This Small-Cap Space Stock Rocketed 500% Last Week, and You Probably Didn't Notice

A funny thing happened on the way to President Donald Trump's tariffs war, and his threats to pull out of Nato and cut off military aid to Ukraine. Europe discovered it needs to spend more on its own defense.

Shares of European defense companies have been on an upsurge ever since. One European satellite company in particular caught my eye last week when it suddenly rocketed more than 500% over just five days of trading: From Feb. 28 through March 5, shares of satellite telecommunications stock Eutelsat (OTC: ETCM.Y) -- which you can mentally pronounce to yourself as "EU telsat" as a reminder of what it is -- jumped from just $0.35 per share to close at $2.21. It's given back some of those gains over the last few days, granted, but at Friday's prices, remained up more than 300% from its price at the end of February.

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Introducing Eutelsat

What's behind this insanely good performance from a little-known (in the U.S., at least) space stock?

At first, you might look at the share price and dismiss the move as nothing new. A $0.35 stock becoming a $2 stock, then subsiding? That happens with penny stocks all the time -- except the cultural concept of "penny stocks" differs on different sides of the ocean. Here in the U.S., stocks costing less than $5 a share are infamous for their volatility and rightly regarded with skepticism, as they so often turn out to be fly-by-night operations, value traps, and not serious businesses.

Over in Europe, however, things work differently. Giant, well-funded companies like British Telecom and British Airways parent International Consolidated Airlines, for example, routinely trade for just a couple of bucks a share.

And that's the case with Eutelsat, too. Although its market cap is just $3 billion, Eutelsat is a sizable company doing $1.4 billion in annual business and generating substantial cash flow.

Image source: Getty Images.

Why Eutelsat is rising

And why is this satellite company's stock going up all of a sudden? European Union nations are planning to increase their defense spending in response to U.S. threats to cut off military aid and access to satellite intelligence to Ukraine, which has been fighting off a Russian invasion for just over three years.

Ukraine's backers in the EU seem especially concerned that Ukraine might lose access to Starlink satellite communications services provided by SpaceX, which are seen as crucial to the war effort. In response to this threat, Eutelsat was quick to point out in a media statement that its OneWeb satellites "can provide an alternative for certain government and defense applications." Eutelsat added that it is in talks with "European institutions and business partners [to] enable the swift deployment of additional user terminals" to plug any gap created if Ukraine is deprived of Starlink services.

It's not an empty promise, either. Bloomberg reported that the 630 orbital satellites comprising Eutelsat's OneWeb constellation are "the second-biggest portfolio of low-earth orbit satellites after Starlink." It might not be as large or as capable as Starlink's constellation, but it's literally the next best thing.

And it could get better if Europe follows through on plans to increase defense spending to plug any holes left by an exiting U.S. European nations are currently in talks to boost defense spending by as much as $841 billion under a new "REARM Europe" program. If even a portion of these funds are devoted to military space capabilities, they could be used to build out OneWeb's capabilities and provide a shot in the arm to Eutelsat's revenue growth rate.

Image source: Getty Images.

Is Eutelsat a buy?

It wouldn't even take much of that $841 billion to move the needle on Eutelsat. With only $1.4 billion in annual revenue, earmarking just 1% of the EU's planned increase in defense spending to buying satellite services from Eutelsat would be enough to grow annual revenue more than 60%.

How much of a difference would that make?

Well, for context, analysts polled by S&P Global Market Intelligence were projecting Eutelsat's revenues to grow just 2.5% this year, and its losses were expected to exceed $1 a share. That was before Europe started getting serious on defense spending, though. If spending levels do increase, things could change for Eutelsat in a hurry, much like increased spending on Starlink helped transform SpaceX from an unprofitable rockets company into a very profitable satellites company in a matter of just a few years.

Will the same thing happen to Eutelsat? Only time will tell. But for investors who've bid the stock up already, I'd say that's exactly what they're hoping will happen.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.