Very few space companies today have an operational activity generating millions of dollars. Galactic Virgofor example, is always pre-recipes. Planet Labs (PL 0.17% ) may not be as exciting as space tourism, but this space venture runs a solid business that is seeing its finances improve dramatically.
Planet Labs has more than 240 Earth imaging satellites in orbit today, and this fleet can capture images of the the whole world. Every day. With this huge library of data – which will be irreplaceable by future competitors — Planet has become one of the largest Earth imaging companies in the world, and it has amassed many customers in the public and private sectors who buy the images it takes.
The company’s fourth quarter was littered with signs of success, but there are a few things that are holding me back for now. It’s currently only worth $1.3 billion, so there’s plenty of time to wait for this business to improve, while still being able to earn above-market returns.
Growth is soaring
It’s important to note that 92% of Planet’s revenue is recurring because it simply sells specific images to its customers to do whatever they want. As a result, Planet incurs relatively few operational costs once it puts its satellites in space. As a result, its margins improved rapidly. Its fourth-quarter non-GAAP gross margin was 42%, a jump from 25% a year ago. On top of that, the company expects its fiscal year 2023 — which ends January 31, 2023 — non-GAAP margins to be between 43% and 50%.
Due to this tremendous progress, the company’s net loss margin has decreased. In the last full fiscal year, its net loss was 105% of revenue, down from 112% a year ago. It’s still extremely high, but it’s heading in the right direction – a good sign for Planet.
Planet’s revenues are also experiencing a significant acceleration. Its growth rate in the fourth quarter was nearly 50% higher than its annual rate, with revenue increasing 23% year-over-year to $37 million.
What’s even more impressive is that its 2023 revenue forecast is $180 million, which is a 37% year-over-year increase. This growth rate is 131% higher than that of Planet in fiscal 2022, which should excite investors.
What needs work
However, there is still plenty of room for improvement. Planet’s loss margin may be down, but its free cash flow burn is not. It burned $57 million in fiscal 2022, far more than the cash burn of $34 million a year ago. Planet Labs has $491 million in cash on its balance sheet to subsidize this loss, but the rate at which that is growing should worry investors.
Additionally, I expect Planet to deploy its own in-house artificial intelligence (AI) capabilities. Under the current system, Planet does not take responsibility for analyzing its data; he just sells it. While this has proven to be an effective business model, creating a system to analyze customer data could open many doors.
If Planet could do this, its services would gain in value, leading to higher spend per buyer. Additionally, it would increase the number of customers who could use Planet’s data. At present, its images can only be analyzed by experts. However, an internal machine learning engine could analyze the images for non-experts, which could lead to delayed customer adoption.
Is Planet Labs a buy now?
Its competitive advantage, accelerating rate of growth and increasing margins are good things to see for this company, and investors should make sure they continue in the coming quarters. That being said, investors don’t need to rush into this business just yet. Its consumption of free cash is concerning, and given the early stage of this business, investors can wait to see more green flags before jumping in. If Planet is a major hit, investors can still see incredible gains if they invest later down the road. , when things seem stronger.
The company is trading at 11x sales, which isn’t too expensive, but it’s not a bargain either. There’s nothing screaming at me as a reason to buy today, so this will continue to be on the watch list until its cash flow and AI capabilities come to fruition.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.