Welcome, subscribers! We’re back with another issue of Elevator Pitches, where our goal is always to save you time & energy by curating the best stock pitches we come across in our weekly reading.
If our work is helpful, please consider forwarding to a friend or colleague.
In this issue, we're happy to share a bunch of new ideas, including:
Under the Radar GPS Giant: This small-cap player is quietly revolutionizing location technology with its next-generation GNSS solutions, boasting partnerships with major automakers and disrupting traditional GPS giants.
HR Hero for the Hybrid Age: This cloud-based HR platform is changing the game for companies navigating the new normal of remote and hybrid workforces.
Specialty Polymer Company With International Reach: A recent spin-off that provides mission critical technology to many industries, including aerospace and defense.
Healthcare Powerhouse with Broad Portfolio: This diversified pharmaceutical giant is a one-stop shop for essential medications and treatments, with a strong presence in emerging markets.
Disclaimer: Nothing here constitutes professional and/or financial advice. You alone assume any risk with the use of any information contained herein. We may own positions in the securities listed. Please do your own due diligence.
To the investment managers who read this, you can send us your letters at elevatorpitches@substack.com or on Twitter (and Threads!) if you’d like to be included in a future issue.
Let’s get to it.
Laughing Water Capital started a position in Nextnav Inc. (NN), a busted SPAC that’s seen its share price fall from $10 to below $4. They like the group of investors who are now involved in NN and outlined the thesis in their latest letter.
New Position: Putting The Band Back Together
Nextnav Inc. (NN) – There is a lot to hate about Nextnav. On the surface it is a busted SPAC that consummated a merger with an investor presentation that tied the value of the go-forward company to flying taxis. Flying taxis are miles away from my core process, so one may wonder how NN made its way into our portfolio.
Nextnav owns the rights to 8 MHz of wireless spectrum in the 900 MHz band which has been earmarked by the federal government for Location and Monitoring Service (LMS). What this means in practice is that the Company has two business lines, one which adds vertical axis capability to the existing GPS network (what floor of a building you are on) and one that is a next generation GPS system, that unlike its predecessor is encrypted, making it difficult to spoof, and the signal is much more powerful than existing GPS, making it difficult to jam. The federal government and first responders have made it clear that the development of these technologies is a priority, and the recent conflicts in Ukraine and Israel/Gaza have put a spotlight on the shortcomings of the existing GPS system. And yes, in theory if the world will someday have flying cars, the vertical axis would be important.
However, I am not sure how to value these business lines. In fact, a recent short report by a well-regarded short seller laid out the challenges faced by them, as well as the competition. Where it gets interesting though is that NN has been running tests to validate the idea that they can run their LMS businesses on a small portion of their owned spectrum, and then repurpose the remaining spectrum for 5G broadband. This spectrum could then be sold or leased by NN to anyone from the large cellular companies, cable companies, or tech companies.
The FCC has made it clear that they want more spectrum available for broadband, and the laws of physics means that no one is inventing more spectrum. This is low band spectrum, which while it can carry less data than mid-band or high-band, can travel further and more effectively penetrate obstacles such as dense tree cover or urban environments. It covers 93% of the U.S. population, and in industry terms NN has 2.4 billion MHz-Pops, meaning the amount of spectrum multiplied by the population in their coverage area. If we assume that NN will need to retain 1 MHz for their LMS businesses, and ascribe no value to these businesses, we purchased our shares in NN for less than 30 cents MHz-pop. This compares to past transactions and industry experts that suggest this spectrum could be worth anywhere from 2x to 7x or more depending on event path, timing, and the potential that the FCC demands windfall payments in a sale. For me, focusing on the bottom end of the range is enough as even disappointing outcomes suggest that NN is severely mispriced. At the same time, the top end of the range could be exceeded depending on how competitive a bid process is, and also because antenna technology is progressing to the point where adding new spectrum to an existing antenna can be done by software upgrade rather than hardware upgrade. In theory, this reduction in necessary CapEx means that a buyer of spectrum could pay more for the actual spectrum while maintaining their ROIC.
Where it gets even more interesting is the people that are involved. The shareholder registry and list of insiders are a “who’s who” of spectrum operators and investors. Notably, they have “put the band back together” as it relates to a previous investment in Straight Path Communications Inc. an owner of high band spectrum, which was sold to Verizon (VZ) in 2017 for $184 per share approximately 18 months (deal announcement) after a negative report from a well-regarded short seller caused shares to trade around $7. The band leader can perhaps be thought of as Neil Subin, who manages the family office of the late Lloyd Miller III, who was regarded by many to be perhaps the best small and microcap investor ever. A partial list of Subin’s credentials as an investor in spectrum can be found below:
• Chairman and major shareholder of Teletrac, Inc, a developer of vehicle tracking and location systems through wireless spectrum and holder of FCC licenses in the 900 MHZ band.
• Director and large shareholder of Nucentrix Broadband Networks, Inc., a wireless broadband access provider and holder of FCC licenses in the 2.5 MHz band.
• Director and large bondholder of Metrocom Wireless Inc., a consumer electronics provider and holder of FCC licenses in the 2.3 MHz Band. New CEO November.
• Director and large shareholder of WCS Wireless LLC, a manufacturer of communications equipment and substantial holder of FCC licenses in 2.3 MHz band.
• Largest shareholder of Mpower Communications Corp., a competitive local exchange carrier.
• Chairman of the Board, Director, and large shareholder of First Avenue Networks Inc., a wireless backhaul provider and holder of FCC licenses in the 39 GHz band.
• Director and large shareholder of CCTV Inc. a holder of FCC licenses in the 1.4 MHz band.
• Chairman of the Board and large shareholder of Primus Telecommunications Group, Inc., a diversified telecommunications holding company with interests in competitive local exchange carriers, wireless access and VOIP in the U.S., Canada and Australia, and holder of Canadian 2.5 MHz licenses.
• Director and large shareholder of 360 Networks Inc., an owner of a substantial fiber network.
• Large shareholder of U.S. Telepacific Holdings Corp., a large competitive local exchange carrier.
• Director of the Leap Wireless International Inc. Liquidating Trust.
• Director of the Iridium Communications Inc. Liquidating Trust
Needless to say, Subin knows a thing or two about spectrum; he is not here for the flying cars. Importantly, the SPAC announced their merger with Nextnav only nine months after its IPO – it is clear this was not a case where the SPAC sponsors were forced to settle for a subpar deal because of a limited time line. Additionally, it is notable that at the time of the transaction, when NN shares were trading at ~$10, Subin said:
We believe that this is a 100 year plus asset that will drive innovation, enable the global economy, and produce significant free cash flow for decades to come that I believe we are creating at or below underlying spectrum value.”iii (emphasis mine).
I expect that within the next few weeks Nextnav will formally ask the FCC to repurpose a portion of their spectrum away from LMS and toward broadband. This by itself should be seen as a milestone as the FCC must grant permission for such requests, meaning that if the request is made, the Company has proof of concept in hand from the tests they have been running in the Bay Area. From there, the timing of an FCC review is uncertain, with anything from a few months to perhaps 2 years being within the realm of possibility. However, the outcome is highly likely to be favorable as the FCC has made it clear that they want more spectrum to be freed up for broadband. Further, my research suggests that Nextnav has the relationships in place and has done the groundwork in advance necessary to expedite the process. Importantly, as long as the world is consuming more data, the value of spectrum should continue to go up with time. Upon successfully “splitting” the spectrum, NN is likely to sell or lease to the highest bidder, which could lead to a dramatic re-rating in share price in the not-too-distant future.