Investing in Google's Project Loon

An icy breeze blows across my bare knuckles as I lock the front door behind me.

It’s six in the morning, and I’m hoping for a quick commute to the office downtown as I walk the path to the car.

The weather is cold but clear, so I know it’s one of those days.

Instinctively, my eyes check for the unmoving black spot in the dawn sky.

Soon it will turn white in its reflection of the rising sun.

It’s an aerostat that detects cruise missiles, a cost-effective new part of America’s missile defense shield from Raytheon (NYSE: RTN) called JLENS. I can see it from my front porch.

Even though it’s effectively just a radar-equipped helium balloon, its presence is not at all comforting. I don’t feel any safer with it up there — quite the opposite. It’s ominous and dystopian. Seeing it is a constant reminder both that cruise missiles are a threat and that 24-hour surveillance is just outside my front door.

Fortunately, payload-bearing balloons don’t have to be threatening, nor do they even have to be visible. They can also be used to overcome the cost of laying cable and act as communications platforms instead of surveillance.

This is what Google hopes to accomplish with its Project Loon “Internet balloons.”

These balloons aren’t aerostats; rather, they’re a free-moving mesh network of flying nodes way up in the stratosphere where they can’t ominously loom.

We’ve looked at Project Loon a couple of times since it was announced in 2013, but it’s received a new coat of paint from Google Senior Vice President Sundar Pichai.

Pichai announced that the initial goal was to have the balloons stay aloft for three months. If they could do that, they were commercially viable.

Most of them have managed to stay up for six.

One specific balloon was reported to have circled the earth nine times over the span of 187 days.

The project has moved forward enough that Google is now navigating commercial agreements with a number of international service providers.

One component manufacturer has worked with both Raytheon on its JLENS aerostats and with Google on Project Loon. It’s Raven Aerostar, a subsidiary of Raven Industries (NASDAQ: RAVN).

Raven Aerostar made the balloons for both of these projects. Its Super Pressure Balloons have been used by NASA under some of the most extreme conditions on Earth.

They’ve flown for 50 continuous days over Antarctica and for three weeks straight at over 100,000 feet of altitude in “near space.”

This is the balloon design that’s been used for Project Loon, and Google has pushed it to all kinds of other extremes: one balloon maneuvered through 23 countries in one shot, another endured -117-degree temperatures over the Andes, and another one traveled at 201 miles per hour over Argentina.

Aerostats have been in use for border surveillance by the Air Force, Coast Guard, and Customs agency since the 1980s. They were cut from use in 2011 but were picked back up by the Department of Homeland Security in fiscal 2014.

According to the White House’s National Drug Control Strategy for 2014, Customs and Border Protection was able to cut 32% of its operations and maintenance costs by shifting its border control balloon program over to the Department of Defense:

The Tethered Aerostat Radar System (TARS)… program has assisted CBP with interdicting suspect aircraft for more than 20 years and is a critical component of CBP’s bi‐ national narcotics and contraband interdiction operations with Mexico.

Customs and Border Protection is the single-largest uniformed federal law enforcement agency in the country. By transferring the project over to the Department of Defense, it is ensuring Raven Aerostar’s products continue to be in demand by the U.S. government.

In the beginning of 2014, Raven Industries announced it expected its contract manufacturing revenues to decrease through fiscal 2015 until they hit approximately $20 million. This caused a major sell-off and a drop in share value.

However, there was an important bit of information in the company’s 8-K that seems to have been overlooked…

The company said it wasn’t going to focus on contract manufacturing like it had done with the Department of Defense, but instead that it was focusing more on its own proprietary product lines. The Super Pressure Balloon used by Google is one of those designs.

So even though contract manufacturing could continue to fall, the sale of its tough “Internet balloons” might serve to lift revenues back upward.

The company is putting out its fourth quarter fiscal 2015 results on March 11, and it could provide new information about Google’s project and Raven Aerostar’s contribution to it.

Good Investing,

Tim Conneally

 @TimConneally on Twitter

For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.