compressed form and on November 14 the company shared the satellites are ready to become operational. This is a significant accomplishment as these satellites are the largest commercial communications arrays ever launched in low Earth orbit (each satellite measures about 700 square feet).¹

While these five satellites will provide coverage for less than one hour per day, this is sufficient for some revenue generating government and commercial services. Further, these five begin the march toward the 45 to 60 satellites needed to provide continuous coverage of the continental United States (and other key developed markets) at which point we expect AST to be able to offer a compelling value proposition for the consumer mass market.

The company targets continuous commercial service in the United States in late 2026. To achieve this ambitious goal, the company will need to build and launch another 40 to 55 satellites over the next 24 or so months. AST produces its satellites in two locations in Midland, Texas with a combined 185,000 square feet. We think the company has the capability to produce two satellites per month now (24 per year), and has plans to ramp to six satellites per month by the end of 2026 via enhanced automation (72 per year). They have been working on 17 additional BlueBirds over the last few months, so they already have some production momentum.

AST announced on the 3Q Business Update call that it had successfully entered into launch services agreements securing the orbital launch capacity to enable continuous space-based cellular broadband service coverage across some of the most in-demand cellular markets globally.

2. Funding/Strategic Partner Progress

Building a global constellation of low Earth orbit satellites to provide space-based cellular broadband service to everyday smartphones is a capital-intensive endeavor. AST has raised about $1.5 billion since inception and will require another $1.5 to $2 billion of additional capital investment (some meaningful portion of this generated through retained profits) to accomplish its objective of continuous global coverage using 95 low-band spectrum satellites.

With AST’s accumulating technological proof-points, growing constellation, and increased regulatory clarity (discussed later) we believe concerns about the company’s ability to fund its business plan have given way to substantial strategic partner/institutional interest in financing the buildout of its constellation. Consider its strategic and funding activity year-to-date:

•    In January, the company raised $100 million of equity capital from the public markets while near simultaneously issuing $110 million of convertible debt to strategic partners AT&T, Google, and Vodafone.

•    In May, the company announced a strategic partnership with Verizon that included a $100 million commitment.

•    In September, the company established a $400 million at-the-market equity (ATM) distribution agreement with eight investment banks. It remains to be seen if AST will use the full ATM, or if it is more of a backup source of capital and signal to potential international partners that it is well funded and operating from a position of strength.

•    In October, the company completed the redemption of its public warrants generating about $154 million in aggregate proceeds.

Now, with cash on hand of $519 million at the end of their third quarter and expected proceeds from the release of success-based payments from strategic partners and availability under their ATM, AST is fully funded on a pro forma basis for the build and launch of its first 25 commercial satellites (five of which are the recently launched BlueBirds). We expect these 25 satellites will likely get AST to operating cash flow breakeven.

Additionally, the bridge to 45 to 60 satellites (an incremental 20 to 35 satellites) is substantially funded. Inclusive of what remains of the $400 million ATM (representing minimal future dilution relative to the company’s $8 billion quarter end market cap), we estimate that AST is $200-400 million short of what it needs to complete this cohort of satellites. This cohort should get them to continuous coverage in key markets and a compelling mass market consumer offering. At that stage, we believe AST will be generating substantial positive EBITDA, and will be able to self-fund additional buildout of its full constellation.

Importantly, the company has multiple paths to funding the $200-400 million capital gap cited above. While the ATM may be expanded, we think a more likely (and non-dilutive) source of funding is converting some of AST’s more than 45 memorandum-of-understandings (MOUs) with international MNOs into revenue prepayments, similar to what has already been structured with AT&T, Verizon, and Vodafone. A further path is the potential for government grants and/or EXIM Bank or similar low-cost agency debt financing.

3. Regulatory Progress

In March, the Federal Communications Commission (FCC), AST’s primary U.S. regulator, released new rules for Supplemental Coverage from Space (SCS). This order formalized the regulatory ground rules for SCS providers and took effect on May 30, 2024.

Without getting into the details, the key takeaways for us are that AST is able to comply with the new rules, and competitor Starlink DTC (“direct-to-cell”) satellites are not. Key to compliance is controlling out-of-band emissions, i.e., the interference you cause to adjacent spectrum bands in the process of delivering your service.

As the name suggests, SCS is “supplemental” coverage to the primary wireless coverage provided by terrestrial MNOs such as AT&T, Verizon, and T-Mobile. U.S. MNOs provide essential communication services for the country, and have collectively paid over one hundred billion dollars to the U.S government for rights to wireless spectrum underpinning these services.

AST has been partnered with AT&T since 2018, and has been in communication with the FCC even longer. AST purpose-built its technology from the beginning—in consultation with these stakeholders—to manage interference and to work in harmony with terrestrial MNO networks.

In contrast, Starlink’s DTC satellite was not a clean sheet design, but rather a repurposing of technology from other projects in order to accelerate time to market. As a result, by Starlink’s own admission, it cannot deliver its intended service with its current satellite design without causing out-of-band emissions in violation of FCC SCS rules.

Starlink has requested a waiver from these FCC rules. AT&T, Verizon, and numerous others (including a group of seven European MNOs) have vigorously contested this waiver request, including direct threats of legal action if approved. If the waiver is approved by an FCC with a Republican majority, it is likely AT&T, Verizon and others bring legal action and request a stay of the waiver leading to the potential for further delay and litigation. If the waiver request is denied or deferred, Starlink would face the difficult choice of offering a significantly scaled back consumer service (text only) or pivoting to redesigned satellite technology capable of meeting FCC standards.

Meanwhile, AST has run a sophisticated regulatory process with the support of AT&T (and more recently Verizon). As a result, the company appears well positioned on the regulatory front. AST received FCC permission for the launch and flight control of BlueBirds 1-5, and we expect approval to begin testing these satellites soon now that the request for Special Temporary Authority has been filed with the FCC. With successful demonstration of beamforming, data transmission, and interference levels, we expect AST will apply for and receive a permanent license for commercial operations in the coming quarters.

Importantly, many global regulators look to the FCC as a model for their own regulatory framework. Since the FCC’s approach to SCS is favorable to AST, this favorable position could potentially extend to many geographies around the world.

Separately, testing of the BlueBirds’ dual-use capability (i.e., defense applications) appear to be largely independent of FCC review, and may have already begun abroad. Additionally, AST has already been granted testing and/or commercial licenses in several other countries.

A Wide Moat Business?

In a prior letter, we shared our case for the AT&T relationship generating about $1 billion of annualized EBITDA for AST in five- to ten-years’ time. With the addition of Verizon as a partner in May, the U.S. case doubles to about $2 billion (and the global MNO opportunity could be 3x to 5x greater). We continue to ascribe a good probability to achieving these financial results, and further observe that there is growing evidence that other revenue streams such as government services, IP licensing, and third-party satellite manufacturing could emerge as important additional profit streams. But beyond the magnitude of future cash flow is the equally important question of how durable that cash flow will be in the face of competition. On that front, while early, we believe a favorable outlook is taking shape.

In our opinion, the developments discussed above solidify AST as the early leader in this emerging industry. Additionally, given the technology, regulation, long lead times, and capital-intensive nature of building a mobile broadband satellite network, we are increasingly thinking that there will probably be only two providers that are able to achieve the minimum required scale to compete.

This is a global business, not a national one. In low Earth orbit, satellites rotate rapidly around the earth rather than staying stationary above one particular geography. The satellite that is over Chicago now might be over Madrid in 15 minutes, and Nairobi 15 minutes after that. So, you need to build a global constellation and pair it with a global customer base to achieve network utilization and economic returns.

While this SCS market has a huge potential TAM, it also has low ARPU (perhaps $5 to $15 per month in the U.S., and less internationally), making efficient customer acquisition crucial to the business model. As a result, we think wholesale relationships with MNOs, providing access to their more than 4 billion subscribers, will prove essential pathways to market.

To that end, AST has signed agreements and memoranda of understanding (MOUs) with more than 45 MNOs around the globe representing about 2.8 billion wireless subscribers, or about 70% of the currently addressable market. While few of these MOUs have converted to definitive agreements yet, they are important indications of interest and are a prelude to contracts. Contrast this with Starlink, AST’s only direct and credible SCS competitor today: it has only eight global partners listed on its website representing about 200 million wireless subscribers (1/13th as many as AST).²

We think this early lead should kickstart a positive flywheel for AST, where the company’s growing user base should provide robust cash flow allowing for reinvestment in additional satellites for improved quality of service. As AST’s network quality increases, it raises the cost to compete for everyone else.

Additionally, for a variety of reasons (regulatory, network engineering, operational risk), we think each MNO will partner with only one broadband SCS provider in any one country, with significant switching costs once that partner is in place. Most countries have consolidated wireless markets with the top three MNOs controlling 85 to 100% share. With only three potential MNO partners in any given country, there are precious few seats at the table for aspiring SCS providers. So, AST securing one or two of the top three MNOs across many countries could simultaneously help secure an enduring distribution advantage and constrain competition.

Some observers have described AST’s satellites as “cell phone towers in space.” They intend this to quickly communicate to others that satellites function as shared wireless telecom infrastructure, similar to terrestrial cell phone towers. However, we think the parallels extend further; we see similarities in business model, unit economics, regulatory barriers to entry, switching costs, and limited customer/partnership set. Since we view cell towers as among the best assets in the entire investable universe (we have owned American Tower for 20+ years), we welcome these parallels. However, we have the added positive dynamics of AST being, we think, a global scale business (while cell towers compete mostly at the local level) with technology protected by 3,450+ patents and patent pending claims.

Again, it is early in the evolution of this company and industry, and many uncertainties remain. But we like how things are developing so far, and think AST shows the hallmarks of a wide moat business with corresponding durable cash flow and premium valuation.

Upcoming Milestones

AST continues to be a rapidly developing business. In the coming quarters we will be watching for the following milestones as measures of progress toward our thesis.

1.    Testing of the first five commercial satellites with U.S. partners AT&T and Verizon, European partner Vodafone, and Japanese partner Rakuten in 4Q24.(Filed STA application in November 2024)

2.    Signing of definitive commercial agreements with Verizon and Vodafone.

3.    Filing of AT&T/Verizon spectrum lease agreements with the FCC.

4.    Execution of prefunded commercial agreements with additional MNOs.

5.    FCC deferral or denial of Starlink’s request for a waiver of FCC Supplemental Coverage from Space interference standards.

6.    FCC approval of AST commercial operations in the U.S.

7.    FirstNet Funding/subscriptions for first responders.

8.    EXIM Bank or similar agency debt financing.

Conclusion

We believe that AST’s recent technical/operational, strategic/funding, and regulatory progress has substantially reduced the risk profile of our investment. The company’s technology, strong partnerships, and solid funding position it to capture leading market share in the potentially huge market for space-based cellular broadband to everyday smartphones. While the stock price has appreciated significantly, so have the fundamentals. We think the risk-return remains one of the most compelling that we can find.

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