When investing in a business, there’s one quality I look for to separate the “good” from the “great”…
I’m talking about whether the business runs on a subscription model.
This model is beloved by Wall Street because it generates relatively predictable, recurring cash flows.
It’s no surprise that companies growing recurring revenue also tend to obtain higher valuations than those with less consistent sources of revenue.
Take Netflix, for example…
The streaming giant was the best-performing S&P 500 stock of the 2010s – returning 4,181% from January 2010 to January 2020. By comparison, the S&P 500 gained just 181% over the same decade.
Along the way, competitor Blockbuster, which had several opportunities to buy Netflix, went belly-up.
Netflix founder Reed Hastings became a billionaire… and Netflix became so successful that every media company followed suit with its own streaming service.
Then there’s Adobe. The software provider earns more than 90% of its income from recurring revenue.
Rather than selling a one-off product every few years, having an active subscription allows users to get instant updates. Adobe is up 885% over the past decade.
Another fantastic example is Bloomberg…
The company is renowned for its $30,000-plus per-year market terminals, which provide the most complete and recent economic data.
Thousands of investment analysts across the world use these machines. And they’ve made founder Mike Bloomberg one of the wealthiest men in the world.
Netflix and Adobe are now multibillion-dollar tech giants. So their high-growth days are behind them. And Bloomberg is a privately held company… So it’s out of reach for investors like us.
In today’s essay, I’ll tell you about a subscription-model company flying off Wall Street’s radar. It went public as a special purpose acquisition company (SPAC).
Now, I can’t blame you if you think SPACs are a trainwreck. The AXS De-SPAC ETF (DSPC) – a proxy for the space – is down 62% in the past year.
But in that wreckage, you can find some great bargains with huge growth potential.
The “Netflix” for Satellite Imagery
The company I’m talking about is Planet Labs.
It provides satellite imagery for everything from flood and fire damage to agricultural areas. And, yes, it even provides images for government snooping.
Planet Labs went public via SPAC in 2021. In retrospect, it seems like terrible timing, as the SPAC market has tanked since then.
But it was actually a blessing in disguise for the company.
CFO Ashley Johnson says the SPAC deal allowed Planet Labs to receive about $400 million in cash, sustaining it until it can turn a profit in 2025.
Here’s what she told the Wall Street Journal in January.
In the end, I’m really glad that we [went public via SPAC] because we wouldn’t be in the position that we are today. If we had to wait until this year to go public… we wouldn’t be public.
That’s exactly what a SPAC deal should do.
Having capital earlier in a business life-cycle can fuel higher growth opportunities later.
The company boasts the highest frequency satellite data available commercially. And it’s working to position itself as the “Netflix” for earth data.
With roughly 200 satellites in orbit, the company’s “Planetscope” constellation provides continuous and complete data. And it’s all available through a subscription.
The amount you pay depends on how much data you need. A state government may not need as much information as a weather service.
Its business requires literal rocket science… Satellites must be designed, built, and then hitch a ride into space on a rocket. But once a satellite is operational, it can provide data for years.
Now, the growth of the satellite industry is attracting plenty of competition.
The global satellite market hit $271 billion in 2020 and is expected to grow to $1.3 trillion by 2030 – about 17.6% annually.
Fortunately for Planet Labs, many of these rivals have shoestring budgets and often need capital infusions or risk going bankrupt.
With interest rates rising and investors’ risk appetites declining, that’s become a tough sell. The time may have passed for big capital infusions for satellite companies.
That’s where Planet Labs’ competitive edge comes in.
Thanks to the large cash hoard from its SPAC deal in 2021, it can continue to operate while other competitors get swept from the board.
It’s not just about having a large cash balance, though… Planet Labs has something many SPACs don’t: Revenues.
An Asymmetric Opportunity
Planet Labs is past the “drawing board” phase.
The company has 800 subscribers, from large insurance companies to dozens of government agencies… boosting revenue nearly 57% for the year ending October 31.
And, thanks to its subscription model, these customers can call up satellite data much like you can call up a movie on Netflix…
This model is beloved by Wall Street because it creates predictable cash flows. Already, Planet Labs has generated $175 million in revenues.
Right now, the market is penalizing all SPACs, regardless of their fundamentals.
That’s where our opportunity comes in…
From an initial price of $10 per share in late 2021, Planet Labs briefly touched $12 before falling about 50% to just under $5.
But share price isn’t everything…
Let’s assume the stock was slightly overvalued when the SPAC deal closed. Today, the company’s revenues are 50% better. Yet, shares have been cut in half.
In other words, you can get a growing revenue stream for one-quarter of the valuation a mere 14 months ago… That’s a fantastic discount.
Now, let’s be clear. The SPAC market is still in a downtrend. And generally, you want to buy when an asset is in an uptrend.
However, Planet Labs is a compelling asymmetric opportunity. That’s when an investment has the potential to 10x, 100x, even 1,000x your money.
That could turn a small stake into big profits – like an investment in Adobe or Netflix a decade ago. But it’s also a high-risk play that could go bust.
Given the asymmetric potential returns, a position in the $200–500 range could pay off handsomely in the years ahead.
Using small position sizes ensures that your downside is limited on the chance that the Planet Labs story turns into another Blockbuster instead of a Netflix.
And if the story is a great one – you’ll still be handsomely rewarded for digging through this hated part of the market now.
Regards,
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Andrew Packer
Analyst, Palm Beach Daily