3 Reasons to Worry About AST SpaceMobile's AT&T and Verizon Contracts
Space investors are in love with AST SpaceMobile (NASDAQ: ASTS) stock -- and for good reason.
Three years ago, AST broke on the scene as a rather sketchy-looking special purpose acquisition company (SPAC) initial public offering (IPO). It promised to build "the first and only space-based cellular broadband network accessible directly by standard mobile phones," enticing investors with dreams of "five billion mobile subscribers" paying for a "$1 trillion global mobile wireless services market."
The problem was, while the company made big promises, it held its cards close to the vest. When asked for details on how is technology works, AST's only response was "the technology is highly proprietary, and exactly how it works cannot be disclosed." Suffice it to say I was skeptical, and so concluded that "I wouldn't touch this space IPO with a 62-mile pole."
Promises fulfilled
But here's the thing: The technology actually works. In April last year, AST SpaceMobile announced that it had successfully placed the world's first ever call from one ordinary cellphone (i.e., not a "satphone" -- just an ordinary Samsung Galaxy S22) in Texas to another cellphone in Japan. In between the two phones were no cell towers, no terrestrial infrastructure at all. Just one single BlueWalker 3 AST SpaceMobile satellite.
And so was history made.
ASTS data by YCharts.
This changes everything (or does it?)
AST stock has bounced around quite a lot since that first cellphone-to-cellphone-via-satellite phone call. As recently as April, the stock was actually still down since the announcement. But two even more recent developments seem to have changed the story for AST.
Two weeks ago, AST announced a deal to provide AT&T (NYSE: T) customers with cellphone-to-cellphone broadband internet connections via AST SpaceMobile satellites in orbit. Then just this past week, AST announced a second, similar deal with Verizon Communications (NYSE: VZ).
Details on the contracts are scant. The AT&T announcement, for example, states that the contract's duration is through 2030. But it doesn't state the value of the contract. The Verizon contract, in contrast, gives a value -- $100 million -- but doesn't say how long the contract will last! Still, if we use the details from the first announcement to flesh out the second, and vice versa, it appears likely that AST SpaceMobile has secured about $33 million in annual payments from its two partners ($200 million total, spread over six years).
The first problem with AST SpaceMobile stock
And here's the first problem for AST SpaceMobile: $33 million a year isn't going to be nearly enough.
AST placed one successful phone call via one single satellite last year, but to take this business to commercial scale it will need to build and launch a lot more satellites. The first five are expected to be launched this year at a cost of $115 million. Covering most of the United States will require a total of 20 satellites in orbit, at a cost of $550 million to $650 million. Eventually, the company wants to put as many as 168 satellites in orbit -- implying the total cost of building this constellation could approach $5 billion.
AST's second big problem
So $33 million a year isn't going to cut it. For that matter, even if AT&T and Verizon pay AST SpaceMobile $200 million upfront, the company could soon run short of cash.
Consider: At last report, AST had only $210 million in the bank (and $174 million in debt). S&P Global Market Intelligence data show the company is already burning cash at the rate of more than $300 million per year. And its costs are probably rising as it builds more satellites. Even if AT&T and Verizon pay all the money they're supposed to pay over the next six years (which I'm assuming is $200 million) upfront, this still means AST will run out of cash before its first 20 satellites are built, launched, and able to deliver the service that AT&T and Verizon are paying for.
AST's third problem would be a nice problem to have
All this being said, I've been skeptical of AST SpaceMobile stock before, and proven wrong. I could be wrong about AST's looming cash crunch as well. Given the stock's strong recent performance, the company could, for example, sell a lot of stock now, at a favorable valuation, and raise the cash it needs to bring its project to fruition.
If and when this happens, the next problem AST will face is criticism from astronomers, who've already noticed that AST's "apartment-sized" BlueWalker satellite is "incredibly bright" with reflected sunlight, and could interfere with their work. This problem is only going to get bigger if AST launches 20, then 40, then 168 total satellites into orbit, and it's a PR problem AST must solve if its business is to be a success.
The good news is: This only becomes a problem if AST survives to put 100+ satellites in orbit, serving its promise of delivering satellite call capability to the 5 billion mobile subscribers down here on Earth, in the first place. I expect the space company would consider this a nice problem to have.Should you invest $1,000 in AST SpaceMobile right now?
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