Investment Thesis
Viasat (NASDAQ:VSAT) delivers lackluster guidance for the year ahead. At its core, even though Viasat looks cheap at less than 2x forward EBITDA, the fact of the matter is that this business is eyeing up a year of puny growth, if any, together with a balance sheet that is expected to swell further over the next twelve months.
On top of that, management openly declares that investors should not expect positive free cash flow for another year.
In short, the stock looks cheap, particularly as it's close to its all-time lows. But it's I charge that it's more likely than not that it will continue to get even cheaper from this point forward.
Why Viasat? Why Now?
Viasat provides satellite communication services, focusing on delivering high-speed internet and connectivity solutions for various industries, including aviation, maritime, and government.
They offer advanced in-flight entertainment systems, secure communication networks, and global satellite coverage to ensure reliable and efficient communication.
Viasat's near-term prospects appear fair. The company seeks to deliver cost-efficient services to high-demand mobility customers.
Additionally, Viasat's focus on developing new in-flight entertainment, next-gen encryption, and advanced technology programs for government customers reflect its growth aspirations.
Essentially, the pitch here is that fiscal 2025 (these next twelve months) will pave the way for a reacceleration of its topline in fiscal 2026.
However, Viasat also faces headwinds. For instance, during the earnings call, Viasat described its technical anomaly with the ViaSat-3 antenna deployment, which necessitates redesigns to reduce costs and improve return on investment. This anomaly not only impacts the immediate availability and performance of the new satellite but also poses risks to the schedule of future satellite launches.
Given this mixed background, let's now discuss its financials.
End of the Inorganic Growth, Now Flat Growth for Fiscal 2025
Recall that Viasat acquired Inmarsat just over halfway through fiscal Q1 2024. This means that fiscal Q1 2025 will still have a few weeks of inorganic growth to report, but once we are past these few weeks and into fiscal Q2 2025, Viasat will have to compare with the very high hurdles of the prior year.
Accordingly, management recognizes the task ahead and has preemptively guided for an approximately flat y/y revenue growth rate for fiscal 2025.
Is that a massive problem? Well, given that the stock is already down more than 50% in the past year, during a very strong bull market, I would say that investors have well and truly factored in this potential. So, to answer the previous question, no it's not a massive problem.
However, it is a problem, when we consider the overall context of its valuation. A topic we zero in on next.
VSAT Stock Valuation - Less than 2x EBITDA, With A But
Let me highlight the bull case first. In the best-case scenario, Viasat will deliver $1.6 billion of adjusted EBITDA in the coming twelve months. For a stock with a market cap of $2 billion, that's a complete steal.
And yet, the problem is succinctly depicted in the following excerpt from Viasat's earnings call:
We continue to expect an inflection point to positive free cash flow by end of Q1 FY 2026, our path to positive free cash flow is expected to be driven by double-digit operating cash flow growth and continued declines in capital expenditures as we normalized capital expenditure in line with satellites going into commercial service.
This is a business that simply doesn't produce any free cash flow. And furthermore, it's not expected to be free cash flow positive for another twelve months.
And then, on top of that, investors still have to contend with the fact that its balance sheet is already bulging with debt.
And if all that wasn't enough, management openly notes that:
We continue to expect net leverage to increase modestly by the end of FY2025 [...] reaching peak levels prior to our turn to free cash flow in the first half of calendar 2025.
In short, investors will have to stomach an increasingly leveraged balance sheet for at least another year, before its leverage levels start to moderate.
So, yes, the stock does look cheap at less than 2x EBITDA. But once we move beyond this heavily adjusted financial metric, we are looking at a business with mediocre prospects at best.
The Bottom Line
In conclusion, while Viasat's stock appears cheap at less than 2x forward EBITDA, the reality of its financial situation paints a more concerning picture. The company is poised for a year of negligible growth, and its balance sheet is expected to swell with debt over the next twelve months.
Management has candidly communicated that investors should not anticipate positive free cash flow until the start of fiscal 2026.
Despite its potential for future growth, the immediate outlook involves significant financial challenges and an increasingly leveraged position, making Viasat a risky investment in the near term.
Personally, if I owned these shares, I would move on. I believe there are a lot better opportunities in the market right now.
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