After delivering returns of more than 50% over the past two years, the S&P/TSX Composite Index has maintained its upward trajectory, gaining about 12.5% year-to-date. Higher commodity prices and improving corporate earnings have supported the broader Canadian equity market.
Meanwhile, Telesat (TSX: TSAT), which provides secure, high-capacity, low-latency broadband connectivity to enterprises, defence agencies, and government customers, has significantly outperformed the broader market. The stock has delivered a 71.4% return year-to-date and approximately 221.7% over the past three years. Growing demand for its connectivity solutions, new contract wins, and ongoing expansion initiatives have strengthened investor sentiment and supported the stock’s strong performance.
However, Telesat has recently come under pressure amid a broader pullback in the technology sector, with the stock losing more than 20% from its recent high. Following this decline, let’s examine the company’s second-quarter performance, expansion initiatives, growth prospects, and valuation to assess whether the pullback presents a potential buying opportunity for investors.
Source: Getty Images
Telesat’s second-quarter performance
Telesat operates through two segments: Geostationary Earth Orbit (GEO) services and Low Earth Orbit (LEO) services. Its GEO services segment operates and manages the company’s existing fleet of geostationary satellites and generates most of its current revenue and cash flow. Meanwhile, the LEO services segment focuses on developing and deploying Telesat Lightspeed, the company’s next-generation low-Earth-orbit satellite constellation, which represents a significant potential growth opportunity.
However, Telesat’s recently reported second-quarter results remained under pressure. Revenue declined 25.1% year over year to $79.5 million, primarily due to the non-renewal of certain broadcast contracts and lower service revenue from fixed broadband customers. New contract wins helped offset some of the decline but were not enough to fully offset weakness in the company’s legacy operations.
Adjusted EBITDA fell 62.3% to $22.1 million, while the adjusted EBITDA margin contracted from 55.3% to 27.8%. Lower revenue and higher expenses related to the company’s debt refinancing weighed on profitability. Telesat’s net loss also widened sharply from $75.5 million to $558.6 million, mainly due to non-cash losses from changes in the fair value of financing warrants, unfavourable foreign-currency translation, and higher debt from the stronger U.S. dollar.
Despite these near-term challenges, Telesat continued to invest heavily in its future growth. The company invested $165 million during the quarter, including $20 million in operating expenses and $145 million in capital expenditures. It ended the quarter with $383.2 million in cash and cash equivalents, providing liquidity to support its operations and ongoing expansion initiatives. While the second-quarter results were weak, the development of Telesat Lightspeed, new contract wins, and continued investments could create significant long-term growth opportunities. Let’s examine these catalysts in greater detail.
Telesat’s growth prospects
Telesat’s addressable market is expanding as demand for LEO satellite connectivity grows across defence, government, and AI-driven data applications. The company recently signed a $2.7 billion contract with the Government of Canada to provide secure connectivity to the Canadian Armed Forces. To support this contract and meet growing demand, Telesat plans to expand its Lightspeed constellation to 225 satellites from the previously planned 156. The agreement also includes milestone-based payments, which could provide additional funding as the project progresses.
Telesat also has significant revenue visibility through its existing backlog. The company’s GEO segment had a backlog of approximately $900 million, while its LEO segment had a backlog of around $1.1 billion. Including the recently announced Canadian government contract, Telesat’s pro forma backlog stands at approximately $5.6 billion. This substantial backlog, combined with the expansion of its Lightspeed constellation and growing demand for secure satellite connectivity, provides a strong foundation for long-term growth.
Investors’ takeaway
Telesat’s evolving business model and substantial share-price gains over the past three years make it a higher-risk investment. However, its strong customer base and milestone-based payment structure could provide greater visibility into future cash flows and help mitigate some of these risks. Despite its significant growth opportunities, the stock trades at a relatively modest forward price-to-sales multiple of 3.7. This combination of improving growth prospects, revenue visibility, and a reasonable valuation could make Telesat an attractive opportunity for investors comfortable with higher risk.
