One of the world's largest providers of broadband connectivity services for the business aviation market, Gogo Inc. (GOGO), has been operating for nearly three decades. The major stock market indexes witnessed a decline on October 1 on inflation fears. The S&P 500 index declined 4.8% on October 1, while the Dow and the tech-heavy Nasdaq Composite fell 4.3% and 5.3%, respectively. However, GOGO’s shares have surged 38.8% over the past month to close Friday’s trading session at $18.57.  Moreover, the stock hit its 52-week high of $19.23 on Friday. 

The company raised its long-term financial targets on September 28. Its revenue is expected to grow at a 15% CAGR between 2020 and 2025, while its annual adjusted EBITDA margin is expected to rise from 40% in 2021 to 45% in 2025. However, GOGO will not likely launch its 5G network until next year. It sold its Commercial Aviation (CA) business in December 2020. Moreover, the company reported losses in the second quarter. So, GOGO’s near-term prospects don’t look very promising.

Here’s what could influence GOGO’s performance in the upcoming months:

Industry Headwinds

The full approval of Pfizer Inc. (PFE) and BioNTech SE’s (BNTX) COVID-19 vaccine in August 2021 provided the air travel industry some hope. However, the Delta coronavirus variant keeps dampening the industry’s growth prospects. According to an Adobe Inc. (ADBE) report, airline prices began falling in August 2021 after rising in July for the first time. This trend continued last month. Moreover, Bain & Company reduced the revenue projection for the industry this year. So, GOGO could be negatively impacted.

Mixed Financials

GOGO’s total revenue surged 50.8% year-over-year to $82.38 million for the second quarter ended June 30, 2021. Its air-to-ground (ATG) aircraft online (AOL) came in at 6,036 in the quarter compared to 5,399 in the year-ago period. However, its satellite aircraft online decreased 2.5% year-over-year to 4,587. Its total operating expenses increased 40.7% year-over-year to $52.77 million. Its net loss came in at $69.25 million compared to $85.98 million in the prior year quarter, while its loss per share came in at $0.63 compared to $1.05 in the year-ago period.

Ongoing Investigation

Several law firms have launched an investigation against GOGO, alleging that the company made certain false and misleading public statements about the reliability of its in-flight internet connectivity services and its impact on its financial picture. Also, on April 26, 2021, Judge Jorge L. Alonso denied a motion to dismiss a class-action lawsuit pending in the United States District Court for the Northern District of Illinois against GOGO and certain of its officers.

Stretched Valuation

In terms of forward non-GAAP P/E, GOGO’s 55.43x is 180.8% higher than the industry average of 19.74x. Similarly, the stock’s forward EV/S and EV/EBITDA of 8.43x and 21.06x are higher than the industry averages of 2.60x and 9.85x, respectively. In addition, its forward P/S of 6.18x is 255.3% higher than the industry average of 1.74x.

POWR Ratings Reflect Bleak Prospects

GOGO has an overall rating of D which equates to a Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. GOGO has a D grade for Value, consistent with its higher-than-industry valuation ratios.

The stock has a D grade for Quality. This grade is justified as GOGO’s trailing-12-month net income margin and levered FCF are negative, compared to the industry averages of 6.62% and 11.43%, respectively.

GOGO has a D grade for Stability as well, in sync with its beta of 1.27. Moreover, it has an F grade for Sentiment, consistent with analysts’ expectation that its EPS will remain negative in fiscal 2021.

GOGO is ranked #62 of 66 stocks in the Air/Defense Services industry. Beyond what I have stated above, we have also given GOGO grades for Momentum and Growth. Get all of GOGO’s ratings here.

Bottom Line

GOGO’s shares soared to hit their 52-week high on Friday due to investors’ optimism surrounding its long-term financial targets. However, as the airline industry continues to face pressure related to the COVID-19 pandemic, it remains to be seen if GOGO can meet its targets on time. In addition, the stock looks overvalued considering the company’s near-term growth prospects. So, it could be wise to avoid the stock now.

How Does Gogo (GOGO) Stack Up Against its Peers?

While GOGO has an overall POWR Rating of D, you might want to consider taking a look at its industry peers holding a B (Buy) rating: Atlas Air Worldwide Holdings, Inc. (AAWW), Napco Security Technologies, Inc. (NSSC), and L3Harris Technologies, Inc. (LHX).

GOGO shares were trading at $17.49 per share on Monday morning, down $1.08 (-5.82%). Year-to-date, GOGO has gained 81.62%, versus a 16.41% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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