Planet Labs (NYSE:PL) has been a much-talked-about stock for years, though share prices have stubbornly remained low.
The company, which famously images the entire Earth daily with its fleet of satellites and maintains a massive archive of satellite images that no competitor can easily replicate, may finally be getting its moment in the sun after its most recent earnings report.
Shares of PL are up more than 50 percent in just the last five days, and there’s a chance that more returns could be ahead. How high can Planet Labs go now, and is the stock finally going to deliver the returns investors have been anticipating for years?
Digging Into Planet’s Earnings Report
Planet’s Q1 earnings report delivered a number of notable positives for investors. To start with, Planet generated record quarterly revenue of $66.3 million, a 10 percent increase from the year-ago quarter.
It also pared back its losses significantly, reporting a net loss of just $12.6 million against $29.3 million in losses a year earlier. This resulted in a GAAP loss of $0.04 per share.
Even more positive, though, was the fact that Planet reported its first-ever free cash flow in Q1. Though it was only $8.0 million, this demonstrates that Planet is moving decidedly in the right direction and could be headed for net profitability in the not-too-distant future.
While management will still have to build on this success going forward to keep its share prices rising, the development of positive free cash flow was a massive step forward for Planet.
The leadership team also made significant strides in building its base of contracts during Q1. A prime example is the 8-figure contract PL was awarded with a European defense customer. The government of Wales also became a Planet Labs customer last quarter in hopes of using satellite data to improve agriculture and natural resource management.
Planet Labs still has remaining performance obligations of $451.9 million, up more than 260% over the year-ago quarter. The backlog, meanwhile, exceeds $500 million. With contracts continuing to come in, this puts Planet Labs in a strong position for continued growth.
It’s worth noting, however, that Planet doesn’t expect any huge gains in revenue in its next quarterly report. Will Marshall anticipates revenue in the range of $65-$67 million. Even so, the trajectory is on largely confirms the argument investors and analysts have been making for its viability as a business over the last several years.
How Is PL’s Valuation?
After its recent price surge, Planet Labs stock does look a bit expensive at nearly 7 times sales and 4 times book value. As a young firm with a potentially very long growth runway like Planet may well justify somewhat high multiples with strong future revenue growth and eventual net profitability.
Even so, it seems clear that much of the immediate upside in PL has already been priced into the stock in recent trading sessions.
Analysts do maintain a consensus buy rating on Planet Labs, with seven issuing buy ratings, two issuing hold ratings and none issuing sell ratings.
What Are the Risks?
As a business that has yet to achieve net profitability, Planet Labs carries a degree of inherent risk. The balance sheet still has a reserve of over $133 million in cash and cash equivalents with no long-term debt on its balance sheet. As such, it is in a good position to keep investing in its technology without the need to raise additional capital for the time being.
Although Planet Labs has an essentially unmatched catalog of geospatial data, other innovative competitors could start to break into the market in a meaningful way. Most notable in this space is Starshield, a program being developed by SpaceX.
Given SpaceX’s considerable resources, it’s far from impossible that it could take a leading spot in the Earth observation market and somewhat break the unique moat that Planet Labs currently has thanks to its large imaging archive.
Finally, investors may still be somewhat put off by management’s poor track record when it comes to providing and meeting financial guidance, a factor that has contributed to volatility in the past.
While the most recent earnings report shows considerable improvement in terms of execution, it may still take some time to re-establish investor trust. With that said, institutional ownership of PL remains at nearly 65 percent, suggesting that past mistakes aren’t driving large investors away from its potential value proposition.
So, How High Could PL Go Now?
The consensus price target for PL is $6.27, just 7.4% higher than present levels though the highest price target is $8 per share.
For now, it’s likely that PL’s surging prices have brought it to a point where it may plateau. This is especially true if Q2’s revenues remain roughly flat as management currently projects. A better-than-expected Q2 report, however, could send PL shares higher.
Looking a bit further down the road, though, it’s far from difficult to imagine much higher share prices for PL in the years to come. As Will and his team build out the contract base and build its revenues, it will likely keep getting gradually closer to net profitability while also building on the cash flows it achieved in Q1. With demand for the kind of data and analytics Planet offers likely to remain high for the foreseeable future, Planet Labs could handily outpace the broader market in the coming years if all goes well.
Planet Labs is still likely quite risky as a pre-profitability startup. Current technological trends favor it as a long-term stock for risk-tolerant investors. Though it may take some time for PL to move significantly higher than it already has without a major earnings surprise, the stock could generate strong compounding returns over several years if Planet Labs continues on its current trajectory.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
