2023-05-26 10:42:23 ET
Summary
- I consider the analysts' outlook for achieving profitability to be unlikely.
- In addition, analysts have in the past tended to revise their sales growth estimates for the company downward.
- The valuation is not excessively high, but not cheap either.
- In my view, it is not an attractive investment because shareholders are massively disadvantaged by share dilution and SBCs.
Investment Thesis
Planet Labs ( PL ) has rising revenues but also quickly increasing operating costs, leading to a high net income loss margin. Analyst forecasts of profitability to be achieved in approx. 3 years appear unrealistic, given the slow improvement in their profit margin. In addition, shareholders are currently severely disadvantaged by dilution of their shares and significant share-based compensation.
Short Overview
Planet Labs is an Earth imaging company based in San Francisco, California. The company's ambitious objective is to image the entirety of the Earth daily, allowing the monitoring of changes and the identification of trends. Its fleet of satellites uses powerful telescopes and cameras to cover various areas of the Earth. The images produced by these satellites are accessible online and provide information relevant to climate monitoring, crop yield prediction, urban planning, and disaster response. You can see some of their customers on their website. As of 2021, the company operated a global constellation of over 200 active satellites ? and has acquired over 800 customers, most of whom are annual subscribers to the Planet data service. However, the following chart also shows that growth is slowly flattening.
The satellite imaging industry in which Planet Labs operates is growing, with the global market size valued at $3.27B in 2022 and projected to grow to $14.18B by 2030. The industry's growth is driven by the increasing utilization of satellite imagery for environmental monitoring, disaster management, and defense security. Advancements in satellite technology have allowed for more precise measurements and high-resolution imaging. Key players in the industry focus on providing new data sets and building new sensors to capture additional data from space. Applications range from geospatial data acquisition and navigation & mapping to defense & intelligence, surveillance & security, and others.?
Recent Results & Financials
First, a general overview of sales, expenses, and net income development.
I have created a graph to view and analyze the cost development of the company. We can see that the revenue is increasing much faster than the cost of view and therefore the gross profit margin is improving. This is expected given the business model, where the satellites already in operation hardly cause any costs but generate revenues. From this point of view, the company's business model looks pretty scalable.
However, operating costs are also increasing strongly; YoY even more than revenue. This is not necessarily a criticism on my part, but something like R&D is essential for the company's future. As a result, however, it must be said that the net income margin of -85% is still quite poor, so the company is still far away from profitability. A margin of -85% means that for every dollar taken in, there is a total loss of 85 cents.
Given this still substantial unprofitability, I wonder how analysts are already predicting a profit for the company for the fiscal year 2026. With the next quarter, the fiscal year 2024 already begins for the company, so in other words, two more unprofitable years should follow, and the one after that will be profitable.
This seems to me quite unrealistic because of the following chain of reasoning:
- If we look at the revenue projections, they are expected to be just under $240M more in the profitable FY26 than last year ($432M vs. $191M)
- At the same time, last year's loss was $162M.
- A profit of 0.07 per share with current shares outstanding would mean a profit of $19M
- So, to get from -$162M to +$19M, most of the additional revenue would have to remain as net income if the current costs remain flat (which is also unlikely).
Such a fast and massive improvement in profitability seems unrealistic to me, at least given the data so far and the rapidly increasing operating expenses, as shown in my graphic above. As seen below, the margin is slowly improving, but it is still a long way to actual profitability. In addition, analysts have tended to revise their sales growth estimates for the company downward .
Valuation
The company is currently valued at an enterprise value of $809M, the market cap is $1.20B, and the remaining cash is about $400M. The baseline should be the market cap, not enterprise value, as the remaining cash will likely be depleted when the company reaches profitability. Consider that last year the company lost $162M. The valuation question of unprofitable companies is always tricky and depends heavily on one's interpretation of future prospects. As things stand, the valuation is a bit high from a price-sales ratio point of view but not excessively high.
Risks
The satellite imaging industry, and Planet Labs, face several risks. First, the industry is heavily regulated due to the sensitive nature of satellite technology, and changes in laws and regulations could impact business operations and the distribution of satellite imagery.
Otherwise, it is unclear whether it will be easy for the company to acquire new customers constantly; as we saw earlier, the curve is flattening. The company is still young and does not have a long track record, which makes a detailed analysis more difficult.
Share Dilution, Insider Trades, and SBCs
There is nothing special to report on insider trading, so I leave out this part. Otherwise, we see that there has been a share dilution of almost 5% since February 2022, so quite significant. Even more massive are the SBCs, which account for 20% of sales, which is roughly on par with Palantir's much-criticized level. Not only are these extremely high, but they have also risen quickly. We will see whether the downward kink or the steep rise will continue.
Conclusion
I am not investing here, but will continue to observe the company for the time being. I consider the analysts' outlook for achieving profitability to be unlikely. Moreover, these figures only refer to non-GAAP EPS, as stock-based compensations are not included here. And since these are currently very high in relation to sales, the GAAP figures are also significantly worse. How significant is this effect? In the last quarter, the loss per share would have been $0.14 instead of $0.08.
The valuation is not excessively high, but not cheap either. In my view, it is not an attractive investment because shareholders are massively disadvantaged by share dilution and SBCs.
For further details see:
Planet Labs: Massive SBCs And Profitability Still Far Away