Did Gogo's Earnings Surprise Create a Good Selling Opportunity?

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Gogo is a wireless-services leader in commercial and business aviation, providing communication and Internet solutions. On Monday, May 12, the company reported a surprisingly strong first quarter, with revenue growth of 35.2%. Yet, given the recent news of AT&T's market entrance and the unknowns surrounding Verizon , should Gogo's 7% stock gain serve as a good opportunity to sell?

Looking good at the surface
Gogo operates in two key segments: commercial and business aviation. In the commercial segment, it earned $57.1 million and ended the first quarter with 2,056 aircraft online, which create nearly $9,200 per aircraft on a monthly basis. As the company continues to grow its total number of online aircraft, this becomes a valuable asset to Gogo -- one that's profitable, with $5.8 million of income during the first quarter.

Gogo's business aviation segment accounts for the other half of its revenue, and has even higher margins, creating profit of $16.5 million in the first quarter, or a 43% profit margin. The company offers solutions for wireless connection and also text and talk, having 2,250 systems online to end the quarter.

Lastly, Gogo has an emerging unit called commercial aviation, or worldwide flying. This segment is expected to be rather lucrative for the company, as it will attract larger aircraft and create more usage due to longer flights. However, it's costly, and in the first quarter Gogo lost nearly $17 million from this segment.

With that said, building networks from scratch at 35,000 feet in the air is no easy task. Nor is it cheap, as the company is trying to grow fast and therefore had $105 million in operating costs. Aside from the losses in its commercial aviation business, Gogo reported $28.6 million in capital expenditures during the quarter, and looking ahead, these costs are expected to continue.

Nonetheless, when you look at Gogo's business model, combined with the average flight traffic both in the U.S. and throughout the world, this could become a gigantic opportunity -- and a great investment.

The curve ball and reason to sell
With a market cap of $1 billion and annual revenue below $400 million, Gogo is small but hindered by the rate at which it can grow. This fact creates a rather large risk for the company, as it's always a day shy of some massive telecom company deciding to enter the space with deep pockets and build an exceptional network to steal its market share.

That exact scenario is what AT&T announced late last month. The company disclosed that it will leverage its spectrum to offer Wi-Fi service courtesy of a 4G air-to-ground network. The company also said this service could be ready by late next year.

Moreover, AT&T did not boost its CapEx budget, saying the expenses won't be excessive in relation to its current spending plan. When you have $35.4 billion in operating cash flow, it's a lot easier and faster to build a large network for this type of service. Such a service should really affect Gogo, as it can't keep pace with AT&T's spending, and AT&T already has millions of customers who would likely use such a service.

What does this mean for AT&T?
Gogo has a large existing network, and based on AT&T's press release, it doesn't appear that the company is planning to enter international markets. Therefore, Gogo might still have a market presence, but it's unlikely that the company will create $9,200 per aircraft once AT&T's services are up and running.

With that said, ground-to-air services alone are not an investment catalyst for AT&T. Gogo is the current market leader, yet it did not earn $100 million in first-quarter revenue. The fundamental impact of this news relating to AT&T is likely marginal. However, what it does do is provide an advantage versus Verizon, which is likely the incentive for making such a move.

At this point, with networks constantly upgrading, pricing always competitive, and the top telecom companies being well-saturated in the U.S., most moves by either Verizon or AT&T are attempts to gain a competitive edge. Neither company had tapped the market of air travel, which may be insignificant in dollars, but is significant in creating convenience for customers.

Final thoughts
The U.S. Travel Association estimated there were more than 2 billion seats filled on domestic flights last year of 50 miles or more, which translates into an enormous number of potential customers. If AT&T offers wireless services in the air and Verizon doesn't, it gives the company quite an advantage, and it might persuade frequent travelers to switch carriers.

It's tough to imagine that Verizon will sit back and let this happen. Perhaps Verizon responds immediately with its own initiative. If so, this is even worse news for Gogo, and Monday's stock pop is without question a strong signal to sell. However, if Verizon sits on this news and waits for AT&T to complete its network, then it might acquire Gogo to save on time. Either way, Gogo looks like a sell today, but if Verizon doesn't respond in a timely manner, it might be a buy later.

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The article Did Gogo's Earnings Surprise Create a Good Selling Opportunity? originally appeared on Fool.com.

Brian Nichols owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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