2023-07-10 22:30:39 ET
Summary
- Planet Labs, a provider of on-demand satellite imagery, is seen as a promising investment opportunity despite concerns over its financial performance and high operating expenses.
- The company's upcoming Pelican and Tanager offerings, along with its strong balance sheet, are expected to unlock substantial value, with an estimated price target of $4.
- Risks for investors include unpredictable customer growth, potential revenue decline, potential project delays, and broader macroeconomic factors, necessitating a well-planned investment strategy.
Introduction
Planet Labs ( PL ), a leading provider of on-demand satellite imagery, is at the crossroads of diverging sentiments. The company's unique offering of rapid, near real-time planetary imaging has the potential to unlock substantial value in a myriad of sectors including defense, climate change mitigation, and disaster response. However, the financial performance of Planet Labs is shadowed by concerns related to flattening revenues, high operating expenses, and a perceived lack of operational leverage. Despite these challenges, this analysis believes Planet Lab's current valuation has more skew to the upside than the downside and lists this stock as a buy. Interesting opportunity lies ahead for the discerning investor, with Planet Labs' current market valuation seemingly not reflecting the full potential of the business and their strong balance sheet. In the following article I walk through my price target of $4.
Business Performance
Planet Labs operates in the burgeoning market of satellite imaging , providing near real-time, on-demand imaging services that cater to various sectors. This business model is built upon the company's unique asset base – hundreds of satellites in space providing near hourly imaging of the entire planet. The technology, while highly innovative, also presents unique challenges when it comes to having to constantly innovate and have a high R&D spend to keep up with competitors such as Maxar, BlackSky, and Airbus.
Revenue Growth
Looking at the company's performance, revenue growth stands out as a highlight. Revenue has grown from roughly $32 million in Q1 '21 to $52.7 million in Q2 '23, showing the growing demand for Planet Lab's services. However, the pace of growth has been uneven, with occasional quarters of contraction and a slowing rate of customer acquisition as show below. This variability in growth raises questions about the stability of demand for the company's current services.
With that said, the upcoming Pelican and hyper-spectral offerings will dramatically open the market for their imaging services and data services Currently the main fleet of Doves has a resolution of 3-5m and the Skysats have a resolution between 50cm and 80cm. The new Pelicans are expected to not only have an imaging resolution of 30cm but also upon completion of the fleet they will be able to image a location 12 times per day. This Maxar site shows the dramatic difference of sub-1m resolution as well as 70cm vs 30cm resolution. Once the Pelicans launch Planet Labs will have a much more competitive imaging product to Maxar's plus they will have the advantage of rapid imaging. This increase in rapid high resolution data will be very helpful for not only their typical customers but also for training of machine learning models and AI.
While the details of the Tanager offering are limited we can assume that the multispectral imaging will also increase not only the value of their product but also expand their current customer base. Another aspect to keep an eye on is government contracts being awarded in the space. Recently NRO has signed contracts with many of the large players in the multispectral imaging space.
Gross Margin and Operating Expenses
While revenue growth is slowing Gross Margin has shown a steady improvement over time, increasing from 41.1% in Q2 '22 to 53.41% in Q2 '23. This suggests that the company has been successful in improving operational efficiency at the production level, which is a positive sign. However, the improvements in gross margins have been overshadowed by the high SG&A expenses. Operating expenses have shown a persistent upward trend. Particularly, Selling, General, and Administrative (SG&A) expenses have consistently consumed a large part of the revenues, peaking at 118.34% of revenue in Q1 '22 before easing to 84.73% in Q2 '23. This high level of SG&A expense indicates the challenges the company is facing in scaling its operations and achieving operational leverage. Ideally we would see revenue increase faster than SG&A growth but that hasn't been the case. There have been multiple quarters of SG&A expenses increasing faster than revenue growth (shown in chart below.)
Planet Labs SG&A vs Revenue (Author)
Balance Sheet and Dilution
Date | Shares Outstanding | QoQ Change (%) |
---|---|---|
2022-04-30 | 264,088,997 | - |
2022-07-31 | 266,212,489 | 0.80 |
2022-10-31 | 267,947,661 | 0.65 |
2023-01-31 | 270,159,456 | 0.83 |
2023-04-30 | 272,347,977 | 0.81 |
While stock-based compensation is a constant topic of discussion for Planet Labs in my opinion the dilution isn't as large of a factor as other post-SPAC companies. I believe there balance sheet does not get enough attention from analysts. Below is a table detailing their cash and short term investments.
Fiscal Date Ending | Cash and Short Term Investments (Million $) | QoQ Change (Million $) |
---|---|---|
Q1 22 | 490.762 | 431.773 |
Q2 22 | 484.489 | -6.273 |
Q3 22 | 457.691 | -26.798 |
Q4 22 | 425.287 | -32.404 |
Q1 23 | 408.76 | -16.527 |
Q2 23 | 376.178 | -32.582 |
With $376 Million in cash as well as little debt they have a net cash per share of roughly $1.34 per share. Factoring in portions of this cash sitting in money market accounts and investment grade bonds we can estimate a roughly 5% yield will generate an estimated $15.5 Million in annual interest. At the current burn rate they have roughly 10 quarters of runway and with significant gross profit they do have the ability to reduce and maintain.
Valuation
As I have wrote in previous reports I favor a sum of parts analysis of different businesses and depending on their phase of business I focus on different valuation metrics. For Planet Labs with a strong balance sheet and strong revenue I focus Gross Profit / Enterprise Value. For those that do not know Gross Profit is simply Revenue - COGS. Enterprise value (EV) can be treated as the true cost to acquire the company. It is calculated as Market Cap. - Cash + Debt. The cash is subtracted because you accept the cash from the business after the completion of the sale. For example if you bought a container with $1 in it for $1.50 your real cost of the acquisition (EV) is only $.50 since you are receiving the dollar.
For Planet Labs their last quarter's revenue was $52.7 Million with a Gross Profit Margin of 53.41%. If we annualize these figures it puts the gross profit at roughly $113 Million.
For their Enterprise Value we take their Market Cap:~$900 Million, subtract Cash: ~$376 Million and add Debt: 27M that puts us at roughly $549 Million. The way I look at enterprise value is this is the market value of the business excluding the balance sheet.
At this current valuation, the EV/Annualize Revenue is 2.6X and EV/Gross Profit is 4.86X. At these valuations if R&D and SG&A were cut completely (obviously not realistic) the Gross Profit of the company would cover the acquisition cost in roughly 5 years. Which is a great deal by almost all metrics, but especially for a business that is about to launch some innovative new products.
Luckily with the recent acquisition of Maxar we can have a quick rule of thumb to check these valuations. Do keep in mind that this isn't apples to apples because Maxar is had a much larger revenue base and also had a space infrastructure division that was a supplier for space-based infrastructure to other clients. Maxar at the time of acquisition also had a significant debt load, minimal cash and flat revenue . Maxar was purchased for $6.4 Billion which was about 3.2X Revenue and ~2X EV/Revenue. PL currently has an annualized revenue of $225 Million when multiplied by the same Maxar revenue multiple of 3.2 implies a valuation of $720 Million. For EV/Revenue: $550M/$225M = 2.4X. Based off the Maxar acquisition PL is underpriced.
For my baseline price target I calculate it the following way:
[Annualized Revenue X Maxar Revenue Multiple + Cash] / Share Count
($ 225 Million x 3.2 + 376 Million) / 276 Million = $3.97 per share. Which implies a ~20% upside.
Risks
Planet Labs operates in the rapidly advancing field of satellite imagery, necessitating continuous investment in research and development to stay ahead of competitors like Maxar, Blacksky, and Airbus. The persistent risk of technological obsolescence means that any lag in technological progression could lead to a loss of market share and reduced revenues. Additionally, the forthcoming launch of the Pelican satellites, which is expected to significantly boost imaging resolution, might face unexpected delays or technical issues. If these launches don't meet intended specifications or face substantial delays, it could adversely impact future revenues and the overall financial health of the company.
The company's growth has been uneven with occasional quarters of contraction, indicating potential instability in customer demand for their services. A failure in retaining existing customers or acquiring new ones could stagnate or even decrease revenues, negatively impacting the company's financial performance. The persistently high selling, general and administrative (SG&A) expenses that Planet Labs has incurred raise questions about the company's ability to achieve operational leverage. If the company can't control these operational costs, profitability may remain elusive despite improvements in gross margins.
Market risks are also a significant concern. The satellite imaging market is a niche one with very specific demand patterns. Any changes in market dynamics, like regulations, government policies, competitive landscape, or the introduction of substitute products or services, can significantly affect Planet Labs' revenues and profitability. For example, changes in government contracts for multispectral imaging can alter the demand for the company's services. Furthermore, broad macroeconomic conditions can influence the company's performance. An economic downturn, for instance, might result in lower demand for the company's services, leading to reduced revenues and potential financial strain.
While Planet Labs maintains a strong balance sheet with substantial cash reserves and minimal debt, the continuous investment required for R&D and operational expenses present inherent financial risks. If revenues don't grow as expected, or expenses rise faster than revenues, financial resources may be strained, affecting the company's ability to invest in future growth. Although currently not as substantial as other post-SPAC companies, there's also the risk of share dilution due to stock-based compensation, which could impact shareholder value.
Strategy
A cornerstone of the strategy should be establishing a long position in the stock. With the current stock price considerably lower than the price target of $4, purchasing shares outright offers a straightforward opportunity. It's essential to keep in mind, however, that this will require patience and resilience to market volatility. As Planet Labs continues to execute its strategy and generate more revenues from its Pelican and Tanager offerings, it is likely that the market will progressively acknowledge the inherent value of the business. This implies a longer-term investment horizon. The lack of debt and low EV/Revenue also make it a potential target for acquisition. I believe this acquisition could come from Private companies or from Public space economy companies such as Rocket Lab ( RKLB ), Boeing ( BA ) or other aerospace companies.
Another way to augment the potential returns from the long position, and also to hedge against downside risk, selling out-of-the-money (OTM) cash-covered puts is another option. This entails selling put options at a strike price lower than the current market price of the stock. If the stock price remains above the strike price at expiration, the option expires worthless, and you keep the premium received from selling the puts, which effectively lowers your cost basis if you plan to go long. If the stock price falls below the strike price, you're obligated to buy the stock at the strike price, which could be an opportunity if you believe in the long-term upside of Planet Labs. I believe this also allows investors to take advantage of PL's volatility as compared to being a victim of it. I am currently focused on selling puts for later in the year.
Conclusion
Planet Labs stands at a promising juncture with significant potential in the satellite imaging market, despite facing challenges in the areas of revenue growth and high operational expenses. The potential upside brought about by its upcoming Pelican and Tanager offerings, coupled with its solid balance sheet, presents an attractive investment opportunity that seems undervalued at its current market price. With an estimated price target of $4 it's clear that Planet Labs could be an excellent investment choice.
However, it's essential to note that investing always comes with risks. In the case of Planet Labs, these include the unpredictability of customer growth, potential revenue decline, potential delays in new projects, and broader macroeconomic factors. As such, it's crucial to maintain a well-planned investment strategy that takes these risks into account, potentially including the use of investment mechanisms such as OTM cash covered puts.
In conclusion, while there are undoubtedly hurdles to overcome, Planet Labs presents a compelling investment opportunity due to its innovative technology, strong balance sheet, and the potential for its new offerings. By ensuring a solid understanding of both the company's financial health and the broader market conditions, investors could find significant value in this underappreciated gem.
For further details see:
Planet Labs: A Strong Balance Sheet And Future Prospects Make It A Buy