SPIR - Spire Global: Some Tidy Improvements But Upside Could Be Capped In The Short-Term

2023-11-20 12:32:28 ET

Summary

• Spire Global, Inc. offers space-based research and analytics services to commercial entities and governments, with a focus on aviation, maritime, and defense industries.
• The company has shown solid top-line growth, with revenue expected to continue growing at a rate of 28% through FY25.
• Spire is working towards becoming profitable at the operating level and expects to generate positive operating cash flow in Q4.
• The stock could be on the cusp of hitting resistance and the institutional segment is yet to turn constructive.

Company Profile

Spire Global, I nc. ( SPIR ) is a micro-cap (over $100m) play on space-based research and analytics services, which is rendered to both commercial entities and governments. Whilst SPIR’s services are tapped by a range of industries, it’s the aviation, maritime, and defense industries that show the keenest interest.

SPIR essentially operates over 100 LEMUR (Low Earth Multi-Use Receiver) satellites which observe the Earth (200 times per day on average) using radio frequency sensors. The raw data is collected by the company’s ground station network, and then further augmented with analytics and predictive solutions, before being disseminated to clients to help them gain an edge in a whole host of areas.

SPIR is also well-noted in the market for its popular “space-as-a-service” subscription model which has some tremendous utilitarian qualities and could help it gain traction. Instead of incurring high upfront costs and relentless maintenance expenses, interested companies can sign up for Spire Space Services and then build, launch, and operate their own satellite constellation for a monthly fee.

A Few Promising Developments

One of the first things to say about Spire is that if you're buying this story, you’re buying into a business with solid top-line growth prospects. With the proliferation of new tech such as IoT, autonomous vehicles, etc. this shouldn’t come as a surprise, as the amount of data being sent to and from space will grow at an exponential pace. Deloitte believes space data as a whole could expand by 14x by the end of this decade (relative to levels seen in 2020).

SPIR’s topline has been growing at 30% annually for nine straight quarters now (most recently at 34% in Q3-23), and one can still get a great deal of revenue visibility if you track the performance obligations that are yet to be booked as revenue. At the start of the year, this stood at $167K , but it has since grown by 21% and currently stands at almost $202K . Around $80k of this figure will be booked as revenue over the next 12 months, whilst the remaining $120K will be reflected through FY26.

All in all, notice how this gets reflected in consensus estimates through the next three years. Given the high base one shouldn’t expect 30% rates forever, but yet still, note that on a 3-year CAGR basis, you’re still looking at a decent threshold of 28% growth through FY25.

Given the likely pace of topline growth, it feels incongruent to see the stock priced at less than 1x forward price to sales. The current multiple of 0.74x, also translates into a whopping 78% discount versus the stock’s long-term average.

Then, SPIR is not yet profitable at the operating level, but this is only just a matter of time as the company pivots away from its existing ARR (average recurring revenue strategy). Going forward management intends to be very selective with the clients it caters to, and will only focus on those clients where there’s an opportunity to up-sell or cross-sell, or those with a growing share of ARR. Essentially the goal is to generate even more operating leverage (on paper, the SPIR business model is anyway already a business well-poised to generate solid operating leverage as the same data collected from space can be sold innumerable times to a plethora of clients).

Now management believes they can turn EBITDA positive sometime in H1, and consensus too is pretty much on board with that, with $13.5m of EBITDA expected in FY24. Note that the EBITDA will then surge by over 3.4x the following year.

The other interesting development that we like is that SPIR could soon be on the cusp of generating some very useful internally generated cash flow. After witnessing double-digit operating cash outflows in Q1 and Q2, the trend improved markedly in Q3 to just -5m. Management has recently talked up some of the best practices they’ve been following with regards to working capital, and you can see this being reflected in how efficiently they are turning their working capital these days. Previously it was less than 0.5x, but lately, the working capital ratio has expanded by over 3x, and is currently at 1.68x.

Management now expects to generate positive operating cash flow as soon as Q4.

Even on the CAPEX front, there now appears to be a more prudent strategy which should reflect well on free cash flow. Previously the company was spending close to $10-$12m on maintenance CAPEX p.a, but they will optimize this going forward, and will likely only spend $5-$7m in the coming years. A lower chunk of maintenance CAPEX also means lower COGs related depreciation costs, which in turn should boost the gross margins which have always been trending up at a healthy pace from the mid-40s range a few quarters back (the long-term goal is to get to gross margins of 70%).

The other chunk of the CAPEX is related to the pre-space investments, and whilst this could be lumpy every now and then, note that these are largely funded by SPIR’s clients with a lag.

All in all, CAPEX is expected to be less onerous on SPIR going forward, and the expectation now is that SPIR could have some useful FCF generation from Q2-Q3 of FY24. This should help mitigate some of the pressure seen with its high-cost debt. Note that net interest expense which was lower than mid-single-digits a few years ago, has grown by over 3x.

Management also confirmed that as SPIR gradually shifts the pre-space CAPEX burden to its clients, this will also put it in a better bargaining position with banks as it seeks to refinance its debt at lower levels.

Closing Thoughts- Technical Considerations

Certain investors who are interested in beaten-down names within the space innovation landscape would no doubt have SPIR has one of the names on their watchlist. The image below highlights how SPIR’s relative strength versus a broader ARK Space Exploration & Innovation portfolio looks enormously oversold, trading a long way off the mid-point of its long-term range.

However, before you jump the gun, it's also worth reviewing the conditions on SPIR’s own standalone chart, and on the weekly time frame we can't say we're too chuffed to discover the current reward-to-risk equation. Basically what we can see is that for well over 18 months, the SPIR stock has been trending lower in the shape of a fairly consistent descending channel.

As things stand, SPIR is not too far away from hitting the upper boundary of the channel, representing sub-optimal risk-reward. Also note that until the decline in October, the price had spent around 27 odd weeks, struggling to clear the $7 hurdle, and it is now creeping into that terrain where we’ve typically seen excess supply of the shares, capping further upside.

Investors may also want to consider that after reducing their net stake by over 52% over the last year, the influential institutional segment is yet to start re-purchasing shares in this counter. Unless this cohort starts getting involved, we feel SPIR may struggle to make sustained moves toward the upside and may continue to be a trading play. We suspect institutional sentiment towards the stock will likely only pick up meaningfully if Spire can resolve some of the deficiencies associated with its ICFR (internal control over financial reporting).

To conclude, we’re going with a HOLD rating on SPIR.

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