Pattern Recognition: Episode 2 / Merlin (MRLN) & AST Spacemobile (ASTS)

AST Spacemobile (ASTS) announced their spac merger in December 2020, priced at $10. After peaking at $19 in February 2021, the stock subsequently fell 90%, bottoming in April 2024 at $2. Today it is trading at $89, peaking at $133 a month ago. For investors that remained patience and were able to ride out the volatility, ASTS has been an extremely rewarding investment.

Pattern recognition is a powerful investing tool. I have owned ASTS via warrants, options and stock for over 5 years. During 2020-2022 I analysed every single spac merger and ASTS was only name I committed to owning for the long term. I saw an exceptional, scalable, global business model, with a defendible moat IF the tech worked at scale. I thought of it as a potential $100bn+ market cap company “if they pull it off”, and thus a 100 bagger opportunity, albeit with multiple execution risks. Merlin Inc (MRLN) today reminds me of AST Spacemobile 3 years ago, when it was also trading at about $5. I see a similarly assymetric risk reward set up, namely a grossly mispriced open ended call option, with a $100bn+ market cap potential if the upside case plays out, representing a 100x upside opportunity, albeit with multiple execution risks.

This write up highlight the similarities I see between MRLN today and ASTS a few years ago. If you aren’t familiar with either name, I recommend first digesting:

ASTS - Ryan O'Connor & Toan Tran discussion: youtube
MRLN - Crossroads Capital’s initiation report link
MRLN - Shawarma Capital’s deep dive reports link

10 Similarities I see between Merlin inc (MRLN) today and AST Spacemobile (ASTS) 3 years ago

1) A publically listed VC (series C) investment with disruptive and scalable tech, with an emerging leadership position in massive TAM

ASTS: First direct to device satellite broadband solution vs $1trn mobile telco market.

MRLN: First autonomous pilot platform, able to retrofitted to existing planes vs c.$100bn per year fully-burdened pilot employment costs globally.

2) Adjacent comps, showing a path to $100bn valuation => 100 bagger potential

ASTS: in 2023 Spacex had a $150bn valuation, with over $100bn attributable to Starlink, leader in space-based connectivity, focused on fixed broadband vs ASTS with a $1bn market cap, as the emerging leader in space-based connectivity, focused on mobile connectivity.

MRLN: Waymo has a $126bn valuation, is a “physical AI” pure play, with a leadership position in autonomous driving solutions vs MRLN, a “phyiscal AI” pure play, establishing a leadership position in retrofitted autonomous pilot solutions (i.e. Waymo for planes), with a fully diluted market cap today, under $1bn.

3) Risks, timelines & the inflection catalyst

The downside risks are real and multi-faceted. Regulatory, dilution/financing, delays, technological, competition etc. The risk of impairment (100% downside) shouldnt be ignored.

ASTS navigated this gauntlet, albeit the stock price bottomed at $2, with the capital requirements relative to market cap driving a reflexive negative feedback loop. The inflection point for the stock came once the definitive commercial agreement with AT&T was announced on 15th May 2024. The stock subsequently rallied from $2.4 to $30, 3 months later, and $130, 3 years later.

The capital requirements (relative to market cap) at MRLN aren’t nearly as daunting but the convertible preferred presents additional dilution risks. I suspect progress on commercialisation, will also be the key inflection point for Merlin stock. Given CEO’s comment re 2027 goals, progress on C-130J (completion of critical design review) and the massive $55bn 2027 budget proposal for the Defense Autonomous Warfare Group (DAWG), I’m hopeful that 2027 for MRLN is the equivalent to 2024 for ASTS, but I’m happy to be patient if it isn’t.

4) Market structure, moats & competition

ASTS: protracted regulatory pathway, patented tech, commercial distribution & spectrum moats all serve as compounding moats. Starlink, was key competitive threat, albeit technologically inferioron direct to device.

MRLN: progress on the protracted regulatory pathway and patented tech provide the moat today. Once commercialised: the installed base of customers will have very high switching costs (post installing relevant hardware and training staff) and the data network effects compound. Reliable Robots is the key competitor. Aerospace’s barriers to entry means markets tend to coalesce around cosy oligopolies, with high margins and high multiples. I suspect autonomous flight solutions will be similar.

5) Excellent unit economics

ASTS: High margin toll booths in space. Upfront capex, but at very high ROIC. Satellites should generate over 90% EBITDA margin.

MRLN: customer pay for the hardware & installation costs, thereafter Merlin collects re-occuring licensing fees, at exceptionally high margins.

6) Partnered with industry heavyweights

ASTS: AT&T / Vodafone / Rakuten / American Towers.

MRLN: GE Aerospace / General Dynamic / Honeywell / Department of Defense.

7) Spac IPO & PIPE proceeds provide c2 years of runway but expect more dilution

Both MRLN and ASTS, came to market via spac with big PIPEs that provided financial runway for about 2 years. Nonetheless ASTS share count grew from 75m in June 2023 to 280m today. MRLN’s has already raised capital once post de-spac. Its 96m basic share outstanding, rises by 50-80% on a fully diluted basis after accounting for warrants and convertible prefs.

8) Strong alignment

MRLN & ASTS both have Founder/CEO with a material equity stake in the business, while accepting no/minimal salaries. Additionally there was zero selling and some buying from pre IPO investors in the SPAC deal, all proceeds raised were primary, going towards funding growth.

9) Dual use technology

MRLN & ASTS: Defense & government are the first targeted end markets, due to the faster monetisation pathway. However, the commercial market provides the larger blue sky upside potential.

10) Shareholders & Shorts

As a early stage company, coming to market via spac, elevated short interest and cost of borrow were evident at ASTS in 2023, just as it is for MRLN today. Cost to borrow MLRN today is over 50%. That income stream from stock lending is very material and arguably one of the most ignored source of downside protection, equivalent to a sizable but variable dividend yield. It took years for ASTS to establish institutional investor backing, but before that materialised a passionate retail shareholder base emerged (see Bloomberg article on: “spacemob”). I’m seeing a similar trend emerging at MRLN (i like the sound of “pilotmob”), with a growing overlap in the ASTS & MRLN shareholder base on x.

Note: the author is invested in securities of Merlin (MRLN) and AST Spacemobile (ASTS). Do your own due diligence, nothing written is investment advice.

Uzo