Shares of Gogo Inc GOGO, a provider of broadband connectivity solutions for the business aviation market, are "more than fully valued" after rising nearly 40% since the start of 2021, according to JPMorgan.
The Gogo Analyst: Philip Cusick downgraded Gogo's stock from Neutral to Underweight with an unchanged $10 price target.
The Gogo Thesis: Gogo's 2020 sale of its commercial aviation business translated into a "more simple" business structure with an exclusive focus on business aviation, Cusick wrote in the note. But the stock's recent momentum has more to do with Gogo's status as a heavily shorted stock.
Momentum investors looking to capture further upside in Gogo's stock from the short covering fiasco may want to reconsider. The majority of Gogo's short interest is tied to its convertible debt so there is unlikely to be a further squeeze in the stock.
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"Assuming Gogo uses equity to address the convert implies an additional 38m shares or 95% increase in the float, or 16m shares if GOGO instead used equity for 42% of them and targeted leverage of 5.0x 2021 EBITDA," the analyst wrote.
Meanwhile, Gogo hasn't communicated to investors its 5G upgrade plans, although a launch should come in 2022, the analyst wrote. The network upgrade should set the company back $100 million and this would imply 2021 free cash flow would be "significantly negative."
Gogo could partner with a Low Earth orbiting satellites (LEOs) provider to expand its offerings, but such a catalyst "seems quite far away" and investor excitement will likely be limited in the meantime.
GOGO Price Action: Shares of Gogo were trading lower by more than 6% Monday afternoon at $12.51.
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