With so many large-cap companies in focus these days, now might be a good time for investors to recall that there are plenty of advantages associated with investing in small-cap stocks. These are companies that have a market capitalization between $300 million to $2 billion and offer tons of growth potential versus larger and more established companies. Small-caps tend to outperform large-caps during bull markets and savvy investors can discover some truly undervalued gems since these stocks tend to fly under the radar of institutional investors. With that said, small-cap companies can be extremely volatile and can oftentimes have trouble staying afloat during periods of economic uncertainty.
One small-cap stock in the headlines this week is Gogo (NASDAQ:GOGO), a company that provides inflight broadband connectivity and wireless entertainment services to the aviation industry. Early investors in this stock have been on a turbulent ride thus far but recently got some encouraging news after the company announced that it’s selling off the commercial aviation side of the business. Let’s take a deeper look at Gogo’s business model below and assess whether or not it’s a stock worth buying at this time.
Premier Global Provider of Inflight WiFi Products and Services
If you’ve ever used WiFi while flying on an airplane, the chances are good that you used this company’s in-flight connectivity services. Gogo is partnered up with most of the major airline companies to provide in-flight WiFi, including companies like Delta Airlines, United Airlines, and American Airlines. Until recently, Gogo had two main business lines, business aviation, and commercial aviation. It’s easy to recognize the potential in a company like Gogo since most people want the ability to use their digital devices during air travel. This is especially true for business travelers. With that said, Gogo is a company that has been dealing with some big problems.
Since Gogo is a company that depends on the health of the airline industry, it’s had a difficult year thus far. Gogo has been facing dire liquidity problems as the company’s revenue has taken a major hit thanks to a sharp drop in airline traffic. In Q3, Gogo’s commercial aviation segment reported a year-over-year service revenue decline of 61% to $40.5 million along with a net loss of $71.2 million. Those aren’t the kinds of numbers that long-term investors like to see, even if some of these issues are the result of an unforeseeable pandemic. With that said, it appears that the company might be making progress towards righting the ship.
Completed Sale of Commercial Aviation Business
The news that investors were cheering this week was the announcement that Gogo has completed the sale of its commercial aviation business to a subsidiary of Intelsat S.A. (OTC:INTEQ) for $400 million in cash. The move should help the company pay down some of its debt, generate positive free cash flow, and invest more money into its profitable business aviation franchise. Q3 Revenue for the business aviation segment grew 22% sequentially from Q2 2020 and it’s clear that Gogo is committed to becoming the industry leader in business aviation connectivity.
The sale is also a plus for the company since it will stop the financial damage that has been occurring due to the poor performance of its commercial business. Gogo also received a credit rating boost from S&P from CCC+ to B- taking it out of junk territory.
Is Gogo Stock a Buy?
While the recent sale of the unprofitable commercial side of the business should largely be considered a positive, investors should still be cautious about adding shares of Gogo at this time. The company is taking the right steps towards improving its financial position and focusing on the side of the business that has the best growth prospects, but there’s still a lot of work to be done. The bottom line is that Gogo is a company that investors should monitor going forward, especially after it launches its 5G network in 2021, but the stock is not a screaming buy at this time.
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