Very few space companies have an operational business generating millions of dollars today. Virgin Galactic, for example, is still pre-revenue. Planet Labs (PL 0.77%) might not be as exciting as space tourism, but this space company is running a strong business that is seeing drastic enhancements in its financials.
Planet Labs has more than 240 Earth-imaging satellites in orbit today, and this fleet can capture images of the entire world. Every single day. With this immense data library -- which will be irreplaceable by future competitors -- Planet has become one of the largest Earth-imaging companies in the world, and it has amassed plenty of customers in the public and private sectors that buy the images it takes.
The company's fourth quarter was littered with signs of success, but there are a few things that are keeping me away at the moment. It is currently worth just $1.3 billion, so there is plenty of time to wait for this company to improve, while still being able to obtain market-beating returns.
Image source: Getty Images.
Growth is rocketing higher
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 please. As a result, Planet takes on relatively few operational costs once it gets its satellites into space. Therefore, its margins have been improving rapidly. Its Q4 non-GAAP gross margin was 42%, a jump from 25% in the year-ago period. On top of that, the company expects that its 2023 fiscal year -- which will end on Jan. 31, 2023 -- non-GAAP margins will be between 43% and 50%.
NYSE: PL
Key Data Points
Because of these steep advancements, the company's net loss margin has been shrinking. In the latest full fiscal year, its net loss made up 105% of revenue, compared to 112% in the year-ago period. This is still extremely high, but it is moving in the right direction -- a good sign for Planet.
Planet's revenue is also seeing a meaningful acceleration. Its Q4 growth rate was nearly 50% higher than its full-year rate, with the top line expanding 23% year over year to $37 million.
What is even more impressive is that its 2023 revenue guidance is $180 million, representing an expansion of 37% year over year. This growth rate is 131% higher than what Planet had in the 2022 fiscal year, which should excite investors.
What needs work
However, there is still a lot of room for improvement. Planet's loss margin might be declining, but its free cash flow burn is not. It burned $57 million in the 2022 fiscal year, much higher than the year-ago cash flow burn of $34 million. Planet Labs does have $491 million in cash on its balance sheet to subsidize this loss, but the rate at which this is growing should concern investors.
In addition, I am waiting for Planet to roll out its own in-house artificial intelligence (AI) capabilities. Under the current system, Planet does not take on the responsibility of analyzing its data; it merely sells it. While this has proved to be an efficient business model, creating a system where it could analyze data for its customers could open many doors.
If Planet could do this, its services would become more valuable, resulting in higher spending per buyer. Additionally, it would increase the number of customers who could use Planet's data. Right now, its images can only be analyzed by experts. However, an in-house machine-learning engine could analyze images for nonexperts, which could allow for stunted customer adoption.
Is Planet Labs a buy now?
Its competitive advantage, growth rate acceleration, and increasing margins are great things to see for this business, and investors should make sure they continue in the coming quarters. That being said, investors do not need to rush into this company quite yet. Its free cash flow burn is concerning, and considering how early stage this business is, investors can wait to see more green flags before they jump in. If Planet is a major success, investors can still see amazing gains if they invest later down the road, when things look stronger.
The company trades at 11 times sales -- which is not too expensive, but it is not a screaming bargain either. Nothing shouts at me as a reason to buy today, so this will continue to sit on the watch list until its cash flow and AI capabilities come to fruition.
