Why Is Planet Labs Stock Dropping?

Planet Labs (NYSE:PL) has all the hallmarks of being a popular technology stock that seizes investors’ attention but the price action says otherwise.

The pluses of the company are numerous. Planet has figured out how to get satellites to space and capture images of the entire earth each day at a lower cost than competitors. 

That data can be used for a wide variety of applications from helping governments to track military movements of rival nations to supporting farmers in understanding changing crop conditions.

It’s also got numerous applications when artificial intelligence is applied to help customers quickly zoom in on key insights, whether it’s rainforest destruction or even carbon footprints.

And yet the share price performance has been abysmal, punishing loyal shareholders with each passing quarter since coming public via SPAC. But why?

Why Is Planet Labs Stock Dropping?

Planet Labs stock is dropping on concerns that cash on the balance sheet will run out in the near future. 

Last quarter, Planet Labs reported cash of $101.5 million and short-term investments of $213.3 million. The combined $314.8 million liquid stash doesn’t seem to be worrying given that the company has no long-term debt.

But a closer examination reveals that just a year ago, cash levels were $199.1 million and short-term investments were $226.2 million, resulting in a total of $425.3 million. That’s a decline of $110.5 million in a twelve month period.

Perhaps of greater concern is that, in the prior quarter, the total sat at $367.8 million, meaning $53 million of reserves were consumed in a single quarter. 

If investors were to extrapolate that level of cash burn over the coming quarters, Planet Labs has just over 5 quarters left before running out of money.

So the big question for management is can it stem the cash burn tide and turn around the profit-and-loss statement before liquidity becomes untenable.

Unfortunately for shareholders, it’s not the only issue to be worried about.

Planet Labs Financials Are Weak

The fundamental problem Planet Labs faces is profitability, or lack thereof. The cash burn problem is likely to remain as long as the company’s income statement posts a bottom line in the red each quarter.

Since 2020, each quarter Planet has reported negative earnings before interest and taxes. If profitability were scored on an A to F scale, Planet Labs gets an F.

But a lot of companies perform poorly on the bottom line and are rewarded by the market. The way to earn Wall Street’s admiration is to have a fast-growing top line.

Institutional investors will often forgive losses for an extended period of time in exchange for the promise of high profits later on, and high revenue growth is the key performance indicator that buys that leniency.

For Planet the problem is that growth just isn’t high enough. For a spell in 2022, it was looking very promising with year-over-year growth for the quarters coming in at 59.3% and 56.8% in the second half of the year.

Then came the slowdown in 2023 with the most recent quarterly revenue report revealing top line growth of just 11.4%, an anemic figure for a young technology company hoping to wow investors. 

Concerns have risen in recent weeks too that management has failed to issue material PR releases of notable deal sizes. While the CEO had commented on a robust pipeline of prospective deals last quarter, it’s perhaps worrying that so few have come to fruition, at least publicly.

So, what does this all mean for Planet Labs shareholders?

Is Planet Labs Stock a Buy?

Weighing up the pros and cons paints a bleak picture for Planet Labs shareholders at this time. Profitability remains an ongoing concern and analysts do not expect the company to be profitable over this coming year, either.

That raises the prospect of further cash burn eating into the ever narrowing liquid reserves on the balance sheet. 

As worries grow about the robustness of the balance sheet, the share price has tumbled and the stock price fared poorly.

But it’s not all gloom and doom, and shareholders can cling onto a few bright spots.

For one, the market capitalization now at $595 million is within striking distance of the balance sheet cash plus short-term investments of $314 million. It suggests the operations of the business are being valued at around $280 million and given that the company posted revenues of $214 million over the past twelve months, the price-to-sales multiple ex-cash now resides at 1.30x, by no means a high valuation.

The counterargument to the operations being valued at only 1.3x sales is that there are no profits to speak of and so who would want to buy a business losing $50 million a quarter that has potentially just 5 quarters left before it runs out of money?

For shareholders, the real concern is that the company must resort to issuing a secondary to raise more capital to shore up the balance sheet in order to push off the date of destiny when cash has evaporated. By raising more cash the runway will be extended but fundamentally management needs to get a hold of expenses to stop the cash leakage. 

Failing that, revenues need to grow at a much faster pace in the near-term to alleviate the profitability concerns. Will management figure it out? Certainly, they have the connections to powerful people and institutions to suggest they can make headway.

If there was a time to buy the stock, trading at $2 per share with a lot of potential upside seems like a bargain. Nonetheless, it will take a courageous investor to buy when others are so fearful, but perhaps that’s precisely what is needed to build wealth.

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