Bad news, investor: Planet Labs is probably not the space stock you're looking for anymore.
Once upon a time, Planet Labs (PL +2.59%) was a growth stock -- and boy oh boy was it ever growing fast!
Preparing for its December 2021 coming public via a special purpose acquisition company (SPAC) transaction, the owner of the world's largest constellation of Earth observation satellites laid out a story of consistent and enduring growth as it put its new IPO money to work. Accelerating from a mid-teens growth rate pre-IPO, Planet Labs would grow its sales at an annual compound rate of about 44% over a five-year time span. It would expand its non-GAAP gross-profit margins from 40% to 74%, turn free-cash-flow positive by 2024, and generate positive free cash flow of 20% or more.
Somewhere along the way, however, things went horribly wrong.
NYSE: PL
Key Data Points
Stage 1: Trajectory nominal
Initially at least, this story appeared to be playing out according to plan. The company's first quarterly-earnings report as a public company showed Planet Labs posting impressive profits growth. Sales began accelerating toward the targeted 40% range as well. Planet Labs even won part of a massive U.S. National Reconnaissance Office (NRO) spy satellite contract that seemed likely to add hundreds of millions of dollars to its revenue stream.
By late 2022, however, worrisome trends began to emerge. After posting strong, 46% sales growth in its first post-IPO year, and a sizable expansion in profit margin, growth forecasts began to come down in a big way. 2023 growth would not be in the 40% range promised but somewhere in the low-to-mid-30s. And as 2022 shifted into 2023, that growth number got rolled back even further.
After growing 31% in 2023's first quarter, Planet Labs grew its revenues only 11% in Q2 this year. And when the company reported its latest sales last week, the number was again just 11% growth.
Q3: Planet Labs by the numbers
Don't get me wrong. Planet Lab's performance in fiscal Q3 2024 wasn't horrible. It was just...ho-hum.
Sales for the quarter came in near the high end of management's $54 million to $56 million projection -- $55.4 million, to be precise. Gross-profit margins maxed out management's guidance for a 50% to 52% range. And capital spending was much less than expected -- only $7.4 million according to data from S&P Global Market Intelligence, much less than management's capex prediction as high as $14 million.
That being said, with operating cash flow turning sharply negative in the quarter, Planet Labs remains far away from generating real free cash flow. Over the course of the quarter, the company burned $30.3 million, bringing total free cash flow for the year to date to negative $73 million. This was better than last year when Planet Labs burned $68.1 million over its first three quarters -- but not a lot better.
Meanwhile, Planet's 11% growth rate in fiscal Q3 2024 was a lot slower than the 57% growth rate it posted in last year's Q3. And profit margins on Planet's revenues actually slipped a bit. Gross-profit margin dropped two percentage points year over year. Non-GAAP gross margins declined by three percentage points.
From ho-hum to horrible
And it gets worse. Turning to guidance for the fourth and final quarter of its fiscal 2024, Planet Labs warned that sales are going to slow even further at the tail end of the year. Management is guiding for sales of $56 million to $59 million in Q4, with non-GAAP gross margins between 52% and 56%. So profit margins and sales will both grow sequentially. That's the good news. But sales will still rise only 8.5% year over year, continuing what's really starting to look like a trend of sharply decelerating growth.
And that's the bad news.
When all's said and done, it appears Planet Labs will end fiscal 2024 with a 15% sales-growth rate -- less than one-third of the 51% growth rate it was promising for this year back in 2021.
Is Planet Labs stock a sell?
And yet, despite all the bad news, I still own shares of Planet Labs stock myself.
Even if growth looks slow now, I have to figure that this space stock had some reason to believe it would be able to grow at 40%, 50%, and more. It may just need a bit more time than it (overoptimistically) thought it would need to get there. I figure I can give the company one more year to prove that it wasn't just whistling Dixie.
Also, to be honest, the company's not in such dire financial straits that I feel a need to sell immediately. Cash reserves ($300 million-plus) look ample to support an annualized cash-burn rate of $100 million or so for a few more years. Indeed, at last report, nearly half of Planet Labs' valuation is made up of cash in the bank, cash equivalents, and short-term securities.
I also still have hope that the company's vaunted NRO contract (which turns out to be worth about $146 million over its first five years) might turn out to be worth more than that if extended over a full decade. I may be wrong about that, but...fingers crossed.
