Near the end of 2021, a broad downturn hit the tech sector and nearly every stock that is focused on technology, data, and artificial intelligence. The NASDAQ-focused Invesco QQQ Trust is down 10% from its all-time high as of this writing, and many high-growth tech stocks have recorded far steeper declines. However, Wall Street analysts have initiated coverage of some of these stocks during the market correction, calling out the opportunity for significant upside.
One stock in particular is Planet Labs (PL 1.71%). The company began trading publicly in Dec. 2021 following an SPAC transaction, yet it already has seven analysts covering the stock, many of which have aggressive growth projections for the business. Goldman Sachs analyst Noah Poponak initiated coverage on the stock with a price target representing 75% upside from current levels. This figure represents just one analyst's opinion, so that projection isn't the end-all, be-all for your investment decision. However, it does warrant a closer look at Planet Labs given its growth potential.
Image source: Getty Images.
What is Planet Labs?
Planet Labs wants to change the way businesses and governments look at the world by providing Earth images for analysis. The company has over 240 satellites in space today taking high-definition images of the world. This fleet is the largest Earth-imaging fleet in history, and it has allowed Planet Labs to capture daily images over the past decade. This unrivaled portfolio of data is not physically replicable by its competitors, giving the company a major competitive advantage.
The breadth of this data has attracted over 700 customers and $100 million in annual recurring revenue, ranging from agricultural users to government agencies. Planet Labs does have some customer concentration -- 23% of its revenue came from just two customers in the first nine months of 2021 -- but their share of the top line has been decreasing.
The company's business model is more attractive than meets the eye. Its gross margin is low at 37% for the first three quarters of fiscal 2022, but this is rapidly expanding as the company scales -- new customer sign-ups boast a margin as high as 96%. If users want access to more images, they have to pay more, setting the stage for a lucrative land-and-expand strategy for Planet Labs.
The company's unrivaled data set makes it the top dog in this space, and with enough satellites in orbit to continue capturing images of Earth every day, the company will continue to hold that position. This makes it incredibly difficult for a competitor to disrupt the industry. Any attempts would require a massive investment to just match Planet Labs' existing scale.
The concerns
Despite these strong attributes, there are concerns about the future of the business. Currently, Planet Labs only sells its data. The company makes the data "machine-learning ready" for customers, but that leaves out many users who do not have AI engines. Management is working on developing analytics tools to help customers analyze its images. This would not only make the company's offerings more valuable, but it also unlocks a new customer base.
Another risk for the business is its steep losses. In the first nine months of fiscal 2022, the company reported a net loss of $91 million, or 97% of revenue. This figure improved slightly from the year-ago period when losses made up 108% of revenue, but it's still a concern. The company is also burning cash: Free cash flow almost hit negative $30 million in the first nine months of the year.
The road to $11
With the adoption Planet Labs has seen for its Earth imaging capabilities, its financials should continue to improve over time. The company acquired an agricultural analytics company, VanderSat, to fuel the growth of its analytics capabilities. If the company can leverage that deal and the creation of an AI platform, it should see boosts to revenue per customer, revenue growth, and customer count (and in turn, its profitability and cash flow).
While there are no guarantees, the opportunity in front of Planet Labs is significant. This is likely why multiple analysts have bullish outlooks for the stock. Even if the company does not live up to those analysts' near-term projections, the company still presents an attractive buy for long-term investors.
