2023-03-27 12:48:10 ET
Summary
- BlackSky is growing but not at a particularly rapid clip, with yearly revenues still under $100MM.
- It has a balance sheet that I would call 'just fine', with plenty of cash on hand and runway in order to continue operating.
- Additionally, its gross margin appears to be improving significantly as it has become more of a software company following the successful deployment of its 'base constellation' of satellites.
- The key metrics I would be watching here are revenues, operating cash, and margins; if these hold steady then things could get interesting for BlackSky. For now, it's simply unclear.
Overview
BlackSky Technology (BKSY) is a satellite company providing real-time geospatial intelligence. Their offering leverages a network of satellites along with a proprietary SaaS platform. The software is also readily integrated into popular analytics platforms such as Palantir (PLTR). Together, this hardware and software are able to provide customers with tailored data feeds and dashboards. They provide this capability across various sectors, including supply chain, commodities, and financial services.
The company is quite new to the public markets and has only been trading publicly since Q4 2021. Entering the markets via SPAC merger with Osprey Technology Acquisition Corp, it has depreciated significantly since.
This article will review the financials and valuation of BlackSky to see if this firm represents a quality investment at this time.
Financials
BlackSky is an early stage growth stock and is not profitable, and the other financials must be looked at through these lens. With that being said the company has actually posted several quarters of positive net income, although this is certainly the exception rather than the rule.
The revenue trendline is more clear and has been increasing consistently over the last 10 quarters, although it still stands at quite a low number of $19.4M in most recent quarter.
Additionally, the firm has not established a consistent gross margin. However, this figure looks to be improving steadily over the last year, with cost of revenues decreasing significantly and gross profits achieving a robust 62% of revenues. This can be understood due to the company having brought a lot of its hardware online and now allocating more of its resources to its software offering – certainly something that has much better margins. I think this figure is worth paying attention to in particular as the company continues to operate; the proof will be in the pudding as to whether it’s a credible SaaS business on account of its margins. With that being said there is simply too much variance for me to be certain of that just yet.
As to operating performance, the company has not yet turned the corner on this – we knew this from the negative net income. It is still losing money from operations and does not appear to be close to breaking out from this pattern as of just yet.
Unsurprisingly this has also yielded a consistent cash loss from operations. The highlight here is that the cash from operations loss appears to be less than the operating income loss, consistently since Q4 2021. What this tells us is that the company’s operating cycle is able to generate cash from customers efficiently; it is able to take in cash prior to expending it now that its hardware is operational.
As to the balance sheet, things are decidedly mixed. The firm has a solid amount of cash on hand; at its current burn rate I would not be concerned about them going out of business out of the blue. Indeed, I think they can comfortably operate for a few years based on their operating burn rate.
This figure appeared to be further allayed during the prior quarter, with a cash loss of only $3M against an operating cash loss of $5M.
There are a few other highlights from the balance sheet. The company turned the corner on having positive net debt as of last quarter, although we can’t infer too much from this. What is more interesting is the high book value of the firm. Since they own a lot of hardware, this creates a floor to their valuation – a margin of safety, if you will – that is quite significant. As of the last quarter the firm’s book value of $1.02 per share was a full 71.8% of its current valuation.
As to valuation, I wouldn’t read too far into current numbers. Comparing it against the greater Industrial sector that it is a part of is also a bit tricky, as this is clearly an emerging software company that happens to have a lot of hardware. The book value is notably cheap but everything else is quite expensive; indeed, the current revenue figures are dragging down future prospects for the firm materially. However, the aforementioned cash holdings of the firm do give it a good amount of runway.
Conclusion
BlackSky looks to be well-positioned to continue operating, but it doesn’t have the levels of growth that I would like to see in order to call it a buy. Contextualizing its overall financial picture, I see one metric that needs to grow in order to make things interesting here: revenues. While it does have the cash to keep going, as well as a balance sheet that doesn’t raise eyebrows, the firm hasn’t yet hit $100M yearly revenues. As such the margin of safety provided by its book value doesn’t serve to create an asymmetric return.
Additionally, its operations are still losing money. Looking at this for what it is, which is both a hardware and software company, it hasn’t yet turned the corner and proven its model; I do believe its valuation reflects that at present. It's cheap because of the material uncertainty associated with its financial picture. With that being said I very well think that this company has potential and will be keeping my eye on it over the next year; for now, let’s call this a hold.
For further details see:
BlackSky Technology: Still Unproven, But Has Runway