It’s the penultimate day of the workweek, which means it’s time for me to identify a stock with unusually active options that are worth buying or selling.
Excluding options expiring on Friday, Barchart.com’s list of the top unusually active options from Wednesday’s trading included some interesting names.
Leading the top 100 of 1044 unusually active options was Gogo (GOGO) with an August 16 $10 call. It was expiring in 155 days (5.5 months) and had a volume of 20,051, 174.36x its open interest. That’s more than double the next-highest ratio at 74.20.
Gogo’s volume on Wednesday was 45,672, more than 20 times its 30-day average. The last time its volume was over 10,000 was November 16. Someone has a major interest in the company’s stock.
Despite the enormous volume yesterday, GOGO shares are down 4.5% year-to-date, 40% over the past year, but up 90% over the past five years, 701 basis points higher than the S&P 500.
Here’s why you might want to consider Gogo call options.
Who Is GOGO?
According to Barchart’s Price Overview page:
“Gogo is the leading provider of in-flight connectivity and wireless entertainment solutions for the global aviation industry. They currently provide services on approximately 9,600 aircraft, representing more than 20% of the world's total commercial and business jet aircraft.”
I’m trying to remember when or if I’ve written about the company. Alas, I did in November 2022. At the time, I thought the stock was cheap, and its business was good. It was trading near $16. It’s down 41% in the 16 months since.
In 2022, I suggested that the company expected its free cash flow to hit $200 million by the end of 2025, up from a projected $55 million in 2022.
How’s Gogo Doing?
Well, it’s a mixed bag.
In Q3 2022, its total revenue was $105.3 million, 21% higher than in Q3 2021. In Q3 2023, it was $97.9 million, 7% lower than 2022. On the bottom line, Q3 2022 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $43.7 million, 7% higher than Q3 2021. In Q3 2023, it was $43.2 million, 1% lower than a year earlier.
However, in 2023, its free cash flow was $82.7 million, 43% higher than its actual free cash flow in 2022 of $57.8 million. To reach its goal of $200 million, it’s got to appreciate by 56% in 2024 and 2025.
That’s a bit of a stretch.
As I review its Q3 2023 guidance, I see that its projections were even more ambitious than I remember.
“We reiterate our long-term financial targets for 17% revenue growth for 2021 through 2026 and over $200 million in Free Cash Flow beginning in 2025,” stated Gogo CEO Barry Rowan on Nov. 3, 2022.
Further, the company stated that its 2023 free cash flow would be $150 million at the midpoint of its guidance. It got a little more than half that.
The inability to meet its guidance is the likeliest reason for the downward push on its share price.
Remember, the company called for 17% revenue growth from 2021 to 2026. In 2021, revenue grew 24%, 700 basis points higher. For 2022, its revenue was $404.1 million, 20% higher than in 2021. In 2023, revenue was $397.6 million, 2% less than in 2022.
Overall, its revenue growth between 2021 and 2023 was 8.8%, about half its projection. In 2024, it expects revenue of $418 million, or 5% growth over 2023. It expects to grow revenue by 15-17% annually through 2028, with free cash flow between $150 million and $200 million.
Gogo changed its tune.
Why Buy Given Downward Revision?
First, it’s launching two new products. Gogo Galileo and Gogo 5G. The former is dedicated to business aviation and provides 100% global broadband coverage, while the latter claims to provide the best in-flight streaming experiences available.
I’m not a techie, so I can only assume that, given its history in this field, it is not blowing smoke. It’s conceivable that these two products could deliver the requisite revenue growth to meet its latest goals.
More importantly, consider its current valuation based on 2023 free cash flow of $82.7 million and an enterprise value of $1.73 billion. That gives it a free cash flow yield of 4.8%. Anything between 4-8% is fair value.
Should it hit $150 million in 2025 free cash flow, its free cash yield would be 8.7%, putting it squarely in value territory.
Back to the call option.
With an ask price of $1.35, it was a down payment of 13.5%. While that’s high, it’s still not a big deal in the grand scheme. If these products gain traction through the summer, I don’t have any doubt their share price will be in double digits.
How far? We’ll find out, but the risk/reward proposition is fair.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
