Buy or Sell ViaSat? 3 Analysts Debate

By Rich Smith Markets Fool.com

It's been a busy week for ViaSat (NASDAQ: VSAT) investors -- which is kind of curious when you realize that we're in the middle of earnings season right now, and that ViaSat is one of the few defense companies that has not yet reported any earnings. (It's actually not expected to report until next Tuesday, Feb. 7.)

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So far, we've seen RBC Capital initiate coverage of the broadband satellite internet provider with an underperform rating (as TheFly.com reported last Wednesday). In response, this morning, both Wells Fargo and William Blair announced new outperform ratings on the very same stock.

Which of these analysts are right? Here are three things you need to know.

ViaSat excels at satellite-based communications, but how good of a stock is it? Image source: Getty Images.

1. Why RBC hates ViaSat

PraisingViaSat's "unrivaled satellite tech heritage," and predicting the company will "radically disrupt the satellite market" with its new very high throughput Viasat-2and Viasat-3 communications birds (currently under construction with help from Boeing), RBC starts off its report on ViaSat on an optimistic note -- which soon turns sour. Simply put, RBC says it is not convinced that ViaSat's satellites will be able to effectively compete against terrestrial cable and fiber providers as they build out their fixed-line internet capacity over the next 15-plus years.

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RBC also sees the growing capability of cellphone-based mobile internet services as a threat to satellite broadband internet. And finally, even if ViaSat survives all these threats, the analyst worries that a new system of low Earth orbit (LEO) small satellites, such as SpaceX is talking about building, threatens ViaSat's more limited ability to provide internet services via just a handful of larger sats.

In short, the communications industry is evolving rapidly, and if you look out more than just a few months, it becomes very difficult to figure out who the winners will be -- and if ViaSat will be one of them.

2. Wells Fargo responds

Wells Fargo, meanwhile, seems to think RBC is a bit of a worrywart. While the distant future may be hazy, Wells Fargo argues that ViaSat will enjoy very strong growth over at least the next few years. Upgrading ViaSat stock to "outperform" this morning, Wells predicts that ViaSat's impending Viasat-2 and Viasat-3 launches will drive 41% growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) in fiscal 2019, and then 21% more in fiscal 2020.

Longer term, analysts polled by S&P Global Market Intelligence expect things to settle down a bit -- but most analysts agree that ViaSat can probably maintain an earnings growth rate in excess of 12% annually over the next five years.

3. William Blair bets on defense

And that's not all. While commercial communications may be ViaSat's bread and butter, ViaSat also gets 43% of its revenue from providing satellite communications services to government clients such as the Department of Defense. In a new rating initiated this morning, William Blair focuses on this defense business as key to the ViaSat buy thesis, arguing that ViaSat's role as "a key defense contractor is underappreciated."

William Blair estimates the stock -- currently priced south of $65 a share -- is worth closer to $85, while Wells Fargo posits a target price anywhere from $94 to $98 a share.

Bonus thing: What should you think?

If William Blair is right, a movement from $65 to $85 could deliver 30% profits to ViaSat shareholders this year, while Wells Fargo's projection implies that ViaSat shares could even rise as much as 50%. On the flip side, RBC Capital attached a $42 target price to its underperform rating on ViaSat stock, implying the stock could instead decline as much as 35%.

So which of these analysts is right? Honestly, I'm more inclined to side with RBC Capital in this debate -- for a number of reasons.

First and foremost, according to our ratings here at Motley Fool CAPS, where we've been tracking the performance of all three of these analysts for more than a decade, RBC Capital boasts a 90.80 CAPS rating. This tells us that RBC's picks perform better than those of 90% of investors in the market today.

RBC's record is nearly as good as Wells Fargo's 92.77 overall rating, and significantly better than William Blair's 83.13. Additionally, RBC Capital has proven itself especially adept at evaluating aerospace stocks similar to ViaSat, scoring nearly 67% accuracy on its picks in this sector over the years -- a record of accuracy twice as good as Wells' record in aerospace.

And speaking of records, let's not forget ViaSat's record -- of losing money. According to S&P Global data, ViaSat hasn't generated any positive free cash flow whatsoever since at least as far back as 2008. Although technically "profitable" today, the company's GAAP profits have averaged less than $8 million annually over the past five years. Meanwhile, from a free cash flow perspective, ViaSat has burned cash for nine straight years.

Call me a spoilsport if you will, but I simply don't believe that numbers like these justify ViaSat's current $3.7 billion market capitalization -- and I certainly don't think they justify analysts running around promising 30% and 50% profits to new investors in ViaSat stock. To me, those just don't look likely at all.

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.