GOGO:  Within One Decree of Annihilation

Price Target $7.50

Link to SI News Release
June 8, 2017

You’ve heard of six degrees of separation?  Well, Gogo, Inc. (NASDAQ:GOGO) is within one decree of annihilation.  Why would anyone want to invest in a company that is one Presidential Executive Order, or one Homeland Security decree, or even one Presidential tweet away from near extinction?  Not us.
From the day after our election in November of last year to yesterday, GOGO has seen its share price rise by an astounding 28.5%!  And while there has been a bit of weakness in the stock over the last week or two, the runup from November 9th of last year when it closed at $8.91 to yesterday when it closed at $11.45 has been nothing short of amazing.  We don’t believe this run will continue; quite the contrary.  Looking forward, we hear a hissing sound as the air fizzles out of this balloon.  As such, we have set a price target of $7.50.  Here are some of the reasons why:

First and foremost is the ever increasing overhang of a laptop ban, or even worse, a total electronics ban on flights.  Just three months ago, the United States and Britain imposed a ban on certain electronic devices on airplanes coming from specific airports in Muslim-majority countries in the Middle East and North Africa.  Our U.S. ban applies to 10 specific airports in Egypt, Jordan, Saudi Arabia, Turkey, Kuwait, Morocco, Qatar, and the United Arab Emirates.  London has included Lebanon and Tunisia on their banned list.

The ban includes larger devices such as laptops, tablets, and cameras…such devices cannot be brought into the main cabin.  The ban was implemented after military intelligence reported that extremists wanted to smuggle explosive materials via electronic gadgets.  Apparently the Islamic State is developing or has developed a bomb that can be hidden in portable electronic devices, and it is ready or soon will be ready to launch new types of attacks against the Western world.  At the time, U.S. government officials added that the ban could extend to other airports and other countries because the intelligence community believes this to be a real threat.  This ban has received bipartisan support on Capitol Hill as Representative Adam Schiff, the top Democrat on the House Intelligence committee, says he sees it as "both necessary and proportional to the threat."

An expansion of the ban is currently “on the table.”  Just last week, Secretary of the Department of Homeland Security told European officials the Department is still considering an expansion.  Such a ban may include laptops from airplane cabins on all international flights both into and out of the United States as Mr. Kelly reviews the most recent intelligence.  The current restriction covers roughly 350 flights per week.  Yesterday, Secretary Kelly told a House Panel the U.S. government is actively considering expanding the ban to include all inbound flights from 71 overseas airports.  This would be a dramatic increase from the 10 airports where the existing ban currently applies.

An eventual extension of the ban to all European airports would cover almost 400 flights per day and affect 30 million travelers.  What’s even more alarming for GOGO, just yesterday, reports suggested that a TSA spokesperson appeared to confirm the possibility that the ban could be extended to flights that never leave the country.  According to TSA officer Camille Morris, "A AA battery is fine.  A AAA.  A 9-volt battery is a huge power charge.  The size of the battery that can take down a plane when attached to an explosive."  This comes at the worst possible time for GOGO as the summer travel season is upon us.

It is disquieting to learn that a 9-volt battery can take down an airplane when attached to an explosive.  Indeed, terror groups have been competing for years to make smaller bombs, and they’re actively pursuing innovative methods to smuggle such bombs onto commercial flights, such as embedding them inside computers.  U.S. authorities believe there are active threats similar to a disaster last year in Somalia where a bomb hidden inside of a laptop blew a hole in the side of a plane. 

Last month we learned that U.S. intelligence now believes that ISIS and other terror organizations have developed innovative ways to hide explosives in electronic devices that FBI testing shows can evade some commonly used airport security screening methods.  FBI testing found that the laptops could be modified using common household tools.  According to CNN, “Heightening the concern is US intelligence suggesting that terrorists have obtained sophisticated airport security equipment to test how to effectively conceal explosives in laptops and other electronic devices…One official called the intelligence ‘hair-raising.’”  If correct, that is a sobering thought for any air traveler.  According to Reuters, Yemen-based Al Qaeda in the Arabian Peninsula (AQAP) has boasted of one of the world's most feared bomb makers, Ibrahim Hassan al-Asiri.  U.S. officials are worried that Asiri's expertise has migrated to other groups.

Besides the threat of device bans resulting from terror groups, there are many other reasons to be bearish on GOGO.  Earlier this week, President Trump endorsed a proposal to privatize air traffic control by signing a memo and letter to Congress outlining his desire to overhaul the country’s air traffic control system. The proposal would detach air traffic control from the Federal Aviation Administration within three years.  According to President Trump, the measure would make “flights quicker, safer, and more reliable.”  Quicker flights -> less air time -> less GOGO time.

GOGO’s fairly unimpressive financial results give us further pause:

 - According to the company’s most recent quarterly report: “Net loss increased to $41.4 million, a 72% increase from Q1 2016, and Adjusted EBITDA decreased to $10.7 million, down 26% from Q1 2016.”  To be fair, those numbers do include $9.4 million of expenses related to the development of GOGO's next generation ATG solution.  And while the company reaffirmed its 2017 fiscal year guidance in that report, we see the strong possibility of a downward revision within the next two quarters.

 - According to that same report, revenues increased QOQ by 16.7%, while operating expenses increased by 19.8%, implying pressured margins. 

 - Interest expense over the period increased 65.3% QOQ! 

 - Cash, cash equivalents and short-term investments decreased 3.6% QOQ.

 - Total liabilities increased 4.7%.

Of the past 5 fiscal years, not a single one has been profitable.  The company came close back in 2014 with a net loss of only $0.99 per share.

At this time, we see no real reason to own GOGO stock, despite its faster in-flight internet access.  The company continues to underperform the S&P & Nasdaq, has no dividend, faces multiple and increasing headwinds, is not profitable, and sports deteriorating financials.  As such, we have set a one-year price target of $7.50.

Disclosure:  We are short GOGO.  We do not have a financial relationship with the company.