Anpanman - SpaceMobile Markets: The Rakuten Exit and Analyst Games

[00:00:07] Speaker A: This is the AST SpaceMobile Podcast. It will just basically come to your phone and be seamless regardless of where you are. We don't want the user even to know that it's connected by satellite. Listen, the opportunity that we have is very, very, very large. Hey everyone, thanks for joining. Thought I'd fire up a space this morning to talk about the latest development here around AST SpaceMobile. And I'm also going to talk about Strata Critical, which reported earnings this morning. I'll just talk very briefly about it, but first I'll start with AST. So last night we just found out that Rakuten has wrapped up their sales. They sold a total of just over 15, I think 15.5 million shares. Since April 17th, and they instituted a 10b5-1 plan. What that is, is an automatic selling program that, you know, you give certain parameters or instructions to an investment bank. In this case, it's Bank of America, and you say, I want to sell these shares over— you might provide some parameters like, you know, I want them sold over a certain period of time or above a certain price or no more than this volume or Whatever it is, like you give them a predetermined trading plan, but a lot of it is left up to them in terms of discretion, and then they go execute it, right? And the reason why you do that is it frees you from, you know, in case you do get non-material, non-public information in the future, it's not going to restrict you from selling, right? And so you'll see executives of companies where just as part of, you know, estate planning, And just good, you know, for any executive, especially if you have a family, it's just good financial planning to have a 10 plan in place to sell some predetermined amount of shares over some period of time. And by putting that in, you're telling the market that that's an automatic thing. I'm not doing it ahead of material news, whether that's positive or negative news. And so it cleanses you from having or being restricted from selling. And so for those that don't know Rakuten, back in January, the chairman and CEO and founder of Rakuten, Miki Mikitani, who was an early investor in AST SpaceMobile, and quite frankly, we owe a lot to Rakuten because they were an early believer and they provided a ton of technical support and financial support to the company. They invested many years ago and I think they had invested, maybe it was like $100 million overall. And of course that's turned into billions of dollars. And so for those that don't know, Rakuten is a well-known e-commerce company in Japan. And Miki Mikitani is this maverick. He thought, hey, I'm going to follow in the steps of Masayoshi Son and take on the wireless industry, which Masayoshi Son, many people know who he is. He started SoftBank and got into the mobile business and broke into that market and was a maverick. And then Miki Mikitani was like, hey, I want to be a maverick too. And so he started Rakuten Mobile. He got his hands on some mid-band spectrum, which, you know, that was the only spectrum that was available at the time. Tried to start service. Of course, with only mid-band spectrum, it's really tough to compete for coverage and propagation, you know, service levels. And so I think it was like 2, 3 years ago, he finally got his hands on some some 700 MHz spectrum, which by the way is the spectrum that AST is going to use for service. They call it the platinum band out in Japan. But anyway, this is all background because Rakuten, the e-commerce business was doing really well. And then by getting into the wireless business, he had to invest a ton of money. The company became overleveraged and it's become somewhat of an arbitrage for the company. But then You know, ASD space mobile service, he viewed as being a key differentiator for the company that was going to allow them to take subscribers from the other carriers, which is on the come right now as we roll out service. But in the meantime, Rakuten, with rates skyrocketing in Japan, they had to deleverage, right? Because I think they were spending something north of like $500 million in interest expense. This is USD. And so they've been in a program right now to deleverage. They are, I think they looked at strategic options and might make some type of decision. They have a pretty big fintech business. They might monetize that. But then the other highly liquid asset that they have that they've made a shit ton of money on is AST SpaceMobile. And so there eventually was going to be a day in time, a day for them to monetize some portion of it. And so coming into this month, they were an approximately over 10% holder of the company. And by Mickey Mikitani stepping off the board in January, they became free from their obligations to hold the entire stake. Now, there are conditions. They still have a board observer seat. And so what that means is they can still attend board meetings. They can't be an active participant in each of the committees. They can't be active in those, but as an observer, they know like what's going on with the company. However, If there are sensitive commercial matters and probably strategic matters as well, they probably in the agreement that they have, they have to recuse themselves from those discussions because obviously, you know, especially as they've reduced their stake and they don't sit on the board, they don't want to be in possession of material non-public information. And so with that board observer seat, they actually can retain that until they— I think there's 2 triggers. One is if they fall below 5% ownership, which they're currently, I think, at like 5.3% ownership. Um, and then I forgot what the other one is, but there is another trigger if they fall below a certain threshold. So they will continue to stay on as board observers. Um, and, you know, congrats to them for such a great investment. Um, and I hope it helps them deleverage, uh, and right-size their business. Um, that said, uh, I, I do want to be critical of Bank of America because, um, Typically, like if you engage with bankers, I was a former banker too, you might go to them and say, hey, what's the best way if we want to monetize half of this stake? And the bankers might give them menu options and timing too. They might say, well, if the company's willing to help you, we might do a marketed offering where we might go on a roadshow and try to place your shares. And the whole point of a marketed offering is to place those shares at less of a discount, but then you also, you're exposed to market risk, right? So if the market craters during that period of time, Iran conflict flares up, then the stock market might go down and your pricing might be worse over that time. Or if the company does a good job in marketing and let's say the markets are stable, the stock price may rise into that offering. But then, you know, you have the dynamic is that, you know, you might have short sellers that sell that short into that offering. And then technically they're not— anybody who shorts into an offering like that cannot participate, cannot buy shares. But then, you know, but there's trade-offs, right? And so with a marketed offering though, you have to have the company's participation in that, right? Like the company management, it takes valuable time away from them. They have to go out on the road and talk about the deal. And so that's especially given the current state of the company where we just lost BB-7 and they're in full ramp of production. That would not be a good use of time. Another alternative would be, and this is what I think they should have done, Bank of America should have said, hey, we can do an overnight book build, a block trade basically. And this is similar to what Redwire did recently. They actually moved a shitload of stock for AE partners, but I would've recommended an overnight deal, right? I would've said, hey, with the stock at, back then it was like $88, you know, they would talk to capital markets, capital markets would figure out which accounts own the stock. And there might be, during the day, there might be, they might bring some of those accounts over the wall, meaning they get restricted and they can't trade. And they might get some, they might gauge what the interest is and then they might, they could go to the company and say, hey, we can take this whole thing. down, you know, the 15 million shares, and we will, um, you know, we'll, we'll, we'll place it overnight with accounts. And we can do that at— and based off their discussions and market dynamics, they'll figure out some type of discount, right? So if that's 5, 10, 15% maybe even, um, but, you know, we'll, we'll take the risk, we'll, we'll, we'll place it. And then for institutions, if it's long-only guys, they'll be happy to buy it. If it's hedge funds, typically like capital markets desks, they are hoping to get a big enough discount to where they can flip it back into the market and make, you know, 2, 3, 4%. And so in that instance, you know, the company would've weighed, well, oh, okay, so that's like a 5, 10% discount, you know, versus $88. So let's say the execution was 80, 80 versus the closing price on April 17th, which was 88. You know, is that worth the risk or is that worth the discount, right? Which in retrospect it is, but then of course there would've been some signaling. It's like, why is Rakuten doing this block trade ahead of the BB7 launch? And so there's like some weird dynamics here, right? Like perhaps they could have waited the following week. They could have waited until FCC approval, for example, like had they not sold on that Friday at $88 and then the market reacted obviously to BB-7 and all that stuff, you know, the stock closed at $79.40 that day. And then going into FCC approval, you know, my guess is if Rakuten hadn't advertised selling before and we lost BB-7, my guess is the stock would've been instead of at, with FCC approval, probably would've been closer in the 90s versus like mid-80s. Or perhaps higher than they could have did a block trade at that time, right? But you know, of course hindsight's 20/20. Who knew that FCC approval was coming? Who knew that we're going to lose BB7? But but I think for Bank of America, I think they've got yeah, it's it was poor execution and advice, meaning you know, oh, we're going to do this this open market selling over the next two weeks. And we're going to put— or no, 3 weeks— we're going to put a lid on the stock. And on top of that, if you look at their trading, they actually— they did okay in terms of VWAP. They beat VWAP on a few days. Other days they were just under, but clearly they were on top of the stock. And most importantly, on the big days that the stock was up, like on the FTC approval, they were 10% of the volume, right? And so they clearly were sitting on it because they were trying to get liquidity. It was that. And then on April 30th, they, after, let me see, it's 1, 2, 3, 4, 5, 6, almost 6 days straight of going down. The one day that stock popped up, they were there for 13.3% of the volume, right? And so that's pretty heavy. That's pretty heavy. And on top of that, I think the key thing is like, if this was a large institution, like let's say if it was Fidelity or T. Rowe and they're looking to sell a decent amount of their position, they would do that. They would do it and it would not be announced. But with Rakuten, it's very visible because they're, you know, they previously were on the board, they're a 13D holder. They've communicated to the market, yes, Bank of America's going to be there with this 10b5-1 plan. And based off of the initial selling, pretty much the market figured out like, oh, they're going to be in the market every day, right? And it could be mid-single digits to high single digits to even above 10%. Uh, and so with that, you, you know, short sellers, um, had carte blanche to do what they wanted, right? And then on top of that, you had, um, you know, obviously the sentiment's negative. It's like, oh, there's this, this big boogeyman out there that's selling stock. And then the, the negative narrative is like, oh, why is Rakuten selling? And, and, you know, Bears can spin that any way they want, but it's like, I mean, for the people who know, it's like, well, they're on financially difficult times and they need to deleverage their balance sheet. And as I mentioned before, like if you're paying $500 million in interest expense a year, where in rates in Japan where rates were negative and zero for the longest time, but now rates are going up, you've got to pay down debt pretty quickly, right? And so yeah, that's, I think, now that we're kind of through this and that overhang is gone, um, and you don't have this presumed seller in the market every day, um, which, you know, to me initially I, I thought, well, okay, maybe if they— if you do like low single digits type of selling, uh, it's not really going to impact the stock, right? But then if you're in a market where, um, you know, you've got negative sentiment, space sectors going down, and then 2 days that the stock is up, you, you go heavy, you go heavy 10% and 13.3%. Yeah, you're going to crush it, right? And on top of that, like algos and algos know that that Bank of America, which you can see in advertised trade volume, that they're going to be out. They're out there in size, and then they just take advantage of it, right? They get ahead of it. So anyway, so yeah, now that that's done, you know, we'll see how the stock performs. Obviously, there's some relief rally going on today to an extent, and. You know, I will add, like, it is interesting to see, like, all these accounts that come out, you know, when stock is down, and then they, like, rage bait people, and inevitably it works because some people engage with them. But, you know, they, like, celebrate and the I told you so's and all this, like, toxic shit, right? But for me, some of those people, it's like too much where I'm just like, okay, I'm going to block this person because I don't need to keep seeing this over and over again. But on the other hand, like there's some of these accounts where they're like the perfect signal, right? Where like this guy Johnny Walker, who Johnny Walker AZ, he's like a Rocket Lab holder. And then he like rage baited people by saying, I always thought Rocket Lab would win in the end. I was asked many times why I wasn't in it. And he like posts this chart and it's like, What's the point of this post? Like Rocket Lab would win in the end. The 2 companies don't compete with each other. But you know, there's like some of these accounts that will post this stuff from time to time and it's just funny, I guess. But some people, for whatever reason, they take it personally and then they go attack that person and then that just like fuels this supposed Rocket Lab ASTS rivalry, which one day I promised to do a space. about the genesis of that rivalry, which was this small group of Rocket Lab guys. I see one, this guy Rocket Lab Labrador or whatever, like he's still around posting shit. But there was a whole like game plan that those guys put together and it worked. It worked, you know, credit to them. It worked back in the summer of 2024. And for whatever reason, people still hold onto that rivalry. But anyway, but yeah, so now that, uh, now that Rakuten's done, um, that, that overhang is gone. And, um, and yeah, so I think now the stock can kind of be more free in terms of trading, and we'll see, um, we'll see how it performs. Obviously we've got the earnings update on Monday the 11th. And, uh, oh, I did want to talk about research analyst too. So I see a few people retweeting or tweeting about B. Riley adjusting their stock price down, their price target down. I think let me look here. B. Riley today lowered their stock price target to 75 from was it 95? Yeah, 95. So and some people are lamenting that. I actually think that's really good because so in The street, as we call it, you know, Wall Street analysts, there's a game that goes on, right? And sometimes, and I think for retail investors, like people don't really understand the game fully and there's kind of a game within the game too. And so I'll just talk about B-Rally, for example. So a normal person might be like, oh, they lowered their stock price target right before earnings. Like, how could they do that? That's terrible. Like they don't even know what's coming. They're just responding to the stock price, which they are. But, you know, in some ways, like, this is a— or in a lot of ways, this is actually a good setup for the company because they're lowering the price target on a day that the stock is going to be up anyway. And they're— that B. Riley not, you know, lowering their stock price target is not going to have any real material impact on the company. However, what it does is it sets the company up for if, you know, May 11th results are positive and they give positive you know, guidance and talk about production and all this other stuff. Maybe the birds have shipped by then. Uh, then that gives B. Riley the room to raise the price target. And I know it sounds silly, but, um, after the update, if B. Riley finds good reason to raise the price target, they will. And so before, by having a $95 price target, like, there's no room to raise the price target. But doing— lowering the price target on a day when the stock is going to be up, there's no penalty. And then once the quarter is out, and if B. Riley feels inclined to do so, they can actually raise it back to 80, 85, 90, whatever it is, right? And so that's kind of the funny game that happens on the street. And so it, and we all know like research analysts to a degree are independent, but they're not, right? Like we all saw Scotia who was a big bull in the company, but then over time became very negative and became bearish. And I was telling some people today that when you work at a hedge fund or a fund, like part as an analyst, part of your job is to talk to the street. And research analysts are, you know, they're not going to— they know the industry sector and they know the sector and they talk to all the companies and they have some level— the good research analysts will do great fundamental work and they'll publish and they'll be independent, right? But then part of their job is to facilitate information flow. Right? So they'll talk to the company, and through their conversations, they'll publish something, and that will become— through the Reg FD process, because they're publishing, that becomes disclosed, right? And so sometimes, like, retail investors will say, well, how come that research analyst or, or that institution talked to the company and they got, like, this information that no one else knows? Um, the company— so it depends on the company. Like, they— if they're truly following Reg FD, they're going to— when they have conversations, they're going to be very cognizant of not giving people MNP And they typically won't do that for institutions, right? But for research, they they have the ability to tell them more because ultimately those research analysts publish, right? But part of the game is that the analysts from hedge funds and and institutions like long-only funds, they'll talk to research analysts, and part of their job is to of course like get some of those nuggets that perhaps aren't actually published. But then also part of their job is to influence research analysts, right? And so if you have If you're bullish on a stock and there's a guy who's neutral on it, you you might call them from time to time and start feeding them your perspective, right? Like this is why you're wrong in the model, or I'm much more bullish. Have you thought about this? You know, there there's various ways to try to get a research analyst on your side, and vice versa too. Like if someone's too bullish, you might feed them just like this Gosha guy. The short sellers feed him all kinds of. Stuff, right? And he publishes it. Like, there's no filter on this guy. He actually publishes it. Um, and so that, that's part of the game. And part of the game too is like the earnings print, right? So, um, what I'm not saying what B. Riley did is they're, they're trying to game it, but it gives them room to upgrade the stock, right? And that's actually a positive thing going into a print. Um, and then the— what, what, you know, there, there's Famous examples of, especially in TMT, where companies like, I remember back in the day, like Viacom and CBS were notorious for managing Street consensus, right? And so what I mean by that is heading into an earnings call, you would have the management team, even during the quiet period, they would reach out to sell-side analysts and they would have conversations to say, hey, your estimates are too high. You're a little high on revenue and you're a little high on EPS. Like, before the print, you should lower them, right? And so then like research analysts, the day or two before earnings, they might say, oh, we've like based off of feedback and research that we've done, we're actually lowering our estimates just prior to earnings to reflect like some development in the quarter. Like advertising's coming in a little weaker or whatever it is, right? But by managing research analysts and then consensus, what the company is doing at that point in time is they are lowering the bar Right? So if you get Goldman, Morgan Stanley, Merrill, any number of firms, like, you know, you manage their earnings down like the few days or weeks prior to a print, then when the company does report, they, lo and behold, like the bar was lowered and then they beat, right? And so then sentiment perhaps is better. Now obviously, like for the smart analysts out there on the buy side, they not going to, you know, that to some degree they're going to see through that. But at the same time, like, that's part of the game. And so if algos pick up like, oh, the company beat by a tremendous amount and the stock goes up, then the company will have done a great job of managing expectations, which is, you know, that's what we call it, right? On the flip side, it can work the other way too. So let's say like, let's say Point72 or Citadel is short a stock, right? And heading into the print, you know, they— the number, it's like a beatable bar, right? The consensus seems to be low. And so the analysts there are like worried that the company's going to beat and we might get a squeeze. And so they'll talk to research analysts and say, hey, I think your earnings projections— they'll pretend like they're bulls and they'll say, your earnings, based off of my due diligence and work, I think your estimates are too low. Like, I think you should raise them. before the quarter, right, for the report. And so they might be able to get a few firms to raise their numbers, right? And so sometimes you'll see these firms raise their expectations into the print, which whenever that happens, by the way, like for stocks that I own, I always get super nervous, right? Because it's like, okay, you are raising the bar for the company just before they announce earnings. And so the the potential for them to disappoint goes up, right? And so you'll have these situations where short sellers are like, hey, you should raise your expectations going into the print. Stock actually trades up because, you know, some analyst comes out bullish like a day or two before and says, hey, we're raising our expectations, and the stock goes up. And then these clowns actually short more stock because it's gone up. And then of course, when the company announces, because consensus has been raised, they are in line all of a sudden, or they just miss and the stock goes down. And so, and that's just for the quarterly results, like also the guidance. You know, maybe there's gaming going on with the guidance. Like, you know, you try to, if you're a short seller, you try to get the Street analysts to raise guidance expectations for the next quarter higher than what it should be. And so this is the game. There's like this constant battle between short sellers and long-onlys and their ulterior motives and utilizing the sell-side research to express and set up things to either beat expectations or to miss expectations. And so this is all part of the game. And so I think when looking at research analysts and research reports, like, it's important to keep this all in mind that there's this constant battle, right? And no one is truly independent or unbiased. Like there's going to be some type of influence, right? And that can change, like just like we saw with Scotia where this guy was very bullish and then he flipped negative and is now just, he's like almost worse than Tim. He's actually worse than Tim Ferriss in a lot of ways. Like he is just printing stuff that's total negative. It's clear, by the way, like the company, I don't think Scotia is working on any of the financings for the company. And of course, like they must be getting paid a lot of commission dollars from some of the short sellers. So that's the piece of the bread, side of the bread that's getting buttered for them. But yeah, so it's important to understand, you know, with today's, like for me, when I see on ASD, when I see people downgrading the ratings or lowering the price targets, Based off of some delays, like that's fair, right? And, but then on the flip side, the other side of the coin is that when the company executes, when the company delivers a batch of satellites, delivers second batch, third batch, you know, New Glenn gets launched, going again, we get more contracts. Like these analysts now have room to upgrade their rating on the stock and raise price targets, right? And so that's just kind of the natural progression of research coverage. But the key thing though is that for a company like AST, like you want to have broad research coverage, which by the way, like back in the day we only had like 2 or 3 research analysts, but now, you know, the company is well covered. It has over 10 major investment banks covering it. And the reason why that's important is that as an institution, for example, anyone who's like doing work on SpaceX IPO and they want to look at the comparable companies and they're like, oh, who puts this out? SpaceMobile. The first thing that they'll do is they'll go and see what research reports are out there, right? And they'll look at like initiation of coverage to just get them up to speed quickly. And then they'll look at the most recent quarterly research to see what is the sentiment around the stock. Like what are the key issues? How's the company performed relative to expectations? And again, those expectations that I talked about, are the consensus battleground of where should they be? Is it too high? Is it too low? Depending on what people want from the stock price, what they want the stock price to do. But yeah, research plays an important role. It's without research, by the way, like if a company had no research coverage, it would be really hard to attract institutional investors because the research analysts themselves, they play critical role in the information exchange and ultimately benchmarking against what does the market think, right? And as we all know, like markets are supposed to be efficient and research analysts are kind of a reflection of that. But as we all know, you can generate alpha from things being out of consensus, company executing or delivering results that are better than people expected or vice versa, right? And so So yeah, but I think it's important to, in a situation where a company is doing well and research analysts are raising price targets and upgrading ratings, like that's a positive accelerating framework, right? And then of course on the other side of that is if research analysts are continually downgrading and lowering their estimates, then that's a problem, right? And so anyway, I hope that's kind of helpful background. The other thing I wanted to talk about very briefly is, and for those that aren't interested, you feel free to drop off, but StrataCritical is a small situation I've been following. It was a former de-SPAC and then the company sold its Blade passenger business, the helicopter business to Joby. And so now what they do is they do organ transplant logistics and facilitation of organ transplants, meaning like removing organs and then delivering them. To the people who need them. But anyway, the company announced another great quarter. They beat revenues, EBITDA, and net income. This company, they also did a transformational acquisition of Keystone Perfusion. I guess it was like 2 quarters ago, but this is now the 2nd standalone quarter where they've beat and performed above expectations. And so this is a company that is going through is one of these like tweeners that, you know, did a transformational divestiture and then did a transformational acquisition. They've got a ton of runway in terms of doing accretive M&A. They just got, they lost, you know, when they were Blade passenger, the passenger business, they had like a few analysts covering the stock, which was primarily focused on the passenger side of the business. Whereas now, they've gone through this churn where those research analysts dropped off and then they picked up 2 new research analysts from— name is B. Riley and Craig Hallam. But yeah, this is part of the rerating process. Like as long as the company continues to execute, they pick up more research coverage and more institutional investors, you know, see that execution become interested in the story. You know, we'll see this gradual rerating in the name, which I still like, but I'll talk a bit more about it. probably next week. And I have a call with management. I'm going to talk to them and get some more details about the quarter tomorrow. So, but yeah, that's one that I continue to be excited about. It's a smaller position, but yeah, good company. I think it's going to continue to execute. And if you look at TransMedic, which is a kind of, they do some similar things. They reported pretty awful quarter yesterday. And so you see a tale of two cities, but Anyway, I'll leave it there. I might do another space on AST at some point, maybe later today or tomorrow, depending. But yeah, I just did want to cover the Rakuten sale and what it means and why they did it and the sloppy execution related to that, which I guess one last thing I'll say about Make America, they probably did have this view that BB-7 would be a successful mission and then perhaps the stock would've performed better. And then, you know, they didn't know that the FCC news was going to come out, but to them it was like, oh great, we got FCC approval after this negative event. But again, I think they inadvertently crushed the stock based off of their execution. And so now that that's gone, we'll see how things go from here. So thanks everyone for joining, and we'll talk again in a bit. Take care. This is the AST SpaceMobile Podcast. It will just basically come to your phone and be seamless regardless of where you are. We don't want the user even to know that it's connected by satellite. Listen, the opportunity that we have is very, very, very large.