Gogo Inc: Little-Known Tech Stock Delivering 43% Return in One Day?

Investors of This Low-Priced Tech Stock Just Got Lucky

If you think only big tech stocks can provide big returns, think again.

No doubt, the tech sector is filled with behemoths, some of which command over $1.0 trillion of market capitalization. Early investors of these tech giants have certainly been laughing all the way to the bank.

However, when it comes to delivering windfall gains to lucky investors in a very short period, smaller tech stocks can be even more impressive, as Gogo Inc (NASDAQ:GOGO) has recently demonstrated.

Consider this: on August 31, GOGO stock closed at $5.14 per share. On September 1, it jumped to $6.20 as soon as the market opened. Then it shot up to as high as $8.00 during the day, before closing at $7.37. In other words, in just a single trading session, this low-priced tech stock skyrocketed 43.4%.

What happened?

Well, first we need to know the background of the company: Gogo Inc is in the in-flight Internet business. Basically, the company provides network solutions that connect aircraft to the Internet.

At the same time, it develops software and platforms that enable customizable solutions for its aviation partners. The company also supports aircraft operators with services ranging from installation and maintenance to monitoring and management of connectivity services.

Now, we know that the COVID-19 pandemic has resulted in a major downturn in the global travel industry, which means business probably hasn’t been that great for Gogo lately.

Indeed, at the height of the pandemic, passenger traffic from commercial airlines was down approximately 95% globally, and Gogo’s “Commercial Aviation” business was losing a whopping $1.0 million a day before the company implemented cost reductions. (Source: “Gogo 2020 Annual Stockholders’ Meeting,” Gogo Inc, April 29, 2020.)

As you’d expect, GOGO stock wasn’t really a hot commodity for most of this year.

But then came the turnaround.

Obviously, even though businesses have started to reopen after lockdowns around the world, the global airline industry is yet to make a full recovery.

However, the turnaround I’m referring to was not in the form of substantially better operating metrics. Instead, it came in the form of a buyer for Gogo’s Commercial Aviation business.

In the evening of August 31, Gogo announced that Intelsat SA (OTCMKTS:INTEQ) would be purchasing the company’s Commercial Aviation business for $400.0 million in cash, subject to customary adjustments. (Source: “Gogo Announces Entry into Agreement to Sell its Commercial Aviation Business to Intelsat for $400 Million in Cash,” Gogo Inc, August 31, 2020.)

The transaction, while subject to customary closing conditions and certain regulatory approvals, is expected to close before the end of the first quarter of 2021.

And that, my dear reader, is why we saw a big surge in GOGO stock in the following trading session.

There are two main reasons why the announcement was such a big deal for Gogo.

First is the sheer size of the transaction. As I said, before the announcement, GOGO stock had a share price of $5.14. Based on the company having approximately 85.1 million shares outstanding, its market capitalization was around $437.0 million on August 31.

In other words, the amount that Intelsat is paying for the Commercial Aviation division—$400.0 million—is almost as large as Gogo Inc’s market cap was before the announcement.

The second reason is that, of Gogo’s two business segments, Commercial Aviation and “Business Aviation,” Commercial Aviation was the worse-performing one, due to the impact from COVID-19.

According to the company’s latest earnings report, total revenue from Gogo’s Commercial Aviation business in North America declined 72% year-over-year to $30.0 million in the second quarter of 2020. This was driven by a 74% decrease in service revenue and a 52% drop in equipment revenue. (Source: “Gogo Announces Second Quarter 2020 Financial Results,” Gogo Inc, August 10, 2020.)

In the company’s “Rest of World” Commercial Aviation business, total revenue declined 67% from a year ago to $12.0 million.

Combined, Gogo’s North America and Rest of World Commercial Aviation businesses reported a loss of $37.3 million for the quarter.

The company’s Business Aviation segment was negatively impacted by the pandemic as well. But with revenue of $54.6 million in the second quarter, the top-line year-over-year decline for the segment was a less dramatic 23%.

Moreover, despite the challenging operating environment, Gogo’s Business Aviation segment still delivered $27.2 million in profit in the second quarter.

In other words, with the announced transaction, Gogo Inc will not only receive a big pile of cash, but will also get to keep its better-performing Business Aviation segment. The company said it will use the proceeds from the sale to reduce debt and invest in growth opportunities such as “Gogo 5G.”

“This transaction creates a stronger and more focused Gogo, with the singular strategic imperative of serving the business aviation market with the best inflight connectivity and entertainment products in the world,” said Gogo’s president and Chief Executive Officer Oakleigh Thorne. (Source: Gogo Inc, August 31, 2020, op. cit.)

“The BA market continues its sharp recovery and strong demand growth trajectory, and our BA segment is exceptionally well-positioned to drive long-term value creation in that industry,” he added.

Gogo Inc (NASDAQ:GOGO) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

However you look at it, selling its Commercial Aviation business is a great deal for Gogo Inc. By selling that division, the company should be able to substantially improve its balance sheet and further expand the presence of its profitable Business Aviation segment.

Normally, after a stock shoots through the roof, it tends to experience some pullbacks. But as you can see from its chart, GOGO stock’s upward momentum has been quite strong After soaring 43% on September 1, it shot up another 28.6% to $9.48 on September 2—and it has kept going up.