Chit Chat Stocks - They Pitched Tesla and Nintendo In 2018. Now, They Are Bullish On AST SpaceMobile Stock (Ticker: ASTS)

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Starting point is 00:01:18 On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome into another edition of the Chitchat Stocks podcast. My name is Brett Schaefer

Starting point is 00:01:48 and as always joined by Ryan Henderson. We have a special episode today. We have two guests covering, let me make sure I get the name of the company right, AST Space Mobile, ticker ASTS for anyone that has never heard of it before. And we have two guests, Ryan O'Connor from Crossroads Capital and Twan from 10 West Advisors. We're going to jump right into it, guys. Ryan, I will let you answer this first question. And Twan, you can have any follow-ups as well. What is AST SpaceMobile trying to build and lay out the history as best you can of how we got to where we are today? Sure. Great question, guys. Pleasure to be here. You know, I think in its simplest, not to steal the company's tagline, but at the end of the day, they're trying to connect the

Starting point is 00:02:42 unconnected. The history involved is kind of a long one. Maybe Twan is, you know, he's been involved for a longer period of time. But that's a story, a book in and of itself. But it's all about connectivity and ensuring that, call it 18 months from now, you could basically sit on top of Mount Kilimanjaro if you want and HD Netflix to your cell phone. Maybe that's a slight exaggeration. But whether you're on top of a mountain or in a desert, providing space broadband the entire world. I mean, I think a lot of people talk about data being the new, you know, the modern world's oil. While I don't necessarily disagree with that, I think connectivity is kind of closer to the modern world's oil. And so this is one of the few companies whose underlying tech

Starting point is 00:03:33 and kind of in the process of, you know, kind of pioneering their own new industry can truly change the world, both in the developed markets and, you know, hopefully over time as their full constellation goes up throughout both developed and non-developed markets. It's just hard to participate in the modern economy absent internet connectivity and, you know, filling that gap everywhere all the time kind of speaks for itself. Tuan, do you kind of want to add anything there? Sure. Thanks for having me on, guys. Just to level set again what AST does. So they are launching the largest phased array antennas in the history of mankind into low earth orbit so about 500 to 700 kilometers up you're going to have these giant antennas that are about half the size of basketball

Starting point is 00:04:19 court and they need to be that big so that they can provide 5g connectivity direct to your cell phone so unlike starlink or kyper where you need to have a dish a terminal on the user side this can go right to your cell phone. So that is the vision of the company. They're well on their way in executing it. And I think for me, in my investing career, it's always been important to understand what a company really does. Was Amazon really a bookseller? No. They built out massive data center capacity and a giant logistics network. Was NVIDIA a gaming GPU company? No. They just provided massive, high-performance computation. And then you could see all the applications that people built on that.

Starting point is 00:05:05 So when I think of AST, I don't really think of just, you know, they're going to let me stream Netflix to my cell phone on top of Mount Kilimanjaro, like Ryan said, which is true. I think of this company as this company can control the electromagnetic spectrum anywhere on Earth. And then you have to think of all the applications that can be built on that from defense to consumer applications and applications I can't even think of. And that's the beauty of investing in a key enabling technology, right? You can never dream up by yourself all the applications that people are going to use this key enabling technology for. So that is what drives my enthusiasm, optimism for the giant TAM that AST conventionally have. Okay. And I want to get more into the TAM and the potential moat here in a bit. But I'm curious because this is probably not a household name for most investors.

Starting point is 00:06:11 Ryan, you mentioned that Tuan brought the idea to you. Tuan, how did you come across the idea to begin with? So I think as an investor, it's really important to notice when things in the world change. And if those changes go against what conventional wisdom is or what people think will happen, you know, for example, Tesla, right? for the longest time, everyone thought starting an EV company was stupid. But kind of the fundamental change that you had to notice there was that the cost of batteries was just going down dramatically. And that was driven by scale economies and consumer electronics. So you ended up where if you ran the math far enough, that you could see that Tesla of making an EV car would be much cheaper

Starting point is 00:07:03 than making an ICE car. So one of the things I noticed was that the cost of launch is going down, thanks to SpaceX, right? Used to cost tens of thousands of dollars, more than that, to put a kilogram of mass into space. SpaceX is just driving down that cost tremendously, and you're gonna have new entrants such as Blue Origin,

Starting point is 00:07:23 Rocket Lab, relatively just a ton of people going to private space launch. So the cost of getting a kilogram in the space is going down. And if you look at the history of just the satellite companies, like the satellite companies were just they're horrible businesses. They've all gone bankrupt. One of the things I had written on my wall once was never invest in a satellite company. Right. They're just they're just terrible. And it was because of launch costs. so and if you look at past attempts as kind of at satellite connectivity you had iridium right because it costs so much to get something into space they had to build a custom giant phone

Starting point is 00:08:04 right to close the the rf loop from your phone to space you either need a giant antenna up in space or you need a giant cell phone which you know is ugly expensive and pretty much unusable So because costs to launch was going down, that means that AST was able to put a gigantic antenna into space, right? And that solves the problem of letting you use your regular cell phone on the user side. So it was just me looking around and saying, how does the world change now that launch costs are going down? And, you know, found AST. It seemed like a crazy idea at first. It came public as a SPAC, so this is sort of like throw up in my mouth twice.

Starting point is 00:08:51 But once you started doing the work and really understand how this company learned from the history of all the other satellite failures and how they corrected the business model problems with that, then it was just, wow, if they get this thing to work, this is just going to print billions and billions of dollars of cash flow. You know, and to Tuan's point, one of the kind of early recommendations that he gave me in terms of kind of ramping this learning curve and, you know, kind of the overwhelming nature of it was, you know, he was like, go by Eccentric Orbits by John Bloom, which is essentially the story of Iridium. In retrospect, that was such a perfect recommendation on so many levels because it does two things. It provides kind of a bird's eye view of a kind of a critical historical case study where, you know, essentially Abel, you know, call it the, you know, the owner operator, right type of crazy CEO behind the company to basically figure out where all the landmines were. I mean, everything from not only the cost of launch, but, you know, having to become, besides a satellite company, a hardware manufacturer, you know, customer acquisition and retention and the marketing expense that goes along with that. Billing, which is so mind-numbingly complex, you just got to laugh. And so, you know, not only was he kind of as a fellow case study nut able to kind of study the past and engineer a business model that kind of sidestepped all of those Achilles heels historically. But, you know, and, you know, one question I'd love to ask him is, was the kind of majestic economics of what AST is, you know, really kind of thought through from the beginning?

Starting point is 00:10:37 Or was it more just serendipitous luck, you know, that came from kind of studying the past, all of the ways you can essentially blow yourself up? figuring out workarounds, the net result was this just beautiful kind of win or take most defense infrastructure aerospace asset, where the economics just were kind of, are so good because of an afterthought of survival, or whether, you know, he kind of had both in his head at the same time. There is no better way to kind of understand not only the beauty of the business, but I think, you know, the true magnitude of all they've accomplished. I mean, simply becoming a prime contractor with the DoD, you know, you read Eccentric Orbits and you're just going to laugh out loud at how incredibly difficult that is. And from my perspective,

Starting point is 00:11:24 when you see, I don't know, 50 plus global MNO partners, you know, the presence of Google and American Tower, who is essentially well known and has been for a long time as kind of the goats of emerging wireless technology, you know, being involved in the cap stack. There's so many different ways. The fact that, you know, in a pretty short record amount of time, they became the DOD, looked at them and, you know, made them a prime contractor. All of these things don't materialize unless a lot of very smart people have taken a very granular approach to the technology and the solution that AST was putting forward. And while not a certainty that it works, I think you can use kind of common sense here in terms of if some of the smartest engineers in the world

Starting point is 00:12:11 from the biggest and best companies that have a lot to win or lose are all involved, maybe you should kind of take notice. And once I got through that book, I became obsessive about it. I still don't know probably a third of what Tuan has accumulated since he got involved, but it is a very unique, very special business that I don't think come around very often in terms of what it is today versus what it will be three, five, 10 years from now. It's a special setup for sure. Okay. Let's talk about some of the technological differences of what AST is building versus some of their competitors. I guess, Tuan, maybe I could direct this question at you, but what are the differences between AST's product here and competition from the likes of Kuiper or Starlink? And then what is sort of the addressable market? How many people could this connectivity serve? So I think to start off, there are two, I think, different services in space. So Starlink has both of these businesses.

Starting point is 00:13:20 There is the fixed wireless where Starlink and Kuiper, as they get more satellites in the air, will provide you internet service to a terminal, to a dish that is stationary somewhere, maybe you stuck it on your car. The other part of this puzzle is direct-to-device. So this is what AST is going after and also Starlink. And I would say on the technical side, the key differentiator for AST is that their satellites are just huge. I mean, size matters for antennas. And AST has built a technology where they're able to take a, you know, just imagine a flat array that is half the size of a basketball court.

Starting point is 00:14:06 It's a few centimeters thick. On the top side is solar cells. On the bottom side is just antenna elements. And they're able to fold that all up and get it to fit inside a rocket fairing. So on a Falcon 9 rocket, they can fit four of these satellites on there. And once they're into space, then they will unfold. The issue with Starlink right now is that their direct-to-device technology is it comes from a acquisition of a company called swarm and they really built this technology for iot purposes so internet of things not really high bandwidth applications and starlink's antenna is just too small and they want to correct that and their next they say the next version of their starlink satellite v3 will have a larger array and be able to provide better service

Starting point is 00:15:03 but they need to get starship working for that and starship hasn't been working so well nine launches at least but you know i wouldn't bet against elon i'm sure starlink will get all those things working and you know over the long term i'm hesitant to really you know attribute any type of mode to technology i'll assume that starlink gets there and really the mode that ast will have and why I think it ends up probably a duopoly in space with them and Starlink and for a directed device is AST's commercial model and how they partnered as a wholesale partner with M&O's AT&T, Verizon, Vodafone, and their path to market. Yeah, I would, you know, and Tuan, correct me, you know, depending on your thoughts,

Starting point is 00:15:55 But I think you can point out in terms of the industry structure at maturity and why I think what we're dealing with is very likely a winner take most duopoly. You know, it can boil, you can kind of break it down from a couple of different ways. But, you know, the first is D2D spectrum is really, really scarce. And that fact alone, given its cost. And I remember when Twan and I were talking about this early on, he asked me for, you know, the appropriate sports analogy, my favorite sports. what, who are the two biggest rivals you can imagine? And I think the Royals were playing the Yankees in the playoffs. And so, you know, I said, oh, I don't know, Royals versus Yankees.

Starting point is 00:16:34 And he's like, imagine if you saw two competitors sharing each other's toothbrush, given, you know, kind of what that implies. But, you know, I think that the fact that, you know, they're able to leverage the spectrum of, you know, terrestrial partners is a huge deal, you know, in and of itself and something that I think, you know, should make people kind of take up given, you know, you basically AST for whatever reason you want to presume, got two kind of mortal enemies to share their most valuable asset, you know, for the better good of all of them. And I think that point's very interesting. And then, you know,

Starting point is 00:17:11 the other element of it is basically, you know, if you're going to evaluate, you know, AST, for example, market position with respect specifically to the moat, you know, I think you've got to look at, you know, once their constellation, you know, is up fully turned on and, you know, providing service, you know, you kind of have to ask yourself, what are the economic incentives for building a competing constellation when, you know, one of the competitors, existing competitors, you know, call them Goliath or SpaceX. I mean, given Elon and their, you know, valuation, cost of capital, you know, kind of the relentless nature of who they are, I think it's kind of a enough said thing. And, you know, the David in this story just so

Starting point is 00:17:51 happens to kind of have already locked up 70% share in the North American market, which in telecommunications, the, you know, selfless business, I mean, it is by far the most profitable market in the world. And so you have the three biggest players basically controlling the entire market with AST having 70% share in the most profitable market in the world, the carrot, if you will, for competing constellations to, you know, I mean, just think about getting financing. Assuming you could get some type of toehold in the North American market, you would still, you know, the ability to take market share and therefore get financing to, you know, finance a multi-billion dollar constellation given kind of the forward outlook and, you know, any X or Y

Starting point is 00:18:38 competitor's ability to take share. Good luck with that. But those are just two reasons. But really kind of break it down and think through the business decision making process, you know, of an entrepreneur that, you know, say wanted to compete in this area, and all of the hurdles that would be before them with, you know, AST having a seven and a half, eight year head start, you know, I think you'll come to the decision really quickly that it's kind of an overwhelming task. So it's a It's a very interesting thing. I think the durability of the moat and kind of the continuous widening of its competitive advantage period, to use a jargony term, is a very, very high likelihood once the constellation is up and turned on. Do you want anything to add there? No, I think just to bullet point what Ryan said. So AT&T and Verizon are both partners and investors in AST. So I can give you a real time sort of recollection of my experience of that.

Starting point is 00:19:42 So AT&T had been a long time partner and had invested in AST. And then last May, press release came out that stated that Verizon is joining. And mind you, AT&T had an exclusive partnership with AST at this point, that Verizon was joining both as an investor and as a partner, which means that AT&T had to have waived their exclusivity. and they did that so that they could have a unified 800 megahertz spectrum all across the continental continental us so when i saw that news i was it just blew my mind it's like lakers and celtics you know royals and yankees fans we're all gonna share a toothbrush and share underwear together because you know you have the two biggest competitors or two of the three biggest competitors in the U.S. market and they decide to get together and share spectrums. So I think that's just kind of a testament to, you know, the opportunity that both AT&T and Verizon see with AST. And just to reiterate Ryan's point, like I, you know, if you're a new entrant,

Starting point is 00:20:52 how are you going to ever get to profitable scale? If you can't get AT&T, you can't get Verizon in the US. You can't get Vodafone in Europe. I mean, those are the two biggest Western markets, most profitable markets. And you're going to launch a few billion dollars in R&D, few billion dollars in launch cost. You're going to launch a constellation on spec, not be able to get those customers. It just seems unlikely to me. Okay. Yeah, that makes sense. We're going to come back to the potential unit economics of these deals and how the business model is going to work once you know they start selling services but i want to come back to the technology when we try to you know come up with interview questions

Starting point is 00:21:38 we ask people within our network on twitter what have you and with this one they kind of came back with stuff like well how do we know that it works and people asked you know will it work on an airplane will it work on at sea what blah blah blah blah all these you know use cases are there any concerns over the viability of this technology given that we're still in the pre-revenue phase i have no concerns um so you know one of the benefits of running your own fund is that i can spend my time however i want so you know after learning about ast reading about it you know i just picked up a hobby in rf engineering right i order an rf engineering textbook i spend all my day my entire day on youtube watching engineering lectures and i got comfortable for myself that

Starting point is 00:22:31 the technology would work if you're not you know you're not able to do that or willing to do that i mean i i i totally admit that's extreme behavior but look look you have you have engineers from AT&T, Verizon, Vodafone, Google, they've vetted this stuff. That should be a signal to you that the technology works. There are live video demonstrations. These are not just pictures after the fact that Starlink does. You can go watch a video. You can watch them make a live video call, live FaceTime call using the AST satellites that are up there right now. So I think that brings me enough comfort as an investor that the technology works. They now just have to scale everything up. And that, you know, one interesting anecdote from

Starting point is 00:23:34 another investor that's involved. So Hennessy Funds, they're also a large investor in AST. And the reason that they got involved was that they were longtime investors in American Tower and American Tower is an investor in AST. And obviously, Hennessy being invested in AMT for decades has a good relationship with them. So they wrote that AMT throughout its history has been very accurate in dismissing technologies, saying, yeah, whatever, this is never going to work. the sheer fact that amt amt said hey this is a real thing we're actually investing in the company you know got hennessey to talk to amt and hennessey eventually to invest in ast and amt has a board member so you know all these things you can do the work yourself you can you rely on signals from people that know what they're doing but you can put it together enough of a mosaic i think that

Starting point is 00:24:35 should give you comfort on the technology side and your question about air yeah airplanes airplanes yeah airplanes i was gonna ask about that yeah yeah so you know the the testing that they've done it works you know it works obviously on the ground through one or two walls they've tested it in cars and they are testing it on airplanes so there's no reason for me at least to believe that it wouldn't work on an airplane right and airplanes i guess are that's a small part of the addressable market and probably unless i'm missing something the most difficult so even if that's hard or it's not as reliable up there i mean you know that's not the end of the world right i don't think it's a big deal if you're worried about the motion of the airplane just reminder these satellites are

Starting point is 00:25:21 circling at you know 27 000 kilometers per second they orbit the earth in 90 minutes so there's no velocity issue like i'm moving in an airplane i won't be able to get a connection i i have I have great confidence that works in airplanes. But again, that's that's a ditch use case. Well, it's kind of like, yeah, I mean, I think it's down the line of the several trillion dollars in market cap. You know, it could capital or cannibalize in time. But, you know, I put that in, you know, like cruise ships. I can't remember what it was, but, you know, they make a considerable amount of profit gouging the eyes out of their the people on their cruises because they're captive customers and they have nowhere else to go. So, you know, similar deal with airplanes where, you know, nothing will ruin my day than getting on a flight where the Wi-Fi doesn't work. And, you know, as someone that has paid, you know, $10 to $20, you know, endless amount of times, you know, to get connectivity while I travel, you know, think about it this way.

Starting point is 00:26:25 You know, if you get on your plane and, you know, you can get a relatively seamless browsing internet, you know, all those capabilities already on your phone via your existing Verizon account or AT&T account, you know, what is the incentive to even consider purchasing the plans available that, you know, we've had to purchase for the last, you know, 10 plus years, you know, since it's been a thing. And, you know, I think that from a use case perspective, that rapidly goes pretty close to zero. I mean, maybe if you're a private jet and it's, you know, you're a business that is trying to close an M&A deal in France and fix broadband, you know, you need that antenna because of the amount of data you might be trying. I mean, I'm just trying to think of, you know, potential where their market would be safe. But I think it's pretty hard. I think there's quite a few very nice little niche businesses, at least historically, that are going to be shit out of luck in terms of their terminal value, probably sooner rather than later. But I don't think, to Twan's point, I think it'll be a while. I mean, I think the level of unmet demand for their solutions is so far in excess of what they will be able to provide, you know, at any point over, say, the next three to five years that, you know, maybe there's some time before it starts to kind of attack these smaller adjacencies.

Starting point is 00:27:49 but I think it's a matter of when, not if, and I wouldn't want to be, I wouldn't want to try and compete with that type of value proposition in a world where AST has its full constellation and the bandwidth to start going after some of those more niche opportunities. All right, folks, if you're a regular listener to Chit Chat Stocks, then you know that we use FinChat.io daily. FinChat is the complete financial data platform for stock-focused investors. They have robust financial data on more than 100,000 stocks globally, including company-specific segment and KPI data. So you want to see Amazon's revenue from advertising? Finch has got it. How about Netflix's subscribers by region? Yep, they've got that too. And they just added

Starting point is 00:28:31 Morningstar research reports for all subscribers. So if you are subscribed, you can now get all the latest Morningstar high-quality research reports on more than 1500 stocks globally. If you're interested, head on over to FinChat.io slash chitchat. All new users automatically get two weeks of FinChat Pro for free. But if you want to extend to any paid plans, our link will get you 15% off. That is FinChat.io slash chitchat. The link will be in the show notes. And where is... So maybe this is a dumb question, but we got this from people that you know, follow the show. Where is that large addressable market coming from? I think people look at maybe existing telecommunication providers say, oh, I get AT&T or T-Mobile or Verizon or what

Starting point is 00:29:23 have you. It covers most of the United States. When would I use this product? Maybe how are you guys looking at it when thinking, oh, there is actually a giant opportunity for AST? Twan, I'll leave this to you. I loved in your BIC write-up where you quoted the, was it McKinsey that did the 1980 evaluation of the cell phone market? And I think like it's max, the estimates are ludicrous, but I think this is one of the most absurd angles of the Bayer thesis is that, you know, there are no customers for this type of thing.

Starting point is 00:29:59 And before I turn it over to Juan, like, let's just think of for today and when we'll get into the valuation and the unit economics and kind of what you're buying today. It helps to be very, very simplistic and conservative within its kind of three earnings engines or broad, you know, immediate market opportunities. And the first is the first responder business. You know, these are services where lives are literally on the line for disasters. You know, I mean, within the last year, year and a half, I mean, you've had the hurricane, the California wildfires. There's, you know, a handful of kind of examples that are kind of hitting us in the face of how important ConnectEDV is, you know, in particular in these kind of disaster scenarios. And so let's just look at AT&T's FirstNet, which is kind of partnered with the government. And they are, they have their own kind of spectrum and, you know, their entire purpose is to connect the unconnected when it matters most.

Starting point is 00:30:58 you know, like the wildfire and whatnot. And yet here, I think, Tuan, correct me if I'm wrong, but I think AT&T and FirstNet are in the government combined have spent 21 billion or so building out this emergency network. It probably works 80% of the time. It definitely doesn't work when it's the one use case that like the entire operation was spun up to solve. And so, you know, You've got to ask yourself, you've got $21 billion sunk, a bunch of high-profile disasters and emergency response scenarios where you've, to excuse my language, completely shit the bed. I mean, I can still picture camera footage of Teslas driving in with Starlink's fixed antennas in the back of the cars because that was basically the only thing that could kind of alleviate the issue. But, you know, if you've spent $21 billion and you still haven't accomplished kind of the primary goal of that CapEx, you know, what is taking your utility from works 80% of the time to 100% of the time when it matters the most worth? You know, and, you know, what does that translate to ARPU from AST's perspective?

Starting point is 00:32:13 But so there's obviously a lot of different ways to kind of frame this. But at the end of the day, unlike, say, with the consumer broadband opportunity, where you are forced to kind of take a stab in the dark, and there's various things that can inform this, some of them better than others, but what percentage of users are going to adopt kind of this new technology and, you know, therefore, how fast should they scale? The attach rate on first responder business is essentially 100%. So just with in North America alone, you have its two existing M&O partners, FirstNet from AT&T, and then I think it's Frontline, right, Tuan, for Verizon. roughly 12 million first responder users winning this business and there's been a ton of recent details and FCC filings and whatnot but for without getting into the fact that I think you know this contract will come in the near term you just take those two kind of uh embedded locked in customer bases uh so 12 and a half million you know the attach rate is going to be something close to 100%. I've talked to, we've done channel checks to things like firefighters

Starting point is 00:33:23 and places in Texas, in KC, Missouri, various places. They have kind of confirmed the common sense nature. Of course, they're going to be subscribing. But at 20 bucks in terms of ARPU per month, which I think is kind of beyond reasonable, not only given the sunk cost, but first responders by definition get network priority in various other assurances as part of their subscription to this. But so you run the math and just from the first responder business in North America, between AT&T and Verizon, you're looking at annual free cashflow, 1.5 to call it 3 billion from that vertical by itself. The market cap today is 8 billion, give or take. So zero out the consumer broadband opportunity and just focus on, we'll call it the slam dunk low hanging fruit.

Starting point is 00:34:16 And you're getting one of the best businesses I've ever seen. You know, time will tell. But what could be the best for, you know, a truly ludicrous multiple to call it normalized free cash flow or medium term earnings power looking out two to three years. So I don't know where I was actually going with this or what the original question is, but I'll shoot it over to Twan. You don't have to make, you can make some very simple assumptions and get to a free cash flow estimate a few years out that kind of say it all. But back to you, Twan. Sure. I am not super worried about demand. I think for some time, not a long time, just depends on how quickly they can get satellites launched up there.

Starting point is 00:35:01 AST is going to be capacity constrained and they will have to high grade who they sell their capacity to. And it's going to be by the people who can pay the most and people that can pay the most is department defense. So AST is technically not pre-revenue anymore. They are booking revenue from defense contracts and all the signs point to AST being part of Trump's golden dome. So there are going to be potentially some very large contracts coming in from there and sort of the next group of people that i think can pay a lot are going to be like ryan said the first responders like no government agency is going to be like all right you're gonna have to pay an extra 20 bucks a month but you know if a hurricane comes through you can still communicate like that's

Starting point is 00:35:50 just a no-brainer decision and you know the third tranche of people is just you and me regular consumers. And you know what? Sometimes when people say they won't pay an extra $5 a month or $10 a month, you know, maybe some people won't. I'm a pretty cheap guy and I pay that amount. It's like a Starbucks coffee or burrito at Chipotle. Skip your burrito for a day. And when your kids go camping with, you know, a friend's parents and, you know, there's a wildfire or some natural disaster, you know, this is one of the original ways Twan posed it to me. Try explaining to your wife why you were too cheap to skip a Starbucks or a Chipotle and therefore cannot get ahold of your kids when you need it. To think about it, a lot of people think about, oh, well,

Starting point is 00:36:40 we have coverage everywhere. You know, coverage is great where I live. And, you know, I just chuckle because while that is indeed kind of technically true, I mean, Twan lives in LA. I've spent a lot of time there. I can name 50 times off the top of my head where I've had calls drop, where I've had to leave and go somewhere else to conduct a phone call because of dead spots and various issues that come from the, it is true to say that yes, most of the Los Angeles area has, you know, kind of continuous Wi-Fi and broadband coverage, but it is not true to say like, this is not an issue And there is not room for improvement in terms of the day-to-day quality of service for a pretty substantial chunk of people basically everywhere, certainly within large cities. But again, you know, between the DOD and, you know, I don't know if you guys had come across the video where AST's brass was talking to a bunch of the military brass.

Starting point is 00:37:39 And, you know, he asked that the video not be made public and this, that, and the other. And so the video was kind of quickly taken down. But I think there's a number of very illuminating comments that he makes in there, which is to say the DOD should spit out a few billion in profits at maturity to the company. The first responder business is obviously, you know, kind of in a similar boat. But this idea that there is no demand for this service amongst regular Joes like like Twan and I, I just don't think passes even the most basic smell test. You know, I think it helps to think of it as insurance. I mean, when I, you know, we have a family place, my wife's family in Steamboat, and we tend to go there every year, once or twice a year in the summer, the winter. And when I drive from Kansas City to Steamboat, there's probably five times where my Internet drops.

Starting point is 00:38:31 And, you know, as a professional investor who kind of drinks information through a fire hose for a living, when I get disconnected from the matrix, I start to kind of freak out. And so one of the, I think, really clever elements that illustrates the power of their business model, and this is kind of in a side tangent, but I think it's worth thinking about, and I can send you guys like an article from PCMag that explains this in detail. But, you know, going forward, once the constellation is turned on, the second my cell phone service drops from a Verizon tower, I will automatically have a text message pinged to me, a branded ASTS text message that will say, hi, you know, you've lost coverage. Would you like to buy a day pass and have your coverage restored or, you know, subscribe to our premium plan and, you know, have this all the time everywhere? And so when I think about 70% of families in North America going on vacation every year, loading up the family truckster and going wherever they're going, and the continuous constant brand awareness and mindshare that will come from not only super high margin one-off day passes, drilling into your head, oh, you know, my cell phone's gone. Someone calls me. I can't do this business call. I can't do this or that.

Starting point is 00:39:51 wouldn't it be easier if I just hit auto-subscribe and never have to worry about this type of thing ever again? And so the power of the model is incredible. I don't think anyone that really understands the business and what they're doing, this isn't meant to be your fixed wireless internet connection for your office, but the niche in which it serves and the reality of the many problems it solves for, it amounts to the cost of a burrito. Again, this is why I led with Antoine answering that kind of critique with the cell phone usage prognostications was so beautifully perfect. I just think it's nonsense and self-evidently so. And so as we kind of just walk through, you don't even have to get to taking a stab at what the consumer broadband business

Starting point is 00:40:42 will do in terms of maturity to get a very attractive outcome for the equity. But I think that when you start running the math there the numbers just get so big and so silly so fast that you know you just kind of get your force to pay attention i mean you could look at it as a free option but probably the biggest free option of any certainly public equity that with the exception of maybe the pokemon you know nintendo's control of the pokemon company and that business is uh kind of how that's obfuscated in nintendo's balance sheet i think this is just like that but arguably even bigger because you're getting it for free. And I just think it's ultimately a slam dunk outcome. We can walk through the math later, but it's pretty crazy.

Starting point is 00:41:26 So just to follow up there, you've mentioned the partnerships plus investments from Verizon and AT&T. The investment I think is fairly straightforward, makes sense. the partnership side, is the idea here that they are supplemental and that it's kind of layered on top? Like, I think that was sort of what you were describing where it's like, you can have just straight Verizon wireless, or you get Verizon plus AST space mobile and make sure you have connectivity even in the rural areas. Is that kind of how it'll be pitched to consumers? Yeah. Think about like you have your cell phone and you have your wifi, you know, you have your 5G from Verizon and depending where you are, whether you're home or out,

Starting point is 00:42:12 you know, it will kind of seamlessly switch between those two. In the very near future, you're going to have that. It's going to be like that, but there's going to be a third option, which is satellite service. And a lot of the time you might not even notice the switch. I think it'll work like that. Were you going to say something, John? No, just if you look at the history of how features have been rolled out to sell your customers. Remember, we used to pay for texting. You would pay X dollars a month for, I don't know, 200, 300 texts per month. That eventually just got rolled into the plan. And I'm sure AT&T and Verizon raised the plan prices to monetize it. I think the eventual end state of AST and their

Starting point is 00:42:51 partnerships with AT&T, Verizon, they're just going to roll it into their premium plans or maybe all their plans and jack your price up $5, $10 a month. And they'll be like, great. That's basically the entire, yeah. I mean, that's the entire history of the industry. It's, you know, some new capability becomes available. The MNOs use that capability to steal share. And, you know, it's ultimately rolled into some type of recurring subscription plan. And so how long it takes before we get there, you know, is anyone's guess, but, you know, at least for their existing premium plans, I wouldn't be surprised if it's rolled out kind of day one. And if you look at, there's not a ton of comprehensive data on the percentage of the

Starting point is 00:43:37 highest tier of the average customers for T of Verizon or just all the telecoms, what percentage are at the premium level. But, you know, it's enough to where even if they just roll it into their top tier premium plan and you assume nothing else from all the other elements of its platform optionality, the math gets pretty stupid pretty fast. Just from that integration or rolling the service into the premium subscription tier so they can basically together eat T-Mobile's lunch, which if Starship doesn't get fixed fast, they're going to be at a grotesque disadvantage relative to T and V competing for new customers going forward. And I think it should work out well.

Starting point is 00:44:27 So let me direct this one to Tuan. I'm looking up on our friends at FinChat, let's say the last 12-month cash burn, $250 million, give or take. What are the lifespan lifespan of these satellites? And what do you think the total cost of launch will be for continuous service? I'm kind of talking, what are the maintenance expenditures? What can we expect from, oh, do any of these fall out of the sky like some of the other ones, or do they stop working? What are your thoughts there as someone who's been diving really deep into this industry? This episode of Chit Chat Stocks is brought to you by Blue Chippers Club. The club was started by two friends of ours with the goal of building a tight-knit community of stock-focused investors.

Starting point is 00:45:13 You can break down your portfolios, pitch stocks, receive feedback, talk to other people about their stock ideas, get insights for your own portfolio, and participate in weekly calls with other investors. We love this idea. We wanted role models when we first started to get into investing, and we think that joining Blue Chippers Club can really help you level up as an investor, bounce ideas off other people, talk with us, talk with many other investors that have joined the network. If you're interested in joining, head on over to bluechippersclub.com and hit apply. The link will be in the description. Sure. If you want to model things out. So it costs about just round numbers, $20 million to build and launch a satellite. And these satellites will

Starting point is 00:46:00 last seven years, maybe 10, but be conservative, underwrite a seven-year useful life. And let's call it 90 satellites to get to full continuous kick-ass coverage of major markets around the world. That's not a lot of money for sort of the economic return that these satellites can generate. I think it might be a big write-up or it might have been a message in the short write-up when Ryan was going to battle with someone. It was the poster made a comment that was to the effect of, you know, if these numbers are true, this will be the greatest ROIC business in the history of capitalism. I read that and I was like, you know what? I don't know what your job is, but my job is to try and find the greatest ROIC in the history of capitalism. And so I think that's part of the disbelief, right?

Starting point is 00:47:02 If you just look at the economics of a cell tower, right? They're pretty freaking good. And the cell tower will serve a limited geography. What if you took that cell tower and literally put it in space so that it was not serving just a few square miles, but it was serving the globe? And just think of how many more users that serves, right? And sort of the revenue, how much more revenue that can generate. So, again, the numbers get pretty absurd.

Starting point is 00:47:34 I mean, what's it, you know, just off the top of my head, I mean, you know, assuming 90 SATs, you know, the maintenance capex, useful lives of seven years, you know, what's it, 5 million per SAT per year? So, you know, roughly, I think it's 5, 6 million a year. Seven years is closer to the truth. That implies 90 sats would be about $440, $450 million in maintenance capex. So you could add, fully load the asset G&A, the R&D, the engineering costs, stock comp, and you're still going to get EBIT just on the consumer broadband opportunity alone, you know, in the several billion dollar range. So it is a very, very, very good business.

Starting point is 00:48:19 And, you know, as Twan kind of alluded to, I mean, you think back and you look at this the way most people do, and they look at the base rate of space companies, which is, laugh out loud, atrocious. And, you know, you see, you know, you do this math and you look at what this business can produce in steady state three to five years from now, and it just looks too good to be true. And, you know, most of the time that is actually the case. But as Quan alludes to, what is our job as investors, if not to ferret out the difference between truth and falsehood, optics and reality to see if these, you know, admittedly grandiose claims actually hold water. And I think the more you peel that onion back and dive deeper into the details and all the underlying assumptions, the more I think justly deserved conviction you will gain by kind of, you know, trying to, you know, break this down and be as conservative as possible and realistic with your estimates. But, you know, as I've said a couple of times, you know, the numbers get pretty stupid pretty fast and skepticism is understandable. But mindless skepticism that doesn't attempt to roll their sleeves up and do the real work to understand and know these things for yourself. It's not an idea for the lazy, but, you know, if you're willing to do the work, I think the reward of staking in opinion, analyzing both sides of the argument, the bull and the bear debate. I'm not sure I've ever seen an equity setup where the payoff to that diligence is quite like what we have with AST.

Starting point is 00:50:00 I mean, it is truly in rarefied air and something that rarely, if ever, comes across my plate. And, you know, I think that's just for the intellectual side of it. I think a really fun element to doing the diligence here and trying to get comfortable with the underlying assumptions that you want to underwrite into your thesis, whether that's long or short. Okay. I think we're going to try to wrap things up with this concluding question. When people look at this, especially probably a lot of our listeners, they're going to see SPAC, which kind of has become a dirty word because of all the SPACs that have done poorly. they're going to see pre-revenue for well minus the dod contracts that tuan mentioned and they're going to see space and maybe they'll think it's kind of too far-fetched and so there's kind of these there's some hair on it to say what i guess how do you value the business you kind of just talked through it a bit ryan but also what is if you had to write a pre-mortem on why this didn't work, what would that be? What are you looking at as kind of disconfirming evidence?

Starting point is 00:51:13 If you saw something, what would it have to be for you to feel that you couldn't own it anymore? Sure. I guess I'll give my quick two cents and then I'll take it to Twan. So from the pre-mortem kill the idea perspective, to me, it's like two things really are kind of the key variables here that determines the outcome. One, the tech doesn't work as advertised at scale. We've seen live impromptu video calls from space, you know, most recently with Rakuten in Japan. So, you know, I think the idea

Starting point is 00:51:49 that the tech hasn't been demonstrated fully to work is kind of silly, but there's a big difference between 2,000 people, you know, versus, you know, potentially several hundred million users all over, you know, the globe. So while I think we have every reason to believe the tech scale or the tech works, until they prove it out at scale across the globe, there's going to be some uncertainty there. So there's that. And then I guess the only other way I could kill the idea is trying to be smart and creative about coming up with a hard to conceive chain of events that kind of unfolds in a way that A, delays the launch of the satellites.

Starting point is 00:52:30 B, the delay is of sufficient degree that it causes the company to burn through its balance sheet. I mean, essentially as of today, they're fully funded through, call it full constellation exit velocity. And part of that, the burn results in some type of catastrophic dilution to the equity or an outright bankruptcy. But really outside of that, I mean, that's all I can really come up with, even in theory. Good news is I put the odds of both those coming to fruition is extraordinarily low. Pretty much under all future scenarios, I think the equity offers investors kind of a blush-inducing risk-adjusted long-term return, you know, at the present valuation. And so you don't need a scale to know a man is fat, nor do I think you need to really

Starting point is 00:53:13 fire up the spreadsheets here to know AST's equity is grossly mispriced should the constellation or the promise of its constellation be realized at, you know, a tiny fraction of what I think is its true potential. So again, you have three kind of verticals that you can think of very simply. First response, consumer, D2D, and then military and DOD applications. And I think if you're kind of purposely trollish in your estimates about where those particular verticals kind of balance out a few years from now, you're going to get $5 to $10 billion in steady state free cash flow, even in a pretty draconian future looking two to three years out. To be clear, this assigned zero value to the immense kind of platform optionality in consumer, all consumer broadband

Starting point is 00:54:00 markets, X, you know, North America, the military, you know, the IOT, certain defense applications, future of warfare, I think is somewhat determined on space, zeroing out all value there. And you just, you kind of go on down the check your premise line. And I think a lot of the risks at this valuation are kind of silly if you're really kind of willing to put your mind into the technology. And again, assuming the technology works as advertised at scale and the company can get its birds up in space to complete its constellation. But outside of that, I really got nothing. Twan? Yeah, just to echo what you said, Ryan, I think one of the things the company has to prove out is that the technology works at scale. I have full confidence that it does,

Starting point is 00:54:44 but it's one of those pathfinder things that no one's done before, right? So you don't know if it works until it works. And the other thing more short term is they are going through production hell right now. They are expanding manufacturing facilities, expanding manufacturing capacity. You've got engineers basically living in the factory. Abel, the founder CEO, is at the factory all the time. And they just got to get it done. But I think they have the right culture to get it done they are a hard charging startup oriented take no prisoners run through walls type of culture you know abel abel made his money selling his last company right and sort of the reason he started ast is because he couldn't sit still and the guy pays himself no salary if you look at the

Starting point is 00:55:36 exact comp they don't get paid very much either it's in stock everyone is we're all in this together with the stock, which is, I think, just a fantastic culture to have. And all the hair that you mentioned before, it's space, satellite, SPAC. I thought the same things. And one of the things I've learned as an investor is that you just have to do your own work and come to your own conclusions. You know, just, you know, I used to be a pre member active member of Vic, and I quit like five years ago, because Vic was literally making me a worse investor, because you go on there. You just read the finished products of other people's thinking. And that is no way to invest. And even if you try to consciously avoid it, all that stuff just gets into your subconscious

Starting point is 00:56:30 and it stops you from thinking for yourself. So you know, for me, I don't listen to other people's stock pitches i guess i'm giving a stock pitch right now i don't read other people's stock pitches everything for me has to be ground up and i guess the final thing you know ryan ryan is my good luck charm like every company every stock i've gotten ryan involved in uh nintendo afterpay now asd has uh turned out fantastically so thank you thank you right ryan's gonna hook me up once again. And we have a fantastic ride together on another stock. Well, you know, you bring up a great point, Juan. And I actually think that, you know, the experience that we both went through, we were both involved in Afterpay once like the model itself, a lot of the important qualitative

Starting point is 00:57:18 variables, you know, with the business had kind of been proven out in Australia. And I had a friend that was one of the six guys that launched Afterpay in the US. And so, you know, we were looking at and kind of underwriting the thesis based on what the business should earn, aggregated customer lifetime value, et cetera, et cetera, as it penetrates the U.S. and begins to kind of flow through the financials. And I think, you know, I remember I got involved originally kind of the high single digits as Twan kind of turned me on and we kind of investigated it together. And then it quickly shot up, I want to say, to the mid-30s. And then But the pandemic comes along and within like three weeks, it went back from 32 to nine.

Starting point is 00:58:00 And, you know, the reason I think that's appropriate for today is it reminds me a hell of a lot of ASTS right now, where we've had a left field, left tailed kind of kick to the face from external factors, i.e. Trump and Liberation Day. And that has created this all correlations go to one kind of temporary terror that has caused people to kind of shoot first, ask questions later. The last thing they want to do in the world is, you know, learn a bunch of new jargony terms and get into all these technical details. And the other similarity here that I think really kind of hits me in the face is I can remember, you know, Twan and I, and I won't name the guy on Twitter, but we used to just groan at, you know, how comically poor his understanding of the business model was. Basically, you know, a lot of the players now that go by the BP&L moniker, I think, are this, where I think Afterpay was the real thing with, you know, a genuinely innovative business model that was kind of its own thing. But you have these two things, this external environment, and then you have this company that's trying to pioneer essentially a new industry from scratch with a new model that is not well understood. And in fact, is generally, I think, cartoonishly misunderstood. And you put those two convergence of events together and you have a scenario like we have today where you can take a hack at to every one of your assumptions, then cut that in half again. and you're still at a low single digit multiple to medium terms earnings power, which is, I think

Starting point is 00:59:37 you led this question with, you know, it's pre-revenue. How do we get, how do we think about it and value companies? Well, I value all companies the same relative to what I think they're going to earn two to three years from today. I don't really give a shit what a company has earned in the past. I want to build conviction around the predictability of its margins, its revenue, its profits with a very high degree of certainty with respect to the future and then skate where that puck will be and here we are i don't know a month away from what i like to think of as a trebuchet of rocket launches where every 30 days starting in july they're going to have anywhere between three and eight birds continuously sent to space and with each bird we get closer and

Starting point is 01:00:19 closer to break even on an operating basis which is around right around 25 sats which you know i think we should beat or surpass by the end of this year, maybe early next. And then you have the full constellation at, you know, call it 60 plus. And I think we should get there easily by the end of next year. Talk about like a rapid fire, continuous set of kind of hard catalysts that push us closer and closer to the finish line. There are too many to kind of name here, But we're basically getting a very special opportunity to buy a very innovative pioneering business run by the right type of owner operator, who's the right type of crazy, who eats his own cooking at a laugh out loud multiple to what it earns. And we have gotten that in part because of this subset of convergences that have created this temporary window that goes away in full. Once it turns on and every time you're driving to Colorado and your Internet poops out and you can buy a day pass, you know, et cetera, et cetera, no one will give a shit about the jargony terms with respect to the technology.

Starting point is 01:01:34 They'll just intuitively know immediately that this works what it is. And I guess a lot of the skepticism we see today will be gone definitively forever once consumers see and use the tangible reality of the service itself. So, you know, I think with Afterpay, what was it, like six months later, Twan? I think I was loading the boat in March, April in the high single digits. And I think it was bought out at like $120 billion. It was $2 billion beneath our aggregated customer lifetime value of $129 billion was what Square paid for it. But who knows what the future holds with respect to the stock price. I'm not a stock price target guy, but I think we're going to have something analogous to that. Certainly when the full constellation and continuous service in North America, Europe and Japan turns on by the end of next year. But I think once we pass 25, supposedly the market's a discounting mechanism and, you know, we'll discount the future ahead of time.

Starting point is 01:02:41 We'll see here. But I wouldn't be surprised if by the end of next year, people's skepticism and approach and the valuation of the stock itself looks nothing like what it does today. Much like after pay in March and April of 20, by early 21, it was a very different beast. And so I think history doesn't repeat, but it rhymes. Got a kind of my spidey sense in terms of this kind of backdrop and fact pattern tells me deep down in my bones that this is when you want to buy, not six or 12 or 18 months from today. All right, guys, this was a fantastic discussion. Let me hit the disclosure, and we will get out of here. We are not financial advisors. Anything we say on the show is not formal advice or recommendation.

Starting point is 01:03:30 Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you to both of you for joining the show today. I hope the listeners got some fantastic information about this company and its interesting point in its life cycle and this potential inflection that we're about to come up to. And we'll have some more good podcasts coming up soon. So thank you, everyone, and we'll see you next time. Bye.

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