Is Planet Labs Oversold?

Planet Labs (NYSE:PL), also known as Planet.com, recently experienced a sharp selloff following its fiscal Q1 2023 (not a typo!) earnings report.

 

The day after the report came out, the stock dropped by nearly 20 percent at first. While it did rally to finish the day down 11.46 percent, the losses were still substantial.

 

This event has left many investors and observers scratching their heads as to why Planet Labs sold off so aggressively.

 

The young Earth-imaging company has attracted massive amounts of investor attention and garnered an overwhelmingly bullish view from analysts over the last year.

 

Did the earnings report fundamentally change the argument for Planet Labs?

On the surface, the earnings report didn’t appear to justify such a large selloff.

 

Revenues of $40.1 million slightly beat out the analyst expectations of $39.5 million. Earnings missed analyst expectations, coming in at a loss of $0.17 per share against an estimated loss of $0.15 per share.

 

From a growth perspective, the quarter was reasonably good. Revenue advanced by 26 percent year-over-year, while Planet Labs’ customer count grew by 23 percent.

 

Gross margin improved modestly from 40 percent to 41 percent.

 

On the balance sheet, the company ended the quarter with no debt and $484 million in liquid reserves.

 

The company even reported new partnerships with Bayer AG and Moody’s as well as the NRO governmental body, all of which could set the stage for future growth as Planet Labs begins to work with major businesses across industries.

 

The primary cause of the selloff was that investors expected considerably better improvements in profit margins than what Planet Labs was able to deliver.

 

The company had planned to achieve margins closer to 50 percent. While the most recent reporting did include a non-GAAP margin measure of 45 percent, the GAAP margin still fell well short of investor expectations.

 

This places Planet Labs in a potentially tricky situation. Even as revenues increase, shareholders are clearly much more focused on margin and earnings at this stage.

 

This trend could continue to put downward pressure on the stock for the rest of the year, as there is no clear indication that unadjusted margins will move substantially higher.

 

In spite of the recent stock retreat, there’s a good deal to like about Planet Labs.

 

The archive of planetary images the company has built up gives it a significant moat against future competitors. The company is also based on a subscription model, allowing Planet Labs to generate recurring revenues at a predictable pace.

 

The company is also working on adding value to its image library with machine learning analytics. At the moment, Planet Labs’ product offering is purely access to its images.

 

Customers must use their own analytics to derive insights from the data they procure through their subscriptions. Once Planet Labs has built its own analytics system, however, it should be able to generate more revenue from customers that use it.

 

A final point for the more bullish view on Planet Labs is the customer growth Planet Labs is seeing. Its total customer count grew 23 percent year-over-year as of the most recent quarter. However, that still only amounts to 826 customers.

 

The new contracts with Bayer and Moody’s point to broader use of Planet Labs services among large enterprises. If this trend continues, Planet Labs could continue to see high levels of revenue growth going forward.

 

Planet Labs is trading significantly down from a 52-week high of $12.15.

 

Due to its moat and the value of its data library, the odds are that the company still has substantial long-term potential. While it certainly can affect share prices, a period of slightly lower earnings or margin growth doesn’t change the fundamental value proposition of the company.

 

This view was clearly evidenced in analyst reactions to the earnings report. While many shareholders took the opportunity to sell, two key analysts from Benchmark and Needham maintained their buy ratings on the stock. They did, however, adjust their price targets to a lower level to reflect the new information.

 

More comprehensively, the 8 analysts currently covering Planet Labs have all rated the stock as a buy. The median price target of $10 would offer a 116.2 percent gain. The lowest price target of $8, produced by the aforementioned Needham analyst, would result in gains of 73 percent.

 

It’s also worth noting the company’s balance sheet.

 

Losses notwithstanding, Planet Labs is sitting on a large reserve of cash and cash equivalents while having no debt to service. While the company will burn through this stockpile eventually if it continues to lose money, that day won’t come soon. This places Planet Labs in a strong position to continue growing without the expense involved in debt repayment.

 

Cumulatively, these facts point to a very real possibility that Planet Labs is oversold at its current price. While higher losses and lower profit margins do justify investor concern and will obviously lead to lower prices, the stock appears to be trading at a substantial discount to its fair value.

 

That said, this stock still carries significant risks.

 

If the company fails to fully capitalize on the value of its image library, investors could see stagnation or even further losses. As with all companies that have not yet achieved profitability, Planet Labs’ value is based on the expectation of future earnings. If the road toward those earnings gets longer, the value of the stock will necessarily go down.

 

Planet Labs seems like a good high-growth buy at today’s prices, but it should be carefully balanced out within a well-diversified portfolio. The company’s business model has enormous potential and could allow the stock to grow exponentially over the long haul. Investors who buy Planet Labs, however, should be prepared for some ups and downs along the way as the company finds its footing.

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