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Why Wunderlich Is Selling ViaSat Despite Acknowledging Its Long-Term Success

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Why Wunderlich Is Selling ViaSat Despite Acknowledging Its Long-Term Success

Wunderlich maintains its Sell rating and $48 price target on ViaSat, Inc. (NASDAQ: VSAT) ahead of the company's fourth-quarter financial results on May 24.

Shares of ViaSat have gained 17 percent this year on potential aviation market share gains with American Airlines Group Inc (NASDAQ: AAL) and Southwest Airlines Co (NYSE: LUV) considering alternatives to Gogo Inc (NASDAQ: GOGO) and Global Eagle Entertainment Inc (NASDAQ: ENT), respectively.

But, analyst Matthew Robison expects a lengthy upgrade cycle before significant incremental sales associated with switches to ViaSat.

Related Link: Fitch Upgrades Delta To "BBB-"; Outlook Stable

What's Ahead?

"The promise of ViaSat-3 technical superiority amongst competitive geosynchronous assets is clear, but it is far enough in the future that emergence of competition from planned low earth orbit constellations or upgraded of air-to-ground service with 4G/LTE technology will be factors for aviation market share," Robison wrote in a note.

The analyst noted that competitors such as Gogo and Global Eagle provide adjacent equipment/services, other dimensions of account control and bandwidth provisioning choices.

"In our view, many battles remain before it becomes obvious that the capacity from the next four years of heavy capital spending by ViaSat will be met with lucrative long-term demand," Robison elaborated.

On the competitive front, the analyst noted that although legal maneuvers to change from Gogo by American Airlines seem to bode well for ViaSat, Gogo has reported success in gaining commitments by others for forthcoming 2Ku service.

In addition, Global Eagle appears positioned to provide more capacity from Echostar Corporation (NASDAQ: SATS), which is scheduled to be a month or two ahead of ViaSat-2 with EchoStar 19 deployment.

"It appears to us that if ViaSat does not win American, then there may not be opportunity for transformative commercial aviation growth until after the 2Ku cycle, which could imply the ViaSat-3 timeframe in C2019 and beyond," Robison highlighted.

It May Not Be Simple Or Easy

Although a potential American Airlines win is a positive for ViaSat, the analyst said it may not occur soon and will not happen without a fight from Gogo.

Related Link: Delta's CEO Talks Ongoing Battle Against Gulf Nations Airlines

The analyst noted that Gogo said it is waiting for American to respond to its 2Ku proposal and it is also upgrading American planes to its latest air-to-ground offering, ATG4, which is a faster flavor of 3G mobile style connectivity than the first generation ATG.

"We would not expect planes grounded for ATG4 upgrades to be back in for ViaSat equipment any time soon," the analyst elaborated.

Robison, who expects fourth-quarter non-GAAP EPS of $0.27 on revenue of $374 million, said he doesn't expect any major news from the fourth-quarter results. The Street expects earnings of $0.37 on revenue of $370.17 million.

The analyst expects terrestrial satellite services subscribers to remain essentially unchanged, but expects "robust" average revenue per user (ARPU).

At the time of writing, shares of ViaSat were down 2.72 percent at $71.99.

Latest Ratings for AAL

DateFirmActionFromTo
Nov 2019Initiates Coverage OnSell
Oct 2019MaintainsBuy
Oct 2019MaintainsUnderweight

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