Diamond Equity Research, a leading equity research firm with a focus on small capitalization public companies has initiated coverage of uCloudlink Group Inc. (UCL). The in-depth 22-page initiation report includes detailed information on the uCloudlink Group’s business model, services, industry, valuation, management, and risks.
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Large Market Opportunity
uCloudlink is targeting the massive mobile data connectivity service market driven by the increasing adoption of mobile devices and internet penetration, and the surging demand for optimal mobile data traffic solutions with high speed and reliable connections. According to Frost & Sullivan, the total revenue generated from the global mobile data connectivity service industry by mobile data users is estimated to grow at a CAGR of 7.2% to US$1,210 billion in 2023. The robust development of the entire IoT industry further drives the demand for data usage and connectivity services, as we approach 5G widespread adoption, where entirely new applications will be possible in various application scenarios which may require new mobile data connectivity solution for users, hardware vendors and carriers with higher speed and more reliable connection. We see extraordinary business opportunities emerging in the industry and view uCloudlink as a connectivity service provider that could address growing demand from users for optimal networks across carriers through its leading mobile data traffic sharing marketplace and work towards the goal of allowing users to connect and share without limitations through the extensive capabilities of mobile data traffic sharing.
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Unique Technology
uCloudlink appears well positioned to capture market share in various high growth segments with its proprietary cloud SIM technology and architecture enabling a smooth mobile connectivity experience, its distinct mobile data traffic sharing marketplace, and seasoned management team with years of operational experience in industry. The company’s integral cloud SIM technology and architecture, backed by its PaaS and SaaS platform, are its core competitive competencies in the data connectivity market, supporting physical SIM, eSIM, and soft SIM technologies to ensure that its users have optimal connection resources in its distributed SIM card pool supplied by various carriers globally. We also note the recently launched HyperConn™-Enabled 5G Mobile WiFi Device, which uses AI to ensure users always have the best WiFi connection, opens new markets such as education, IoT, remote work, and surveillance. HyperConn™ products can also help MNOs develop data connectivity markets globally, including 5G markets. Additionally, HyperConn™ products will allow the company to target IoT opportunities in new industries. The company recently released the GlocalMe Numen (first 5G mobile Wi-Fi device, MSRP $599) and GlocalMe Genie, a 4G pad device powered by HyperConn™ (unpriced). The first edition of Numen will be available in Europe and Asia in July 2021, with Genie targeted for release in Q4 2021. We view uCloudlink as a unique investment opportunity for investors seeking exposure to data connectivity markets, which is likely to benefit from the deployment of 5G and IoT technologies, as well as the return of international travel.
Reopening Economy Presents Opportunity
Though the headwind of the global travel restrictions still pressures UCL’s international data connectivity business, we expect a business recovery accelerated by the rebound of international tourism, while its local data business continues its growth. Though international tourism arrivals declined sharply due to the outbreak of COVID-19, we believe the ongoing launch of vaccinations will speed up the recovery of international tourism and are optimistic around uCloudlink 1.0 sales growth, as international tourism returns to normal levels and the asset light cash flow nature of the business can eventually resume.
Valuation
It is challenging to value uCloudlink given its current business still in its early stage and limited number of publicly traded mobile data traffic sharing marketplace providers in market. In our comparable company analysis, we screened for companies within the global mobile data connectivity service market. Given the inherent assumptions in valuation models, we selected to use an average of our discounted cash flow valuation and our comparable company analysis valuation. We arrive at a valuation of $23 per ADS.
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