Iridium Communications Stock: Still Too Lofty (NASDAQ:IRDM)

One of my favorite companies, from a business model perspective, on the market today has got to be Iridium Communications (NASDAQ:IRDM). For those not aware, the company operates a constellation of satellites that encircle the globe. These satellites host payloads and transmit information on behalf of its customers. Over the past few years, it has become clear that the space economy offers tremendous upside for investors. But many of the firms that are in this space suffer from significant losses as they ramp up production. But because of the business model that Iridium Communications operates and the fact that its ongoing operational costs are quite low, it is a different type of animal entirely. Revenue growth is steady, as is cash flow growth. However, the company is not exactly the cheapest player on the market. Given how shares are priced right now, I do think that the company makes for a ‘hold’ candidate rather than a ‘buy’ one. But in the event that shares do drop materially from here, it could present investors with significant upside potential.

Slow and steady

Although I love the operations involved with Iridium Communications, I do not like the idea of paying a hefty price for shares of a firm. For some time, I was actually quite bullish when it came to Iridium Communications. From February of last year until early August, I had the company rated a ‘buy’. And the upside experienced during that time was quite impressive. But given how shares were starting to look from a valuation perspective in early August, I ended up down grading my rating to a ‘hold’ to reflect my view that shares would likely generate returns that would be more or less in line with the broader market moving forward. It would appear, much to my chagrin, that I was premature in downgrading the company. Since the publication of that article, IRDM stock is up another 36.1% compared to the 8.7% seen by the S&P 500 over the same window of time.

This return disparity can be chalked up in part to the strong financial performance that the company achieved during that window. Revenue in 2022 totaled $721 million. That was 17.3% higher than the $614.5 million generated one year earlier. There were a few key factors behind this growth. First and foremost, the number of subscribers paying for access to its satellite network increased from 1.72 million to nearly 2 million. This came about even as the number of government subscribers dropped from 147 thousand to 139 thousand. The real growth for the company came from the commercial side, with its customer base expanding from 1.58 million to 1.86 million. Over this time, the company also benefited from an increase in its commercial ARPU. For voice and data services, this number expanded from $41 per month to $42 per month. It is true that IoT (Internet of Things) ARPU declined from $8.58 to $7.89. But broadband ARPU expanded from $288 to $302.

This increase in revenue helped to push profitability up as well. The company went from generating a net loss of $9.3 million in 2021 to generating a profit of $8.7 million last year. Operating cash flow expanded from $302.9 million to $344.7 million. And over that same window of time, EBITDA for the company popped up from $378.2 million to $424 million. No matter how you stack it, this is rather impressive growth and it reflects a continued interest in benefiting from humanity’s connection with the heavens.

On April 20th, management announced financial results covering the first quarter of the company’s 2023 fiscal year. During that time, the company demonstrated further growth, with revenue of $205.3 million, beating out the $168.2 million reported one year earlier. On this front, the company benefited from an increase in subscribers from 1.78 million to 2.05 million. Once again, the government subscriber count dropped during this time. Brought to commercial subscribers shot up from 1.64 million to 1.91 million. Voice and data ARPU expanded from $40 per month to $44. Once again, IoT ARPU declined year over year, dropping from $7.78 to $7.22. However, broadband ARPU expanded from $288 to $294.

Given the results experienced during the first quarter, it should come as no surprise to investors that management is optimistic about the 2023 fiscal year. They currently expect service revenue, which is the lion’s share of the company’s revenue, to grow by between 9% and 11% year over year. At the midpoint, that would imply overall service revenue of about $588.2 million for the year. Management is also forecasting EBITDA of between $455 million and $465 million. At the midpoint, this would be 8.5% above what it was one year earlier. Management did not provide any guidance when it came to other profitability metrics. But if we assume that operating cash flow will rise at the same rate, we should anticipate a reading for the year of $374 million.

Taking these figures, it becomes pretty simple to value the company. On a price to operating cash flow basis, Iridium Communications is trading at a forward multiple of 21.8. This is down from the 23.6 reading that we get using data from 2022. Meanwhile, the EV to EBITDA multiple should be around 20.7. That stacks up against the 22.4 reading that we get using data from the year before. Truth be told, neither of these multiples generate much enthusiasm for me. Although I am a huge fan of Iridium Communications and would love nothing more than to see its share price rocket to the moon, the value investor in me doesn’t feel comfortable with paying multiples at high.

This is not to say that the company won’t do well for itself in the long run. If the past is any indication, the firm should continue to grow both its top and bottom lines for years to come. Along the way, the company is also working to allocate the significant amounts of cash that it generates in wise ways. One of these is through share repurchases. In the first quarter alone, the company repurchased 0.9 million shares of its stock on the market for $53.1 million. Following this, the company was left with $126.5 million on its $600 million share buyback program. Assuming that the company finishes off this plan by the end of the year, it expects to see a net leverage ratio of between 2.5 and 3.5 moving forward. That number as of the end of the most recent quarter was 3.2. So it is possible that we could experience further debt reduction from here. Fortunately, the interest rate on its $1.48 billion in debt Is fixed with hedges. But it would be nice to see further debt reduction because of the overall reduction in interest expense it would bring with it and because of the lower risk that the enterprise would have as a result.

Takeaway

Based on the data provided, I must say that I continue to be impressed with Iridium Communications and how the company has performed as of late. I suspect that, in the long run, this overall trend will continue. But this doesn’t necessarily mean that shares make sense to buy into at this moment. Given how the stock is priced, I would argue that there are other opportunities that could be had at the moment. As such, I feel comfortable with the ‘hold’ rating I assigned the stock previously, even though I was premature when I did so.