Investors who have propelled a near 300 per cent surge in Eutelsat Communications SA shares this month are getting wary of chasing the rally any further.

After more than three years of continual decline, the stock rose 554 per cent in the first three days of March, fueled by signs of a geopolitical shift and Europe’s race for an alternative to Elon Musk’s Starlink.

Those gains are now faltering, as traders await clarity on how much financial support the French satellite operator could actually receive from the European Union as the bloc raises defense-related allocations. While Eutelsat should benefit from the unfolding geopolitical shifts — in particular Europe’s quest for a homegrown satellite champion to replace Starlink — that extra assistance is crucial, given the company is burning money to compete with industry rivals.

Investors are assuming more EU financial support for Eutelsat, “although we currently have no visibility on what form that support will take,” New Street Research analyst Ben Rickett said. “The current market value implies a very generous deal with the EU.”

Eutelsat’s share price has more than doubled this year, albeit after years of decline as its legacy business was challenged by rivals, most recently by Starlink, whose satellites operate much closer to Earth and are capable of transmitting signals quicker.

Eutelsat does now own a network of low-earth-orbit satellites thanks to its acquisition of UK rival OneWeb in 2023, allowing it to compete with US rivals. However, its constellation of such satellites is 10 times smaller than Starlink’s fleet. And industry competition is hotting up, with Amazon.com Inc. due to launch its satellite broadband network this year.

What’s more, the company faces significant debt maturities, with almost €2.4 billion ($2.6 billion) due to be repaid over the next four years. It’s also pledged to invest about €2 billion in Europe’s project to create a sovereign satellite communications network, another drag on cash flow.

Despite Eutelsat’s share-price surge, “near-term fundamentals have not changed materially,” Morgan Stanley analysts including Terence Tsui said in a March 14 note. Given the company’s significant investment needs, they expect free cash flow to remain negative until 2027.

All the debt and cash-flow issues, alongside a low free-float, indicates share volatility will stay elevated. Also, short sellers who took a beating during the recent rally haven’t entirely given up on their bearish bets. Short interest represents about 25% of free float, according to data from S3 Partners, and the stock remains one of the most expensive to borrow against in Europe.

Most analysts do expect Eutelsat to receive some government support, given roughly 25 per cent of its shares are held by vehicles affiliated with France and the UK. It is likely to play a role in the new military intelligence satellite network planned by Brussels as part of its push to reduce reliance on the US, and it has put itself forward as an alternative to Starlink in Ukraine.

So how much more could Eutelsat stock rise? Assuming the company receives 2.5 per cent of the EU’s €150 billion defense spending budget, the shares could be worth €6.7 apiece, according to an estimate by Goldman Sachs Group Inc. While that’s about 36 per cent above Wednesday’s closing price, Goldman analysts warned of “material uncertainties” and a wide range of outcomes.

Bernstein analyst Aleksander Peterc agrees that Eutelsat is of “absolutely strategic importance” to Europe. Yet, without knowing how much financial assistance is forthcoming, he said “it’s hard to say right now what’s the economic reality, how much the stock is really worth, and to what extent it’s supported by very high levels of short interest.”

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--With assistance from Subrat Patnaik.

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