NextNav

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

NextNav is a location technology company specializing in precise, scalable 3D geolocation for indoor and urban environments, providing a new layer of location services to address challenges that are not served well by traditional GPS.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

NextNav is focused on providing highly accurate and reliable location data in environments where traditional GPS struggles, particularly in dense urban areas and indoor spaces. Their technology relies on terrestrial signals, rather than satellites, to deliver 3D geolocation capabilities, enabling a wide range of applications across public safety, consumer, and commercial markets.

  • Revenue Streams:
    • Location Data Services: The main revenue stream currently consists of subscription-based access to their location data, which is primarily sold to application developers and platform providers.
    • Government Contracts: In the future, the company may obtain revenue from government contracts as their technology gets integrated for emergency services or military purposes.
    • Hardware Component Sales: Currently, not a major component of revenue, but could increase over time.
  • Industry Trends:
    • The demand for accurate indoor and urban location services is growing rapidly. As mobile and IoT devices become more pervasive, more industries, from gaming to supply chain logistics, need to track assets and individuals with far higher levels of precision than is possible through conventional GPS.
    • There is considerable hype about augmented reality and virtual reality applications, which need consistent and very accurate indoor location services to function as expected.
    • Federal regulations are increasingly requiring public safety officials to locate individuals, both indoors and in urban environments, making NextNav’s service highly useful for future use.
  • Margins:
    • Because their core business has been dependent on investment in software and tech, margins have been low. However, there are some key steps the management has been taking to reduce expenditure and thereby increase profitability. As the company scales and wins more big contracts, margins are projected to improve substantially.
  • Competitive Landscape:
    • The location services market is becoming increasingly crowded, and competitive.
    • The company has many other companies, like Ubidots, Pozyx, and Estimote, in the market. These companies all claim to provide excellent indoor location services.
  • Although NextNav claims to be the first company to have created a working system of 3D location services, they are not alone in the market.
  • Many well-funded tech giants like Apple and Google have developed their own location services which can compete well.

  • All of this means that NN must compete with more companies and be able to retain its existing clients while attracting new clients, which is not an easy proposition.

  • What Sets NextNav Apart:
    • 3D Geolocation: Their ability to provide accurate 3D positioning, which is necessary for many advanced applications, is more sophisticated than many of the competitors.
    • Terrestrial Signals: NextNav’s reliance on terrestrial signals provides more coverage in dense urban and indoor areas as GPS is often blocked.
    • Patented Technology: NextNav has many patents in the field which they expect will reduce competition in the market.
    • Scalability: Their tech is designed to be scalable, so a large number of devices can utilize it at the same time with no degradation of quality or accuracy.

Financial Analysis:

NextNav’s financial reports (10-Q and 10-K) show that the company is in a developmental stage with rapidly increasing revenue, but currently operating at a loss. It is also showing some clear improvements that it is on the right path. Some key areas of consideration:

  • Revenue Growth:
    • The company has been experiencing increasing revenue, but it should be understood that the main revenue source is still very small. Most of this revenue is coming from the telecommunication industry. The revenue, for the three months ending on September 30 2024 was 3.6 million dollars, as compared to 1.1 in the previous year.
    • It is important to understand that this is not just an improvement in the old business, since the company has been expanding, and so the addressable market has become larger, meaning that growth is expected to accelerate in the future.
  • Losses:
    • The company is operating with a net loss. The net loss for the three months ending on September 30 2024 is $24.9 million.
  • Most of the loss can be attributed to expenses related to sales and marketing, R&D, and operations. Since the company is still in its growth phase, the losses are not surprising. However, it needs to be seen if the losses come down over time as it scales up its business. * Operating expenses (excluding cost of goods sold) was 34.9 million in the three months ending September 30 2024 as compared to 17 million from the previous year.
  • Cash Position:
    • The company had total cash and cash equivalents of $42.6 million as of September 30, 2024.
    • Cash used in operating activities for the nine months ending September 2024 is about $57.4 million.
    • There were additional investments in business ($10.2 million), and capital expenditure ($2.3 million). Thus, the company has plenty of cash reserves and is in no danger of bankruptcy, but it also needs to reduce expenses and increase profitability.
  • Management said that they have about 3 years of capital remaining and expect the business to be self-sustaining during that time.
  • Liabilities:
    • Total liabilities are reported at around $79.1 million as of September 30 2024, with a lot of it being long-term debt.
    • Debt has risen compared to the 2021 and 2022 values.
    • The company has a sizeable debt burden, but they have been working hard to improve their finances and have good profitability potential.

Moat Analysis:

NextNav’s “moat”, or competitive advantage, is based on the uniqueness of its technology, its market position, and the challenges facing potential competitors.

  • Network Effect:
    • Since their core market is B2B (business to business), they don’t have a lot of customer stickiness.
    • The more clients the company gets, the more attractive the service can become. This effect isn’t clearly observable in its present form.
    • The company also does not compete in a market where network effects are known to dominate, such as social media or payment systems.
  • Rating: 2/5.
  • Intangible assets:
    • The company has some patents, that offer an initial barrier to entry, but they can be contested or reverse engineered easily.
    • The company also has a lot of industry knowledge and experience which is not a solid moat, however, it still helps.
    • Rating: 2/5
  • Switching Costs:
    • If any customer has incorporated their tech into their system, they may have some difficulty switching over.
    • However, the software industry has always been an adaptable market, and it is expected that the transition should be seamless, and thus, switching costs are low.
    • Rating: 1/5
  • Cost Advantages
    • The cost structure of the company does not give any indication that the costs are hard to replicate.
    • Rating: 1/5
  • Overall Moat Rating:
    • Rating: 2/5. The company possesses a weak moat at best and has to constantly fight off competition.

Risks to the Moat and Business Resilience:

  • Technological Obsolescence: Rapid changes in technology can make NextNav’s technology obsolete.
    • The tech space is fast-evolving and what was considered groundbreaking before might be common later.
  • Competition:
    • There are many companies operating in the space and also there are big tech giants that have considerable resources to compete.
    • New entrants or more established competitors could out-compete them in pricing and quality.
  • Dependence on Few Customers: Currently, one single contract with a telecommunications company is providing most of the revenue, putting the company at risk of losing the major part of its earnings if this agreement should fail or not be extended.
  • Market Adoption: The technology requires broad adoption by the market for the company to be profitable, which is still not certain.
    • There is always the risk that even if the tech is best in the class, it will still fail to gain market share.
  • Reliance on Key Employees: A loss of key employees or their expertise could have a direct impact on performance.
  • Reliance on Government Contracts: The company expects large government contracts to grow revenue, which creates an unnecessary dependency on the government, which could change their priorities and hence affect the revenues of the company.
  • Business Resilience * The company is currently a high-growth, loss-making firm and thus, it is not as resilient to market changes as a cash cow company. * However, the company is making smart decisions by diversifying into different streams, and if their expansion is successful, then the company is likely to have a high resilience.

Understandability:

NextNav’s business, while based on advanced technology, is not that complicated to understand. Here’s why:

  • Easy to Comprehend Business Model: The business model revolves around location data and its application, which is not very complex. The company simply provides accurate location information to their clients.
  • Use Cases While the tech behind might be complex, it is easy to understand the use case of this tech, which can range from emergency services to augmented reality applications.
  • Core Tenet A company has a clear core tenet of the problems they are solving, which makes understanding and analyzing the company easier.

Balance Sheet Health The company’s balance sheet, while not in the best shape, shows a lot of potential.

  • Cash Position: Currently good, providing good financial flexibility.
  • Debt: Fairly high and should be reduced to obtain a strong financial position.
  • Other aspects Overall, the balance sheet requires a lot of scrutiny as the company grows to ensure the financial viability of the company.
  • Overall health: 3/5

Recent Concerns/Controversies:

  • Recent Losses The company is still in its initial phase and posting losses. However, management is committed to cutting costs and improving profitability.
  • Competition The competition in this space is growing and well-established companies are entering into it, increasing the need for more research and sales expenses.
  • Dependence on 3Com The company is still dependent on 3Com for its main profits, thus putting it in a precarious position. However, they have said that they want to expand into new areas that can provide more revenues and help them expand into a well-diversified portfolio of customers.
  • Stock dilution The stock has often been diluting and the price has crashed from nearly $10 to under $1. Thus, the stock has a volatile history and requires investors to have more faith than in normal stocks. * Management’s Response: Management has acknowledged some of these concerns, especially profitability and debt, and they are committed to reducing costs and expanding to new markets.