2023-06-12 17:56:58 ET
Summary
- Spire Global operates a fleet of over 100 multipurpose radio occultation satellites, gathering valuable data on weather, maritime tracking, aviation, and military intelligence.
- The company faces challenges in educating its customer base on the various use cases and applications of its data, requiring a significant effort to present usable and valuable data to businesses.
- Spire Global likely has the cash needed to reach cash flow positive, with annual CAPEX requirements of $10-12 million for its fully deployed satellite fleet, providing operational leverage going forward.
For a space stock, Spire Global ( SPIR ) sure has spent a large amount of time at subterranean levels after its IPO in late 2021. Since my last article covering the company, published in late 2022 titled Profitability or Bust , the stock has continued to drift lower, breaching the $1 level required by the NYSE for continued listing.
In this article, I would like to go through a refresh of the business and reasons as I see them for continued bullishness in the stock, though I do not expect to see quick results.
Overview
Spire Global is not your average satellite company, they do not deploy imaging satellites like Planet Labs ( PL ) Maxar or BlackSky ( BKSY ), nor do they connect your calls or provide internet such as AST SpaceMobile ( ASTS ), Viasat ( VSAT ) or Starlink.
Spire operates a fully deployed fleet of over 100 multipurpose radio occultation satellites, which, in essence are space based antennas to gather and relay vast amounts of data. This data, generally, is data that can only be collected from space such as detailed maritime tracking, aviation data, vast amounts of weather data, military intelligence data, etc.
Spire, through its fleet of satellites, gathers over 20,000 radio occultation "soundings" each day covering the entire plant, which the company believes is the largest sample size of any commercial company it is aware of.
It is often hard to understand just how valuable this trove of data is given that Spire does not produce pretty pictures of earth, nor does it allow you to surf the web whilst riding a jet ski on Lake Tahoe, however, the data that the company gathers is of immense value and is useful in nearly every sector of the world economy. The atmospheric weather data alone that the company compiles each and every day, touches literally trillion of dollars of global commerce.
One of the main issues with the company can be summed up with the term heard most from customers, "Oh, you can do that". The company, like many before who have opened new frontiers, has to educate its customer base as to the use cases that it can solve.
Back in the 1980's many businesses were totally clueless on how computing would eventually change their business, with many using a computer as a glorified calculator or a solitaire machine. To fully reach the company's lofty TAM ambitions, it will take a herculean effort to educate the business world and to present usable, easy to integrate data to the masses.
To that end, the company has put together a suite of services that clean, organize and tailor the vast data sets that it generates to allow for efficient data ingestion of its customers.
This is certainly not a simple task as each use case, for the most part, is unique and requires context that applies to a specific business or industry. However, once this has been established and the hard work completed, the company can replicate this data set and format and resell it to the entire industry.
The key piece here is that the underlying data can be resold millions of times over at the same fixed initial cost to acquire it. That my friends, is called massive operational leverage.
The company has already done most of the heavy lifting in setting up a fully functional constellation of satellites and has indicated that the CAPEX needed to refresh and maintain the constellation is on the order of $10-12 million per year, which is quite low, also the company is currently in the process of tailoring massive and useful data streams to various industries and governments around the world. All it needs is time and enough money to take it to profitability.
Profitability or Bust?
A more accurate headline may be profitability or massive dilution, however that does not quite have the same ring to it. As I stated earlier, the company has already done most of the heavy lifting needed in building its one-of-a-kind constellation, this was done at a great cost as the company is currently still losing money and has $133 million in debt on its balance sheet with only $72 million in cash.
To be clear, the company has improved its operating metrics substantially with revenue jumping 34% year-over-year with GAAP & non-GAAP operating losses improving 28% and 24% respectively as of the most recent Q1 report. The company continues to indicate that operational leverage, along with sustained revenue growth will allow the company to reach cash flow positivity in 10-16 months.
The question I have always had with Spire is, do they have enough cash on hand to reach profitability? The answer I am left with is a very firm, maybe...
In looking at the company's cash burn, it appears that Spire used roughly $40.6 million in cash over the last 12 months, which would indicate that they should indeed have no issues reaching free cash flow positive with the $72 million on hand over the next 10-16 month period, especially assuming that operating metrics continue to improve, however, the timing of expenses is crucial and debt covenants requiring minimum cash on hand also come into play. This is certainly not a perfect science.
The company, in a very interesting investor call with Cestrian Capital Research in late May, indicated that it does indeed have the cash needed on the balance sheet to reach cash flow positive. CEO Peter Platzer however, immediately afterwards, issued a caveat to this statement reminding investors that it did authorize a ATM or an at the market facility as a failsafe to draw on if needed.
My magic eight-ball reads, situation still unclear. A definitive statement from the company indicating that it will not need to raise money, would do wonders for the stock. In my opinion, the company's stock has been battered primarily by worries of potential massive dilution if the company fails to reach cash flow positive and while I appreciate Mr Platzer's comments, the idea of potentially using the ATM facility at current stock levels is a recipe for disaster for current equity holders.
The company, yet again recommitted to its 10-16 month timeframe to positive free cash flow and has been delivering on its guidance time after time, however, with shares now trading at under $1, I believe the company will be forced to perform a reverse stock split which is likely to happen shortly after the annual meeting held on June 13th.
Reverse splits, historically have been a green flag to short sellers and weak hands alike and nearly always results in pressure on the stock immediately afterwards, though, stock splits are of course purely for show and change absolutely nothing of the fundamentals of the company.
Comparing the valuation metrics of Spire to others in the space show that the company on an enterprise value to sales ratio is comparatively cheap, with Spire holding a 1.92 EV/Sales ratio and Planet Labs holding a 2.9 and BlackSky clocking in at 3.57. While all three companies are currently unprofitable, this metric may be skewed by the current funding concerns with Spire that are not as prevalent in either Planet Labs or BlackSky.
Risks
Spire Global is an unprofitable, micro-cap company operating in an emerging industry, make no mistake, this is a risky stock. In addition, the stock is quite illiquid with an average of only 615,697 shares traded per day or roughly $442,000 worth.
As I stated in the article, the company does have the potential for massive dilution to common equity holders if it cannot reach cash flow positive with the assets currently on the balance sheet.
The company is subject to technology risks, government risks, execution risks and talent retention risks given its small size and the emerging industry in which it operates. Please always consider your own risk tolerance and consult with a licensed financial advisor before investing in this or any security.
Bottom Line
Spire is a perfect example of a company with massive potential in a potentially gigantic industry, they simply have a few more hurdles to jump over. In markets where risky, unprofitable companies are considered trash, Spire will have to prove that it is a viable business by turning cash flow positive while continuing to grow revenue at a healthy pace. If they can do that, without massive dilution to equity holders, literally, the sky is the limit for this stock.
The company has built an incredible asset and is churning out reams of highly valuable and unique data to companies and governments around the world, this has value and the operational leverage they can eventually exert is perhaps only in the second inning here.
I personally believe that the risk reward is favorable and I believe that they will reach cash flow positive without massive dilution, however, I am keeping my position small until after the reverse stock split is finalized given that historically, reverse splits have usually resulted in immediate value destruction. After the dust settles from the reverse split, I plan to resume buying shares with a 3-5 year time horizon.
I look forward to your comments below, thank you for reading and good luck to all!
For further details see:
Spire Global Stock: A Buy After The Likely Reverse Split