Starry has solid potential, but financing needs fixing – analystStarry has solid potential, but financing needs fixing – analyst
Starry 'delivers a good product and generates good unit economics,' but investors will stay on sidelines until the FWA specialist resolves its long-term financing issues, MoffettNathanson says.
September 29, 2022
Starry has a decent product and a potential path toward long-term profitability, but the fixed wireless (FWA) specialist must resolve its financing issues above all else, a top industry analyst surmised.
With $100 million on its balance sheet at the end of the second quarter and a burn rate that puts the company on track to run out of cash by year-end, "Starry desperately needs to raise capital," MoffettNathanson analyst Craig Moffett wrote in a new report (registration required) issued this week.
Figure 1: Installers equip a building for Starry's fixed wireless access service.
(Source: Starry. Used with permission.)
Moffett issued the report soon after a lock-up period for Starry's shares ended, opening up all of the company's shares for trading. He kept his "Outperform" rating on the stock, but lowered his price target on Starry – to $6.50 from $11 – to "reflect the expectation of a dramatically larger-than-anticipated share count."
A recent agreement with Cantor Fitzgerald that enables Starry to raise up to $100 million in capital, or up to 19.9% of shares outstanding, offers a short-term fix. But Starry, Moffett argues, "needs long-term capital so it can get off the funding treadmill for the next few years (not months). Until then, we think investors will likely remain on the sidelines."
More financing could punish existing shareholders
Moffett estimates that Starry, which went public in March, will need to raise about $600 million over the next three years, and up to $1 billion over the next five. He's also concerned about a potential equity dilution problem Starry would face by raising lofty levels of capital through the issuance of more shares. Assuming Starry would raise about $200 million over the next 12 months (100 million shares at $2 each), the move would reduce existing shareholders' stake by about 33%, the analyst estimates.
"While we believe Starry delivers a good product and generates good unit economics, and therefore (if appropriately funded) has a clear path to achieve long-term profitability, investors are likely to remain on the sidelines until the financing issue is resolved," Moffett wrote. "Paradoxically, while a financing could be punishing to existing shareholders, it could also serve as a powerful catalyst if the overhang is lifted."
Moffett's concerns aren't lost on Starry, as bridging the funding gap is a major focus for the company.
Speaking on the company's Q2 2022 earnings call last month, CEO Chet Kanojia said Starry is "exploring a combination of debt, equity and other financing vehicles." He added that Starry is in "advanced discussions" about potential, additional investments that, if solidified, would put the company on a path to break-even and profitability.
In a likely attempt to give investors confidence in its business model, Starry has also put forth a study (PDF) showing that it's been able to turn a profit in multiple buildings (referred to as "cohorts") that were switched on in 2020 and in Q1 2021 within three to four quarters after launch.
But Moffett points out that the Q1 2020 cohort generated higher revenues per unit than those activated later, suggesting that the later cohorts are penetrating at a slower rate or represent a greater mix of subs on promotional offers or lower price plans. Despite that slower expected ramp in average revenues per unit, the new "disclosure is, on balance, a positive, inasmuch as it reinforces the view that the company, appropriately financed, can indeed achieve profitable growth," Moffett wrote.
Starry has launched in parts of Boston, New York City, Los Angeles, Washington, DC, Denver, and Columbus, Ohio. Its seventh market, Las Vegas, is set to come online in Q3 2022.
Starry added a record 9,703 customers in Q2 2022, for a grand total of 80,950. Starry expects to have more than 100,000 customers by the end of 2022.
FWA is a success. Now the hunt is on for the next big 5G use case Starry adds record subs in Q2 as total nears 81,000 FCC approves RDOF spending with FWA providers Starry, Nextlink, others Starry kicks off personalized broadband effort with 'Upload Boost' trial — Jeff Baumgartner, Senior Editor, Light Reading
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