2023-07-12 14:28:33 ET
Summary
- I continue to recommend a buy rating for PL, despite a near-term slowdown due to the weak macro environment.
- PL's unique position with a large satellite fleet and extensive data archive, along with strategic partnerships with industry leaders, positions it well in the growing commercial satellite imaging market.
- The focus should be on PL's long-term potential and the significant total addressable market.
Summary
This is an update to my previous coverage for Planet Labs ( PL ). Previously, I recommended a buy rating because of the large TAM and profit in the sector. Such that, if PL can achieve its goals and the rate of adoption accelerates, the upside would be lucrative.
For this update, I continue to recommend a buy rating for PL as I expect PL to continue working towards its FY26 targets, and that the near-term slowdown is merely a function of the weak macro environment. Once the macro recovers, demand for PL's solutions should flow back.
Business description
PL is a public earth imaging company. PL creates and maintains a satellite fleet to make monitoring global change easier. What is their goal? As a means of improving Earthly life. PL has over 1700 images from each location on Earth's landmass, gathered with the help of its fleet of 200 satellites. This provides a unique and valuable historical resource for data mining and AI applications.
Industry
Mordor Intelligence projects that the Commercial Satellite Imaging Market will grow from its 2023 valuation of $4,414.76 million to a 2028 value of $7,724.87 million, or a CAGR of 11.84%. DigitalGlobe Inc., Galileo Group Inc., Planet Labs Inc., SpaceKnow Inc., and Skylab Analytics are just a few of the many companies operating in the commercial satellite imaging market.
Historically, only the government and intelligence agencies had access to this market. Complex and pricey data was generated by using very large and expensive satellites. The high launch prices, lengthy development times, and limited functionality of the satellites scared off potential backers. As a result of recent technological advancements, production and launch costs have decreased, enticing new investors to the space industry. The expansion of data platform businesses, spurred by the shift to cloud computing, is also increasing the size of the Earth Observation market.
Thesis updates
Given its special data archive and real-time capture, I think PL stands to gain from the disruption brought on by Generative AI. Primarily, I think PL will put generative AI tools to use by letting its customers take in more data with fewer people on staff. Since PL lacks the required in-house talents to fully capitalize on this initiative, I believe it was a prudent move on its part to form a partnership with a leading industry powerhouse. For instance, PL has begun strategic partnerships with companies like Accenture (ACN), Microsoft (MSFT), and Amazon (AMZN), all of which take slightly different approaches to broadening PL's reach into new industries and use cases. In the coming years, I anticipate substantial outcomes from these collaborations in terms of R&D progress and market entry. A new and intriguing partnership involves the startup Synthetaic , which will use its ability to classify large amounts of unstructured data to trace the launch of China's spy balloon. From a different angle, these collaborations prove the viability of the PL approach.
If we look at PL's recent performance, the NDRR does indicate a more challenging final market. Consequently, management did revise their full-year guidance downwards to reflect slower growth expectations for this year. Given the current economic climate, I believe this is the right decision, as PL's clientele will inevitably experience budget cuts as well. But I don't think there is a structural shift in demand for PL solutions. The company is still in the early stages of creating a product category and teaching customers about its value proposition. I think the company will continue to grow, but at a slower rate.
Financial analysis
Given the weak macro environment, revenue growth has certainly slowed in recent quarters, which is already reflected in management guidance. I would recommend looking past this and focusing on PL's long-term potential. On the one hand, judging PL based on today's financials is inaccurate given the industry is new and the potential growth runway. Nonetheless, I understand why the stock has been punished by the market in recent weeks as investors seek stable, profitable growth companies.
Furthermore, I expect PL profitability to appear far in the future as management continues to invest in the business for growth. To be honest, this is the correct decision because the TAM is significant. It is preferable to gain as much share as possible from the start.
As a long-term investor, the PL balance sheet provides comfort because it is in a net cash position ($350 million), which, according to my analysis, can easily last PL for the next three years if we assume the same EBITDA cash burn rate as the current LTM figures.
Valuation
Author's model
According to my projections, the stock could go anywhere between $6.5 and $17. Here, we consider three alternative valuation models (3, 4.5, and 6x forward revenue multiple in FY25).
This method of valuation is used because there is a large TAM and a wide range of outcomes. Since PL is entering a brand-new market, there are also few comparable businesses from which to comps valuation against. The historical trading range experienced by PL is the basis for my use of these multiples. I realize that it falls short of perfection as a benchmark, but it does point to the potential upside the stock has.
Risk
Commercial companies like PL are beginning to enter the market for public Earth imagery, which was previously the purview of government and intelligence agencies. As is to be expected in untested markets, expansion can occur rapidly, slowly, or not at all.
Conclusion
I believe PL continues to offer attractive long-term upside potential. Despite a near-term slowdown due to the weak macro environment, I believe PL will work towards its FY26 targets and benefit from the recovery in demand once the macro situation improves. PL's unique position as a public earth imaging company with a large satellite fleet and extensive data archive positions it well in the growing commercial satellite imaging market. Strategic partnerships with industry leaders like Accenture, Microsoft, and Amazon further enhance PL's reach and market entry. While the recent financial performance reflects the challenging market conditions, the focus should be on PL's long-term potential and the significant total addressable market. The net cash position and balance sheet strength provide additional comfort.
For further details see:
Planet Labs: Long-Term Upside Remains Attractive