The internet has transformed life as we know it. With the internet, the average person has access to the world’s store of information, nearly limitless media content, and the ability to purchase and order millions of different items online. With the development of cheaper and cheaper rockets and satellite internet, there is now potential for companies to offer internet to billions of people in rural locations and emerging markets who don’t have it at a rather affordable price. By bringing potentially as many as 4 billion new people online, everyone wins. Billions of people’s lives improve and the total addressable market for big companies increases. It’s also potentially lucrative. Although the current market for satellite broadband market is estimated to amount to around $4 billion in 2019, analysts expect that segment to rise to $22 billion in 2024 and potentially as much as $41 billion in 2029. In this article, let’s analyze how the smart money (hedge funds and savvy institutions) is playing the billion dollar satellite internet trend.
Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Of all the companies currently offering satellite internet, Intelsat S.A. (NYSE:I) is one of the sector leaders. Intelsat S.A. (NYSE:I) operates around 50 satellites to provide a secure and extensive communications network delivering cost-effective video and broadbrand around the globe. According to Intelsat S.A., the company offers the first fully global ‘pole-to-pole high-throughput satellite broadbrand network’. Of the around 700-740 elite funds we track, 42 funds owned $946.96 million of Intelsat S.A. (NYSE:I) on December 31, versus 37 funds and $1.13 billion respectively on September 30.
ViaSat, Inc. (NASDAQ:VSAT)‘s satellite services offer fixed broadband services including voice over internet protocol services as well as broadband internet access. In February, the company and Facebook announced a collaboration to help speed up the deployment of affordable, high speed high quality internet to communities in rural Mexico that lack reliable internet. In terms of their arrangement, Facebook is investing in the rollout that provides Viasat high speed satellite Wi-Fi hotspots in thousands of rural locations. CEO Mark Dankberg said,
Enabling the next four billion internet users to come online is one of the grand challenges of our time – and participating in that is also one of the most exciting and rewarding opportunities of the mobile internet era. Rural communities, especially in emerging markets, are often the hardest to serve economically, yet are a vivid example of how Viasat’s innovative space communication systems can bring broadband communication services to the places that need it most, at the lowest bandwidth costs.
Around 10% of ViaSat’s float is short, indicating that some smart money funds are likely betting against it. While that may be the case, the stock has returned almost 50% year to date.
In addition to providing funding for ViaSat, Facebook Inc (NASDAQ:FB) has its own plans for satellite internet. The company recently filed a request with the U.S. government to fly a satellite in low orbit, indicating that its secret internet satellite project – termed Athena- might soon become a reality. If more people have internet, Facebook could potentially have billions more users using Facebook, Facebook Messenger, Instagram, and WhatsApp. That means potentially a lot more ad sales for shareholders. AQR Capital Management LLC reported owning a stake of 6.84 million shares at the end of December, worth almost $900 million at the time.
Like Facebook, Alphabet Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN) also have plans for satellite internet. Alphabet’s Loon division is collaborating with satellite internet provider Telesat to deliver a network operating system design that Telesat can use to support its global low earth orbit satellites. Amazon may launch over 3,200 satellites to access the next 4 billion customers. Both companies win if billions more people have internet access. Not only will their cloud divisions realize more sales, but also Amazon will likely sell more products via e-commerce and Alphabet will have more ad revenue via search and YouTube. George Soros’ Soros Fund reported a stake of 16,000 shares in Amazon at the end of 2018, worth over $24 million at the time. Meanwhile, 161 top funds that we track had a bullish position in Facebook Inc (NASDAQ:FB) at the end of the fourth quarter.