PL - Planet Labs: Market Leader With Strong Growth Tailwinds

2023-12-27 11:55:16 ET

Summary

• I give a buy rating as I expect growth to reaccelerate and valuation to increase.
• Planet Labs is a market leader in global satellite imagery and geospatial solutions, with a first-mover advantage in daily earth scanning technology.
• The company has a huge addressable market in agriculture and defense, with potential for increased demand as the population grows and conflicts continue.

Investment Overview

My overall take for Planet Labs ( PL ) is a buy rating, as I expect growth to reaccelerate and valuation to rerate higher. Using consensus estimates, I have a price target of $3.31 for PL. The core assumption I made is that the growth runway for PL is long, supported by strong secular tailwinds in the agriculture and defense industries. While growth has slowed in the near term, I believe it was mainly due to the weak macro environment. As we go into CY2024, where the economy appears to have stabilized, governments and commercial customers should resume their demand for PL solutions.

Business Description

PL is a leading provider of global, daily satellite imagery and geospatial solutions. This company creates, constructs, and manages one of the biggest fleets of Earth Observation ((EO)) imaging satellites, gathering and organizing data from millions of photos every day. Data collected by PL is used to provide software solutions, advanced insights, and mission-critical data to clients across various industries.

Market Leader With First-Mover Advantage

Since its founding, Maxar Technologies ((MAXR)) has led the resolution market and, thanks to its superior imaging quality, has a long history of working with defense and intelligence clients. But MAXR's business model relies on expensive, high-quality satellites, so their product is only suitable for entities with a strong balance sheet. This also resulted in a growing interest in low-cost solution providers like PL. A big part of why PL is a leader is because of its first-mover advantage in the strategy of scanning the entire globe daily with its own low-cost satellites. I believe PL's offering is unique in regard to its daily earth scanning technology and is years ahead of any new entrants in the industries it competes in because its fleet is fully operational. Most importantly, the biggest asset that PL has, which is also a competitive edge, is the vast array of datasets it has on the plant, accumulated from scanning the earth daily for multiple years. PL not only collects imagery from satellites but also cleans and fuses this data with other types to make it easier to derive actionable insights. These insights help governments and businesses save time and money by improving their monitoring capabilities and operational efficiency. My opinion is that these put PL multiple years ahead of competitors that just started.

Being the first mover and a market leader also puts PL in a good position to know what the in-demand data is that customers need (PL already has connections to many key stakeholders). As data applications become more prevalent for commercial customers, PL can easily tweak its satellites to capture the required Earth's data and leverage its extensive data catalog to win deals.

Huge Addressable Market With a Lot of Potential

There are a wide variety of defense and commercial use cases for EO data. All across the world, governments are utilizing EO to gather intelligence, which includes monitoring, mission planning, mapping, and analysis, as well as the detection and mitigation of disasters. Commercial companies use it for various applications, such as location-based services, farming processes, mapping, and inventory management. In particular, for commercial customers, the PL daily earth scan capability puts the company in a unique position to accelerate the adoption curve of EO data for commercial customers as the cost is significantly lowered.

Agriculture is the most important vertical for PL, and it has a strong base of well-known customers (such as Bayer, Corteva, and Syngenta) that lend testament to the usefulness of PL's data. There are multiple tailwinds in this industry that should continue to drive demand for PL's solutions. For example, I expect food consumption on a global scale to rise dramatically over time as the population continues to grow. To set the context, the global population is expected to reach nearly 9.7 billion by 2050, which is an additional 1.6 billion mouths to feed or an increase of ~5 billion food sessions per day (assuming 3 meals a day). This is going to put huge pressure on the current global agriculture industry; in particular, the scarcity of land is a big problem. Hence, the only way to meet this growing need is to boost agricultural yields and efficiencies, which is what PL's EO data can help with.

The second important vertical for PL is defense. Over the past 24 to 36 months, there have been multiple instances of conflicts between nations, and regrettably, they could lead to more conflicts. As such, I think the growing need for intelligence by the U.S. Department of Defense is becoming more paramount than ever. As such, PL's EO data becomes more important over time as modern conflict is a better use of cyber intelligence and data, unlike World War II, which was based on the nation's industrial power.

What to Look Out For

I think it is apparent that the PL solution has a strong value proposition and should continue to see demand over the long term. However, the problem with investing in PL today is that the industry is still early in the adoption curve, especially on the commercial side. Having PL's EO data has not reached a table-stake status where every company "must have" the data in order to stay competitive. Commercial customers still see adopting the PL solution as a "want," not a "need." As such, it is way down on the priority list. As such, when the economy turned, growth decelerated dramatically from 30+% to just low teens in the past 2 quarters as commercial customers got hit by the impact of higher rates (higher cost of capital), a weak economy (forcing businesses to be tight on their budget), and an uncertain economic outlook (resulting in elongated sales cycles). Even though governments want to increase the level of integration with private companies, this appears to be slowing down as the scrutiny of big awards is greater.

This becomes a bigger issue for PL, as it needs to grow its revenue base in order to reach profitability. If not, it faces the risk of running out of cash. As of 3Q24, PL has $314.9 million in cash and equivalents and $25 million in debt, which is about $290 million in net cash. The business has burned a total of $130 million in cash (using EBITDA as a gauge) over the last 12 months ((LTM)) at a revenue size of $214.8 million. Using LTM cash burn as a yardstick, PL has about a little over 2 years of cash runway left. Hence, when growth slowed, the PL share price fell badly.

My focus on PL over the coming quarters is whether it can reignite growth and improve profitability. For growth, I am less worried as it is only a matter of time before the economy recovers, and governments and businesses will start investing in EO data again. For the latter, I expect the headcount reductions (PL overhired post-IPO) are going to be a big driver of margin expansion. Also, it is not like PL growth has come to a halt; it is still going to grow at 6-11% in 4Q24 (which means FY25 should see better growth as the economy is stabilizing). As PL's business model has a high incremental margin (the cost of maintaining the satellite and database is pretty much fixed), a higher revenue base should drive an asymmetrical increase in margins. Management guidance is that, in FY25, it can achieve positive EBITDA, at least on a quarterly basis.

Valuation

Consensus is estimating PL to see growth accelerate in FY25 and FY26, growing 18% and 27%, respectively. I am using these estimates in my model as I expect a similar growth trajectory, which is anchored upon the recovery of the economy in CY2024 (FY25). The tricky part is figuring out what valuation multiple PL should trade at in FY25 when growth is expected to be 27%, especially as there are no publicly available peers. As such, I look to PL's historical valuation relative to the prevailing growth rate to get a sense. The last time PL grew at a rate similar to 27% was in 1Q24 (31% growth). At the time, the stock traded at around 2.5x forward revenue. As the growth outlook is lower than 31%, I gave a discount of 2.5x, assuming that PL will trade at 2x forward revenue. That said, valuation could go far above my expectations as the market may expect growth to accelerate back to >30%, thereby valuing the stock at its historical average of 3.1x forward revenue.

Risk

PL's strategy to expand into new markets could lead to longer sales cycles and higher investment in sales and marketing and research and development than initially anticipated. These could delay the path to profitability and possibly disrupt growth.

Conclusion

In conclusion, I give a buy rating for PL due to the growth potential for demand in EO data. I believe PL's strategic positioning, marked by its first-mover advantage and vast data accumulation, is a competitive edge. While recent growth deceleration in a still-early industry adoption phase raises concerns, I anticipate a rebound as economic conditions stabilize, reigniting demand for PL's solutions. A key focus will be on PL's ability to reignite growth and improve profitability, especially with upcoming headcount reductions and margin expansion potential.

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