What Planet Labs (PL 8.41%) does may sound futuristic, but it is in fact very real. The company has assembled a fleet of satellites that are taking millions of pictures of Earth daily to derive insight and trends in our world. 

The company came public through a special purpose acquisition company (SPAC) in early December, and since then, shares have been crushed. Shares fell over 47% and now trade at just $6. While the early poor performance is frustrating, the company is clearly up to something innovative. Is that enough to put it on your watch list?

Satellite flying over land mass.

Image source: Getty Images

What Planet does

Whether companies want to solve hard-pressing problems like reduce climate impact or optimize operating efficiency, Planet's images and data can help them do this. With high-definition, 3.5-meter-resolution pictures of every single landmass on Earth being produced daily, Planet's customers can notice changes, spot trends, and make predictions about what will happen in the future.

One of Planet's customers is the Moraga Fire Department in California. When fighting large forest fires, Moraga uses Planet to monitor where the fire is the strongest, where it is moving, and where they should position firefighters to contain it. Human firefighting labor is often limited, and Planet allows Moraga to optimize workers by allowing them to spot fire trends early. 

With over 200 satellites, the company can take a picture of every single piece of land in the world. If you want to look at daily images of your town, Planet has them. If a company needs to look at one place every single day and nothing else, companies can buy only pictures of that area. They can even ask for higher-resolution images of that space if it is core to their operations, and Planet will capture it.

These images and the insights that come along with them have become extremely useful to numerous industries. The company has over 740 customers in industries from forestry to insurance. This has resulted in over $94 million in revenue from Q1 through Q3 of fiscal 2022 -- which grew 13.5% year over year -- and Planet is expecting another $36 million next quarter.

Major barriers to entry

The major competitive advantages that Planet has are its massive scale and the high barriers to entry that come with the industry. It has over 200 satellites currently taking images, 10 times more than some of its competitors. In fact, Planet has the largest earth-imaging satellite fleet in history. 

Getting a fleet of this size up and running is incredibly expensive. Each one of Planet's satellites costs the company roughly $300,000 to make and another $300,000 to put into orbit. Larger satellites can cost billions of dollars. Now that Planet is fully operational and bringing in millions of dollars each quarter, it is relatively easy to replace a satellite. However, competitors would find it incredibly hard to reach the size and scale of Planet without massive capital injections.

Even if a competitor were to do something similar to Planet, it would struggle to find customers because Planet already offers what most consumers need. With images of the entire world and additional satellites to take high-resolution images on command, the company's data is fully scaled. Currently, Planet only sells its data, but it is trying to develop its own machine-learning and analysis tools to assist its customers.

Because it works with such sensitive data, Planet has developed an ethics board that reviews every single customer to make sure it is safe and morally right to work with them. While not a revenue-generating aspect to the company, it is critical to note that Planet has a group that helps the company prioritize ethical decision making and national security.

The risks

With such a young business, it should come as no surprise that the company is losing a lot of money. So far this year, the company lost $91 million -- representing 97% of revenue. It also had a free cash flow of almost negative $30 million this year. However, both of these figures are improving compared to the year-ago period. Its net loss represented 108% of revenue in the year-ago period, and the company had a free cash flow of negative $52 million. Fortunately, the SPAC brought in over $590 million to subsidize these losses.

The company's gross margins are also just 37% in its latest quarter. In addition, 94% of the company's revenue comes from subscriptions, so as its customers continue to use its services and spend more, these margins will improve. Additionally, the company is investing in developing longer-lasting satellites, which will also improve margins. The company has already seen improvements in its gross margin: In its fiscal year 2020 (the calendar year 2019), the company had negative 6% gross margins, and in FY 2021, its margins were 24%.

At just 12 times sales, this company is trading at a very appealing price. However, this company is staring down many risks and difficulties ahead. Not everything is pretty right now for the newly public business, but it has amazing promise. This is why I would keep this as a "wait-and-see" stock until investors can see gross margin improvements and successful product additions that help customers to analyze their data more easily. Until then, this innovative company will remain on my watch list.