Will stable demand help Gogo (GOGO) navigate the virus-hit market?

The ripple effect of the aviation industry’s ongoing recovery from the virus crisis, in terms of passenger traffic, is being felt in the business of service providers like Gogo, Inc. (NASDAQ: GOGO). The consequent improvement in market sentiment is visible in the stock performance of the in-flight internet provider, which is yet to become profitable.

What surprised the market is the ten-fold growth Gogo’s shares witnessed since the early days of the virus outbreak, which virtually shattered the industry the company serves. But market watchers are skeptical about the future of the stock, which according to them might reverse the trend in the coming weeks and return to the single-digit territory.

Short Interest

Also, the Illinois-based company, which provides wireless networking services to the aviation industry, is probably one of the most heavily shorted stocks in recent times, raising concerns that it might go the GameStop (GME) way. In short, the stock looks overvalued and it needs to be approached with caution as the volatile market conditions could impact returns.

From Gogo’s Q3 2020 earnings conference call:

“Continuing operations, which represent our former Business Aviation segment and our former unallocated corporate costs, reflect encouraging continued service demand recovery. Generally speaking, the BA market had a shallower COVID-related bottom and has had faster recovery than the Commercial Aviation market. In Q3, our customers were back to flying 81% of the number of flights they flew in the prior year, up from 47% in Q2.”

Unexpected Blow

That the stock regained the lost ground in the most unfavorable conditions is a testament to Gogo’s strong fundamentals. It is worth noting that the stock was hit by the virus crisis at a time when it was emerging from a weak phase, the same way as its post-IPO prospects were dampened by the slowdown in the airline industry that continued even after the great recession. Customers, mostly airline companies, wouldn’t want to let go of Gogo because it helps in adding value to their offerings. Rather, aviation firms would leverage that premium touch to retain passenger loyalty, thereby expediting the recovery process.

Unique Offering

The company remains popular among aviation players for its comprehensive in-flight communication/entertainment system that plays a key role in enhancing customer experience, which is a focus area for all airline companies. The Gogo system is designed to perform as a comprehensive information system capable of performing tasks like alerting the pilot about the weather while also facilitating connectivity across the supply chain.

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The management is currently busy executing its expansion strategy that involves significant investments in the business, which it expects to meet in part by raising capital through the divestment of the Commercial Aviation division to Intelsat, a deal that is on track for closing.

Q3 Outcome

In the third quarter ended September 2020, Gogo’s net loss widened to $80 million or $0.97 per share from $22.9 million or $0.29 per share a year earlier. The deterioration of the bottom-line was due to an 18% fall in revenues to $66.5 million.

Gogo is one of the few companies that provide in-flight internet connectivity and other communications services exclusively to the aviation market. They include broadband, entertainment, and satellite-based voice/data services. The demand for in-flight communication and entertainment services is expected to grow in double-digits in the next ten years.

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Read management/analysts’ comments on Gogo’s Q3 results

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Maintaining the positive momentum, last week Gogo’s stock climbed the highest level in more than three years. The stock, which slipped below the $2-mark in the early months of 2020 when the markets were battered by the coronavirus, traded slightly above $13 early Monday. The value more than doubled in the past twelve months, but is still about half of the all-time high registered nearly a decade ago.