End Of Year 2025 Letter

244KB ∙ PDF file

Download

Download

A concentrated portfolio has its pros and cons, and 2025 saw the pros on full display. Pagaya proved its economic model and took significant strides expanding its lending network. Xometry reached positive cash flow and continued to build the largest network of manufacturing buyers and suppliers globally. And Planet delivered a few big deals, accelerating top-line growth, and positive free cash flow, which was more than enough for the market to up the bid.

One year’s results are hardly an accurate reflection of the scoreboard. Stock prices today move faster and more aggressively than ever, both to the upside and downside. Planet is the poster child of this dynamic. After a few years in SPAC jail, the stock rose almost 400% last year, the price becoming the topic du jour in my investment circle.

What do I think? I think the calculus looks a lot different at 22x revenue than 2x revenue. I think we’ve seen a huge chunk of returns in a very short period. I think the market was too pessimistic before, and maybe too optimistic today. Today, everyone buys the space stock glory, views Planet as an AI winner, and has high confidence in the company’s ability to capture a large market.

I’ve been thinking along those lines for a few years and think Planet is a generational business. But price is important, and the current price calls for a reassessment of the argument. Nothing is a guarantee in this game, which presents a challenging question: do I sell a winner, a company I still believe in for the long run, strictly because of valuation?

History, and Charlie Munger, would argue that’s the wrong move. “Get in a great business, and stay there.” Great businesses tend to stay overvalued precisely because they are great. Stanley Druckenmiller might counter that the relevant competition is “the opportunity set,” and if the opportunity set looks more attractive elsewhere, it’s probably time to make a move.

Druck’s game is not my game – trading, timing the market and such – but I do believe in being opportunistic. At times, that can mean shortening my time horizon; an excessive price can be just as damaging to long run results as selling too early, and while my confidence in Planet’s business and prospects has strengthened over the past year, my argument has diminished. I expect lower returns looking forward, but I still want outsized exposure over the long run.

I sold a portion of my stake in the company earlier this year and added to my investments in Pagaya, Remitly, Thryv, and Hims and Hers. Planet is still my largest position, and this was was far from a radical change. I just think it makes sense to take some chips off the table at such high prices.

On the topic of Planet

I’ve long written about my ideas of Planet, but it might surprise you to learn that I think tasking satellite imagery is not a good business for the long run. It is a transactional business model at heart, built for the satellite imagery industry of the 2000s and 2010s where a few buyers dominated the landscape, not the geospatial industry of the future where disparate sources come together to provide an integrated, scalable solution to many customers’ problems.

Standalone tasking faces higher levels of new entrants and substitute products than years past. Drones, increasingly mobile and deployable in theater, threaten to steal share of certain use cases. SAR satellites, increasing in quantity and capability, can also be a substitute (but a also a complement). Marketplaces like SkyFi threaten to disintermediate the customer relationship and commoditize supply. But the overarching problem is simple: when a customer knows where to look, there are a variety of ways to obtain an answer to their question.

Tasking, I believe, is destined to become a bundled feature, not a standalone product or platform. This is a long duration evolution unlikely to happen in the next few years, but I suspect it is the inevitable endgame. That view does not sidsuprt my investment in Planet because the company’s core differentiation and competitive advantage flows from the daily scan.

The market is highly focused on Planet’s new satellite system wins in Germany, Japan, and Sweden, and rightly so – these are big deals. But I think the specific point of focus is misplaced. Buried in each press release is a disclosure that these nations are also buying large PlanetScope analytic feeds. These wins are important to fund and accelerate the expansion of Planet’s Pelican fleet – better positioning the company to capture the largest pool of demand today – but the bigger deal is everyone buying the bundle. Dedicated tasking capacity (or satellite ownership, it all means the same thing, just comes from different budgets) is just one feature of the bundle. What is most economically valuable to Planet in the long run is inserting infrastructure into customer workflows, and that is a product of the daily scan.

Ultimately, I believe the daily scan is where most value will accrue. When customers subscribe to monitor an area of the Earth, they build pipelines and models on top of that stack to directly enable a workflow. It becomes operational infrastructure, something customers are unlikely to rip out and have to re-build those pipelines and re-train those models.

I own Planet because I believe they are building a database business, not selling satellites or imagery, and the long-term economics will reflect that reality. Unlike most satellite imagery companies, the daily scan is infinitely scalable, imaging the same area every day regardless of customer demand, and distributing that data at zero marginal (and opportunity) cost.

The daily scan provides developers with infrastructure to build and scale globally, the context required to incorporate business logic, and the rapid refresh rate to fit a real-life workflow. The unique cadence and coverage also serves as a reference layer for complementary sensor fusion, the core building block for solution development. And solutions are how the market will grow.

Planet is the only company to image the entire Earth every day and has been for nearly a decade. I believe they are becoming the default system of record for monitoring the Earth, and whoever holds that position stands to win a huge amount of economic power. It will just take more time than most people expect.

Organizing by Time Horizon

Investors commonly style themselves as “value” or “growth” or “quality” investors. I don’t subscribe to any label other than the long term, but long term can also be variable. It could be three years, five years, ten years, or anything really. So, to better understand the nature of my investments, I organize my portfolio by time horizon.

My advantage is duration, so my work is naturally biased towards companies I want to own forever. That kind of time horizon may seem abstract, and it doesn’t mean I will own them forever; it means I have no defined expectation about when to realize value and am content to be a silent partner in these companies’ progression. This “infinite” bucket is the soul of my portfolio: Planet, Xometry, Pagaya, Amazon, and Upstart. I believe these businesses are uniquely durable and possess structural advantages that allow them to escape competition as they scale.

On the other end of the spectrum sit “situational” bets. Thryv is the sole tenant in this bucket. Here, my argument is over price, and my time horizon is typically five years or less. Valid questions may surround the quality or durability of the business, but expectations are low, and I believe the company can beat those expectations. The bet is on near-term execution and reversion to the mean, a riskier place to operate without the cushion of time horizon.

Somewhere in the middle are “exploratory” investments. These tend to have a private equity-like time horizon, where I’m more comfortable with duration but am still unsure if it is a place I want to park capital for decades. I have some conviction in these businesses, but need to do more work and would like to monitor the situation before committing more capital. Remitly, Hims and Hers, and Spire Global live in this part of the book. While continued fundamental progress can move some names up the chain, I am quicker to sell if the story changes, the price becomes more attractive, or a better opportunity emerges.

Classifying my investments into these buckets helps me think clearly and ultimately size each position. I don’t have any strict rules as to the allocation between buckets, but I want most of my money in the infinite bucket, where my advantage is strongest.

Why Thryv?

Thryv is my only situational play today, and it’s been a painful one. It begs a valid question: if I’m optimizing for time horizon, why invest in a business of clearly questionable durability?

Every sensible investment starts with a belief that you are buying future cash flows at a discounted price from their worth. Most of my investments are duration plays: I am buying cash flows in the distant future, based on an argument about the durability of the business. Thryv is a different story. I own it because I think the market is mispricing the immediate cash flows, and I have confidence in management.

To be clear, this is not some mission-critical vertical software business. It’s a marketing tool, a fairly undifferentiated product selling into a high churn end market, with slow organic growth and the looming threat of AI ahead. Still, the valuation is hard to reconcile; the company should produce more cash in the next five years than the current enterprise value.

The bet is simple: if Thryv can get reasonably close to its 2030 ambition of $1 billion in SaaS revenue, the equity has room for something on the order of an 8x return. $800 million of SaaS revenue in 2030 requires a ~12% CAGR from 2025. The math works if cash flow takes down the debt, and the pure SaaS business reaches a 2x revenue multiple (or roughly 10% free cash flow yield for a business that should run 20% margins, without the egregious stock-based compensation at many other software companies). I don’t think that’s a far-fetched outcome, and that type of potential reward justifies taking some risk.

There are a few things I like about Thryv. The first and most important is Joe Walsh. He is an Act 4 entrepreneur who built and exited multiple businesses, successfully navigated similar business model transitions, and is maniacally focused on execution. He is a skilled operator with real skin in the game, none of which makes the thesis true, but offers some confidence in the decision making behind the scenes.

Second, I think they are making the right strategic moves. Growing up-market, without entering the domain of HubSpot, makes sense. A million dollar business is much more valuable, and stable, than a $500,000 business with 2 or 3 employees. The CAC/LTV dynamics in the very small business segment are structurally challenging, but Thryv has escaped them to date given their focus on converting legacy customers. As they fully cannibalize the legacy business, the value of a large distributed sales force will become more clear, especially with a more capable product.

Over the last few years, Thryv has built out a fuller platform and added vertical-specific tooling and automation (via Keap). It recently launched a specialized HVAC and Home Services solution to support this move up-market. They are returning to their DNA – helping small businesses market their business – while adding functionality for larger businesses with more complex needs. Again, none of this guarantees success, but it raises the probability of a good outcome.

On the AI front, Thryv’s core customer is a buyer, not a builder. I see little risk of thousands of service business owners developing their own marketing automations from scratch; they are more likely to use a tool they already know. The company is thoughtfully implementing AI in pockets of its product (content generation, auto-reviews, etc.), and the new CTO hire should accelerate these efforts. In the near term, I expect AI to accelerate product velocity and form more of a tailwind than headwind; over the longer-term, it remains a bigger question mark.

Organic growth is another common cause for concern. Excluding Keap and the conversion of legacy customers, the company has reported sluggish top-line growth. This analysis misses the point, however; the entire strategy over the last few years has been to convert legacy customers at no cost, get them actively using the SaaS product, and upsell the ones who stay over time. You can’t exclude that growth contribution the total because it is the focal point of the strategy! I am less concerned about this point, at least for now, but it is worth active monitoring.

In all, I don’t think you have to believe much, and leadership has earned some credibility. It’s a transitioning organization, still in the process of cannibalizing the old business in service of the new; the numbers may not move smoothly, but the transformation is progressing. I would be shocked, and pleasantly surprised, if I still own Thryv in five years, but the business is not dead. There is still some money to be made.

A Note on Remitly

Remitly is the other portfolio addition from last year. The business has steadily taken share in remittances for more than a decade, and I have yet to hear a convincing argument for why that changes. The category is huge, throwing off tens of billions in revenue each year, and still evolving towards digital means, giving Remitly a long runway for continued growth.

There is no lack of competition, but it is generally weak. Legacy players like Western Union are burdened by the declining value of retail storefronts, and sub-scale digital challengers struggle to match Remitly’s coverage and marketing efficiency. Wise is the most dangerous operator as Remitly looks to double down on high amount senders, but the industry is more than capable of supporting two leaders. Just look at the co-existence of Expedia and Booking.com.

The key question surrounds Remitly’s ability to turn share wins into profits. The economics are generally intuitive: Remitly acquires customers via Google and Facebook and earns a fixed fee and FX spread on each transfer, relying on repeat transactions to justify the upfront spend. A new customer typically generates gross profit in excess of the upfront cost in the first year and remains active for years, producing the 6x LTV/CAC the business has maintained to date.

Scale benefits follow naturally. With higher volumes, Remitly can negotiate better rates with payout partners, spread fixed compliance and engineering costs over more transactions, and improve risk and pricing models. The path to 20%-plus operating margins seems credible and not overly dependent on pricing power.

Stablecoins are a headline technology risk, but really a technical enabler promising faster and cheaper payments. For Remitly, I view the most likely outcome as lower costs, which can either be passed onto customers or retained as margin. People don’t spend stablecoins today; the last mile fiat conversion is not going anywhere anytime soon, and shifts in payment behavior happen over decades, not years. Stablecoins also don’t solve distribution and compliance requirements; they are ultimately a back-end optimization to improve speed and economics. I expect their value to be broadly distributed across the industry and ultimately captured by customers, with the core economic model remaining intact.

For most of its history, Remitly has been a one product company. Recently, it has broadened its scope, creating an additional leg to the thesis. I think Remitly has earned the right to offer a broader suite of financial services to its customers, and it will have more success than expected monetizing some of these newer products over time, with interchange a particularly attractive revenue stream long term. This is all pure optionality based on the current price, but the strategic logic is sound, and the right to win is reasonable; it at least deserves a mention.

Remitly is capable of sustaining a mid-teens or higher growth rate while steadily expanding margins. The price doesn’t ask much, and it is beginning to show a clear focus on profits. Modest execution gives you a business earning well in excess of the current multiple, while the bear case means a structural break in a trend that has persisted for a decade. This is a company I suspect will improve over time, not deteriorate.

The Others

I’m already running a bit long, so if you’d like to read about Pagaya or Xometry, I recommend this article. I thought Upstart’s AI day was a fantastic explanation of how the company is developing a unique competitive advantage in consumer lending. I think Hims is a complex story of which my opinion is evolving, but I still need to do more work. I’ve written about Spire Global in the past (check the archives) but am waiting for more consistent reporting and some demonstrable progress to make any additional decisions there.

The Opportunity

With market forces overwhelmingly focused on the short-term, the opportunity has never been greater for those with patient capital and the capacity to think long term. AI will never replace human judgment, and I am convinced the opportunity for fundamentally-minded, long-term investors has never been better. I look forward to playing this game for many decades to come and hope you stay tuned.

Thanks for reading. Feel free to reach out with any questions or topics you’d like to discuss.

Subscribe now

Share

Mid Year 2025 Letter

317KB ∙ PDF file

Download

Download

A quick personal note – I recently got engaged, and writing this letter took a backseat to early stage wedding planning. I apologize for the delay. I will keep this letter relatively brief.

Three and a half years ago, I made a bet on myself. The stock market took a hit in 2022, and the revised opportunity set pushed me to try something new and abandon the index-centric approach I had favored until then. I knew the risks, but I wanted to compete and try to beat the market over the long run. Throughout 2022 and early 2023, I sold all of my index funds and entered the stock picking game.

So far, the strategy has shown some signs of merit. The first two years were pretty much a disaster. The last 18 months have been pretty terrific. Overall, I’ve compounded at around 20% annually, roughly ten points higher than the market. I don’t think there is a big lesson here – we are only three and a half years into a multi-decade game – nor do I think this level of outperformance is likely sustainable, but I do think it’s worth reflecting on the decisions that got us here.

Those decisions are best reflected by the companies I own today, so let’s tour a few names.

Planet Labs was probably the first stock I bought in significant size. I started buying in early 2023 at almost $5 per share, and for the next 18 months, the stock marched steadily lower. I bought the whole way down. Today, my average cost basis is $3.12, but the way I think about the future of the business, it shouldn’t matter too much if my cost basis is $2, $5, or anything in between. If that view turns out to be reasonably accurate, I should do alright.

What drew me to Planet is it being a true “one-of-one” business. Differentiation is a function of doing something differently, and Planet is very different from competitors. It designs, builds, and operates the largest fleet of earth observation satellites and has been the only company to image the entire Earth every day for eight years now. This dataset is a core, daily compounding advantage.

I own the company because I believe the data it produces is immensely valuable, extremely difficult to replicate, yet still poorly monetized. Over the next decade, I expect the economic value of this data to increase non-linearly, and the gap between the value Planet creates and captures to narrow. Scaling up new constellations, increasing fusion of multiple sensors and data types, and moving further up the value chain into delivering solutions to customers, not raw data, will support this value unlock. It is much easier to sell answers than data, and AI is an accelerant to this endgame.

When I started buying Pagaya in early 2024, I had no idea it would turn into my largest position today. I simply saw a disconnect between what I viewed as a founder-led company with a uniquely powerful business model and a consistent track record of growth – even through a major credit cycle – and what the market viewed as a questionable second-look loan originator. I spent a lot of effort trying to understand what I was missing or where I might be wrong but came away each time thinking if it looked and smelled like a good business, it just might be.

I invested a lot of time and money into Pagaya, and it’s paid off much faster than I would have guessed, though the process was accelerated by multiple expansion. In other words, more people have come around to the view it is a viable business with lots of potential, but there is still a lot of work to be done. I expect future returns to be much more closely tied to the fundamental progression of the business, but I’m in it for the long run.

The overarching theme of AI in consumer credit brings another portfolio name, Upstart, into the discussion. Each company approaches the problem slightly differently, but with a similarly thoughtful business model backed by focused execution. In general, I think the problem of consumer credit is a massive opportunity, AI is a perfectly matched solution, and as a result, the industry is likely to evolve significantly over time. I expect Pagaya and Upstart to be major winners from this reshuffling.

Let’s now talk about a different name: Thryv. Very basic business model, nothing too differentiated about it. I’m invested in the company, and recently increased the size of my investment, for one main reason: the leadership. It’s a jockey bet. Joe Walsh successfully executed the same print to SaaS business model transition Thryv is currently undergoing at a prior company. At that company, shareholders earned a ~20x return. History doesn’t repeat, but it rhymes, and great operators tend to remain great operators.

Thryv participates in a massive market with countless permutations of competitors, but I think the greenfield aspect of the opportunity is often overlooked. There is ample growth to be had by simply growing into evolving demand, not necessarily stealing share from competitors. I believe that distinction is important and commonly not given enough weight.

Thryv’s core advantage is its ability to leverage longstanding relationships with small business owners across the country to sell locally at scale. This model allows them to more effectively capitalize on the natural evolution of SMB demand towards SaaS while maintaining a profitable business model (that is, not overspending on customer acquisition). I think it will just take solid execution for shareholders to reach a good outcome, and Joe Walsh is the guy to do it.

One last note on Thryv: I highly recommend listening – not just reading the transcript – to every earnings call. The CEO and CFO have a great rapport, having worked together for something like two decades, and sometimes I think Joe Walsh doesn’t prepare any notes and just talks off the top of his head; the candor is truly refreshing and appreciated.

Turning to Spire Global. I sold a sizable chunk of my position early this year, so it’s worth unpacking the decision. I think every investment thesis exists on a continuum between people-led and business model-led; you need both, but I find it typically leans one way. With Spire, the business model is what drew me in (it is quite Planet-esque), but Peter Platzer seemed to be the relentless driving force behind its success. He sold a clear vision, and he seemed committed to building a generational business.

Then he stepped down as CEO, and I lost the people-led story. If you repeatedly outline a vision for the business measured in decades, why move to a non-operational role in the early innings? Was it a board-led move? Did he not believe in the company anymore? And why is his wife now the CEO?

These are questions to which I don’t have good answers, and while I still think Spire is a unique asset, I became uncomfortable owning the company in size. Do I still believe its prospects skew positively? Yes. Am I confused about what’s going on at the top? Yes. Did I want to reduce some uncertainty and wait for the fog to clear? Yes. Do I think there is a chance I will be a buyer again in the future? Again, yes.

Xometry recently blew earnings out of the water, and the stock jumped over 40% on the day. Volatility has been par for the course over the last three years, though not always to the upside. While I have no evidence to support this, I suspect the extreme price action reflects a constantly evolving view of the bigger picture; the market hasn’t decided if it believes in it or not, but it recognizes something is there.

The bigger picture, as I see it, is that Xometry is digitizing a massive industry. Buying custom parts is a tedious, analog process today. Not many companies are trying to solve the problem in the same way as Xometry, and of those players, it is by far the largest. Xometry’s approach is particularly powerful because scale accrues to its advantage. From my view, it’s a classic digital marketplace disruption story.

Xometry’s business is enabled by an AI instant quoting engine. This technology alone is not a competitive advantage; it’s a foundational technology layer that allows them to pursue a new business model category and offer a “wow” customer experience. Xometry’s primary competitive advantage is the scale and scope of its network, and as it continues to grow, I expect this advantage to deepen. It’s classic network effects.

I believe scale wins on the internet, and if you can remove the friction from a manual / analog sourcing process, people will choose digital every time. That’s the crux of the thesis: millions of custom parts are transacted each year, and Xometry is going to steadily take share of that volume. I think this provides a long runway to grow whether or not they really excel in production (though I think they likely will). Production is no doubt an accelerant – an offensive move to drive further scale – but I think if Xometry were to simply dominate the prototyping market, it would still be a successful outcome for shareholders.

Remitly is my most recent purchase, only a few weeks ago. Let me preface this by saying I pride myself on inactivity. I don’t want to be too frequent a market participant, because it can degrade the advantage of a long time horizon. I try to use that edge intentionally and only invest in situations where I have a differentiated view on what a company will look like, and what its future prospects will be, five or ten years out. Not if I think they will beat earnings next quarter or next year, but if I think the company’s business model will be fundamentally better, and benefit from a more advantaged market position, way out in the future – and I don’t think that view is reflected in the market’s expectations.

Back to Remitly. I’ve been following the company for around a year now and became interested when Mario Cibelli pitched it on the Yet Another Value Podcast. I work in payments, so remittance is a business model and market I am quite familiar with but hadn’t really looked at for investment before. This year, however, the market soured on the company’s narrative. This seemed to be at odds with a business that was firing on all cylinders, so I bought a small stake.

Remitly was an instinctual purchase. The time seemed right; I had become more comfortable with the story, more positive on leadership, and had reason to argue with the prevailing view. The industry is in a secular transition, and Remitly is on the right side of the disruption. The source of the market’s pessimism doesn’t particularly concern me; the fact is expectations were lowered, and the investment equation had changed. I’m happy to have some skin in the game and look forward to learning more as an owner.

This example is broadly indicative of how I approach investing. I often lean into my instincts and am happy to take a small stake prior to doing intensive research. I know my returns will ultimately depend on the very few companies in which I have invested a substantial amount of money. That’s the advantage of concentration.

At the same time, buying a small position in a company allows you to feel what it’s like to be an owner. I think tracking a company as an owner is a fundamentally different process and emotional experience than following it as an analyst. It unlocks a new perspective and allows you to make a better decision about whether you really want to be involved for the long term.

One question I’ve started to ask, to get a better sense of whether I want to be involved, is would I want to work there? Do I read about this company, recognize the problem they are solving, understand how they are executing on that promise, and get excited about the future?

I would be willing to work for most of the businesses I own today (not sure if pet insurance or plastic shoes are truly my passion). I don’t think my skill sets commonly overlap with their needs, but they each seem like an exciting place to work, and I think that filter has proven additive to my investment process.

Investing is a forward looking game. The last 18 months have been great. The last 42 months have been good. But the most important thing is I am still confident in the future. My historical returns have been exceptionally volatile, and I don’t necessarily expect that to change – I am heavily invested in emerging growth companies, and they will continue to swing alongside the public narrative – but I do remain confident that over the long term, the stock price will move directionally alongside the fundamental progression of the business. And that should be enough.

– Tim Gallagher

August 14, 2025

Subscribe now

Share

Thryv Holdings |

• Stock Price (as of April 3, 2025 early trading): $12.10

• Market Cap: ~$550M

• Enterprise Value: ~$830M

• Shares outstanding: 43.3M

Introduction

The fundamental long thesis in Thryv looks similar to what it was a few years ago: a declining, cash cow Yellow Pages business (“Marketing Services”) obscures the growing value of a profitable SaaS business primed to capitalize on a secular change in spend. As SaaS becomes a larger piece of the consolidated enterprise, the stock should reprice.

It sounds good, and management has executed well. But the stock is still roughly flat over the last five years. So, the key question is why now? What makes this investment likely to work over the next five years?

A few ideas worth exploring:

1. The transition from single product to multi-product opens up a ‘land and expand’ motion with potential to increase the pace and predictability of growth. The recent strategic shift to accelerate the migration of Marketing Services clients reinforces this new motion by maximizing top of funnel throughput.

2. Management has the operational chops to bring this transformation to a successful end (rebirth), which will clean up the investor story and attract a much wider buyer profile.

3. Expectations for the business are depressed. Revenue and gross profit multiples (SaaS only) are the lowest ever. Napkin math DCF based on conservative guidance suggests significant upside.

It’s been a painful ride for shareholders to date, but this transformation story is in the final innings, and the investment opportunity has only ripened. Expectations completely ignore the opportunity for long duration SaaS growth. The stock price over the next five years should look nothing like the last five.

Backdrop: The Small Business Cloud Transition

Small businesses today commonly use paper and pen, Excel, or other point solutions to run their business. Buying behaviors, however, are steadily shifting towards software that allows users to manage their business end-to-end digitally. This change creates opportunity, and Thryv is well positioned to capitalize on an enormous pool of changing spend.

Management estimates ~10M customers fit the SAM globally and ~4M customers in the US. The specific number is not important; the opportunity is massive any which way, and Thryv is just getting started.

It has a well-established local sales presence in the US, Australia, and New Zealand, some presence in Canada, and it recently acquired a reseller network functioning across Europe and parts of Southeast Asia. The global expansion, particularly in Europe, should pick up pace in the next few years.

The impending cloud transition may not occur in linear fashion, but we can be reasonably sure a mass migration is inevitable over enough time. The enterprise segment’s path over the last decade is a perfect analog to understand why: cloud tools are value drivers. They improve the customer experience, reduce manual work, and save time. Small businesses who do not evolve risk losing share to those who do.

Product to Platform: Implications on Growth

For years, Thryv was a one product shop selling a CRM tool (Business Center) to its existing Marketing Services client base. It benefitted from long established relationships, but the tool required some significant process reorganization, and many customers just weren’t ready for that type of involvement. ‘If it ain’t broke, don’t fix it.’

Joe Walsh captured this early phase well on the Q3 2021 earnings call: “Let’s be honest, when we started, this was sales-driven growth. We had a simple product, and we sold the crap out of it.”

The second product, Marketing Center, hit the open market in 2H 2023. Right about the same time, Thryv launched Command Center, a freemium product.

These products fleshed out the platform and laid the foundation for a new product-led growth strategy. With Command Center top of funnel, Marketing Center the foothold, and Business Center the scale-up product, what was previously a high-friction upfront sale now looks like a low- to no-friction initial sale leading directly into an upsell motion.

Since mid-2023, the SaaS business has demonstrated the power of this ‘land and expand’ or product-led growth formula. A few pieces of evidence (all SaaS only):

• In Q3 and Q4 2023 alone, Thryv added the same number of net new clients as the prior 18 months combined.

• In 2024, Thryv added more net new clients (organically, excluding Keap) than the prior six years combined.

• Seasoned net dollar retention rate improved from an average of 90.8% in Q3 2022 to Q2 2023 to an average of 96.8% over the last four quarters.

• The number of clients with multiple paid centers has grown from just over 1,000 in Q2 2023 to almost 14,000 at year end 2024.

• In 2024, the number of clients with multiple paid centers more than tripled.

• Gross margins have expanded from ~63% in Q2 2024 to ~73% in Q4 2024.

• EBITDA margins have improved from ~10% in Q2 2024 to ~17% in Q4 2024.

Mid-2023 was an important inflection point in the business. After several years of funneling investment into product and technology, Thryv started to deploy it on the playing field. I think the results speak loudly. The platform is coming together, and the product-led motion is gaining momentum.

With the right platform and the right upsell motion, the logical next step was / is to accelerate the pace of legacy client conversions in order to maximize their lifetime value.

One thing is clear: Marketing Center is the right bridge product to drive those migrations. We can see the fit in the step-change in new client growth, but logically it makes sense because Yellow Pages clients are already buying leads; Marketing Center simply sells them leads through a modern interface. It’s not much of a leap, whereas CRM was quite a bit of a hurdle.

I see (at least) three reasons why it makes sense to push the lever even further.

First, the upsell motion is working; maximizing the top of funnel should effectively translate into more durable revenue growth and better economics. Seasoned ARPU is reliably growing mid-double digits. Net dollar retention is now hovering around the target 100% mark. Multi-center clients have tripled in the last year, and these incremental sales carry gross margins north of 80%.

“We are seeing a steady conveyor belt of growth once our customers get in and bedded down. And we have a defined, kind of automated process that's working. It's not happening by chance. So please don't worry about ARPU. ARPU, we've guided, is going to go from about $4,000 a year to about $7,000 a year. All that's still in place.”
— Joe Walsh, Q4 2024 earnings call

The Keap acquisition also plays right into the expanded role of Marketing Center as a foothold product. Its automations directly complement the lead generation capabilities of the product and, over time, should be integrated directly into the platform for a more seamless, automated upgrade path. It makes sense why management expects $50M in cross-sell opportunity over the next three years (2025-2027).

Second, Command Center is rapidly generating a second client ‘zoo’ from which to hunt for new clients. In just over a year post-launch, Command Center has amassed more than 50,000 free users. Several years from now, the freemium zoo will be capable of replacing the current legacy zoo, so Thryv might as well penetrate the current group as quickly as possible before it depletes.

Third, by converting clients to the new SaaS platform, Thryv can also shut down decades-old legacy marketing tech platforms. The result of dozens of acquisitions over the years, these platforms cost quite a bit to maintain.

We don’t have direct quantification of potential savings, but the rough story is there will be some incremental cost associated with actually decommissioning the systems this year, but in 2026 and beyond, the business will benefit from the permanent removal of a not-insignificant cost item.

Really, the whole story hinges on executing the new growth model. Opening the floodgates unlocks greater upsell opportunities across a larger customer base while removing some cost from the business. But it all comes down to execution.

Threats: Churn and Sales Productivity

As I see it, the two biggest threats are (1) elevated churn and (2) a drop-off in sales productivity after emptying the zoo.

Churn is always a concern in the small business segment, but Thryv has kept churn at “world class” levels over the last few years. The reason to think it might climb higher is because of the “forced” migration of some legacy customers.

At least in year one, the churn profile for new conversions was in line with the broader business. But if the economics were to start to deteriorate, I’m confident in Joe Walsh’s ability and willingness to pivot the strategy. They’ve done it before, and I have full confidence they’ll do it again.

From the 2024 10-K:

Essentially, Thryv converted 46,000 subscribers from Marketing Services to SaaS in 2024, 38,000 of which remained active at year end. But, the whole SaaS business only added 33,000 net new subscribers organically in the year. So, ex-migrations, the business lost 5,000 subscribers.

That implies referrals, the freemium funnel, the reseller network, inside sales, and other outbound efforts yielded net negative customer additions. My question is: what will happen to sales productivity when the zoo runs empty?

I think this is a case of incentives dictating action. In Q1 2024, management re-oriented the sales team’s compensation to pursue multi-center deals; Joe Walsh said at the time, “we moved the needle quite a bit.”

In effect, the conversions are completed outside of a traditional sales process, and the sales team is charged with expanding those accounts once converted. I’ve said it a couple times now, but multi-center clients more than tripled in 2024, growing from 6% to 12% of the base, alongside a >50% increase in the overall client base.

I think the sales team is still highly productive today; Thryv is actually known for a culture of sales excellence. This year, the team was simply targeting a different mission. Move the incentives back over towards signing new customers, and I think we see a different outcome.

Plus, by the time the zoo runs dry, the freemium funnel should be ramped up and the kinks worked out, providing another stream of high-intent customers in which to hunt.

Management: Capable & Aligned

Joe Walsh is a talented operator and capital allocator. Much of his leadership team has worked with him in some capacity for decades. He brings a customer obsession and a genuine passion for doing right by small business that flows into the culture of the organization. He has created a tremendous amount of value in previous pursuits, and he is the largest shareholder of Thryv today.

Over ten years ago, he architected this plan for the business and, since then, has executed beyon expectations. I don’t think many people in the board room at Dex Media ten years ago thought it would actually turn into a half a billion dollar SaaS business while the legacy business continued to throw off cash. But it is.

Walsh often talks of Hubspot as the North Star for Thryv. You don’t often hear a public company CEO refer to another public company as the model for how to think about the business’ progression over time, but I actually think this points to Joe Walsh’s savviness.

The best operators ruthlessly copy what works, then execute better than others in their market. Zuck copied Snapchat, Bezos copied Costco, and so on. Walsh has built Thryv with Hubspot in mind, but focused on a customer segment below it. The strategy is working, the execution has been solid, and the business looks like it will continue to benefit from its emulation of the category leader.

What about macro concerns and the prevailing uncertainty of the current environment? Here is Joe Walsh from the most recent earnings call.

“I would say, overall, and I've said this to you before, I don't really feel like our results ride on small business sentiment or consumer sentiment at all. It's really down to our own execution. But you guys often ask me about what's the macro, what's the climate. And I would say it's meh. It's not bad, but there is just a little bit of extra concern now out there in the environment, and it does not really impact our results.”

Walsh has time and again taken ownership of the responsibility to execute, and then executed. In times of uncertainty or cloudy macro conditions, you want to be in bed with the great operators and capital allocators. And that’s exactly what I think Joe Walsh is. Over the last four years since going public, Thryv has exceeded guidance on both the top and bottom line every single time.

An Expectations Mismatch

Investors do not seem to believe Thryv’s SaaS business is as good as it looks on paper. The stock sits around multi-year lows, creating a mismatch between current expectations (the worst they’ve ever been) and future prospects (the best they’ve ever been).

I’m not a DCF guy, but when there is a near-term cash flow play, in addition to a longer duration story, I like to plug some numbers in and see what comes out. As you can see, I prefer napkin math to an in-depth model.

Long story short, Thryv is cheap. The two columns on the right show my estimates of aggregate cash flow from 2025 to 2030 vs. management’s guidance at the 2024 investor day. Mine are right in the middle of the range, but management tends to underpromise and overdeliver.

In 2030, my estimates put the SaaS business’ historical revenue CAGR at ~17% annually (vs. management’s 20% expectation) and free cash flow margin at ~8% (vs. probably 15-20% normalized). From 2025 to 2030, the business should produce cash flow equal to ~80% of its enterprise value.

So, how will the current cheapness become not cheap?

By cleaning up the investor story. By 2027, the business expects to return to consolidated top-line and bottom-line growth. The following year, it will publish the final print directories, which will produce 100% margin cash flow until 2030. And in 2030, Thryv will become a “pure play” SaaS that, inevitably, will re-rate from the current level of expectations.

Most people don’t have the patience to give it five years. I think realistically we won’t have to wait that long, but you have to be willing to do so. The two-year catalyst is consolidated revenue and profit growth. The three-year catalyst is the exit from Marketing Services.

But if Thryv is a good business led by a top-notch management team with lots of room for growth, why wouldn’t you want to own it for the long term?

Subscribe now

Share

Research Recap February 2025

453KB ∙ PDF file

Download

Download

Last month, we revisited my thesis in Planet, Xometry, and Pagaya. This month is a bit limited – a vacation and an incredibly busy time at work will do that to you – but we’ll take a quick tour of earnings at Thryv and Upstart and close with a brief analysis of Planet Labs’s launch strategy and capital efficiency. March should be a more productive month.

Feedback is always welcome. Disagreements are encouraged. And as always, thanks for reading. If you find my work useful, please consider sharing with a friend.

Subscribe now

1. Thryv | THRY

Context

I’ve followed Thryv for almost two years now, owned a small position for just over six months, and will likely size it up in the near future. I look forward to the Thryv earnings call every quarter for a refreshingly simple explanation of where they’re going, how they plan to get there, and what they have done most recently to execute on that plan.

This is the first time I’m writing about the company, so let me add some context. I own Thryv because it’s a good product and a good business model, addressing a massive market opportunity, and led by a uniquely qualified and talented management team. If I could boil my investment down to one factor, it’s Joe Walsh. I have a tremendous amount of trust in his ability to create a successful outcome for shareholders in the long run.

The stock is generally held down by a legacy print directory advertising business (better known as the Yellow Pages) which, as with all publishers, has been devastated by Google and the internet more broadly.

When valuing the company, I prefer to ignore this print advertising business, though it should throw off enough cash to eliminate the debt by the end of the decade. What I see is a profitable, almost $500M software business that should grow steadily north of 20% and deliver ~20% free cash flow margins at maturity. It’s a well managed operation, led by a group with a history of delivering results.

Q4 2024 is technically an important quarter as it is the first time software revenue eclipsed the legacy print advertising business.

That said, the overarching story is little changed. Thryv continues to deliver profitable software growth while building out its platform and further penetrating an expansive legacy customer base with new software solutions.

Q4 2024 Earnings

The big news surrounding Thryv recently is its acquisition of Keap. The rationale for the deal was straightforward: Thryv’s bread and butter is lead generation, and Keap specializes in lead conversion. In short, Thryv’s marketing offering just got a whole lot more effective, and what’s good for customers is good for the business.

A few other components of the acquisition are (1) the addition of a scaled partner channel motion and (2) a significant increase in development capacity.

Thryv met limited success in its attempts to build out its own partner channel, but Keap brings 1,000 certified partners and a sales motion more than two decades in the making. Thryv excels at selling directly into small businesses, or more specifically upgrading its large base of legacy print advertising clients to its new software solution, but the partner channel broadens the GTM substantially and allows it to reach slightly larger businesses.

Development capacity is a constraint for any technology business, and the Keap acquisition added 100 experienced product and engineering employees, growing the existing team by 50%. Joe Walsh is excited about the potential here, which means I’m excited about the potential as well. We could see an increase in velocity that allows the company to more quickly realize its vision for the platform.

On the call, Walsh highlighted that in just a few months of ownership, they’ve realized $10M of cost synergies. The greater opportunity, however, lies in cross-selling Keap’s lead conversion products and Thryv’s business management software across the combined customer base. All told, management expects this effort to generate $50M of incremental revenue in the next three years: ~$5M this year, $20M next year, and $25M in 2027.

This cross-selling effort, though in the early days, should support an increasing emphasis on ARPU growth in 2025, though by no means is it the only vector of improvement:

“I think we spent the last couple of years really building a very big client base… and I think what we want to do now, and what we're asking our sales organization and our marketing team to do, is really spend time with that installed base and make sure that they are engaged with the product, bedded down, using it and that we're meeting more and more of their needs… And so not to be crass, but upselling them, basically working with them to get more products in place… I think this year, '25 will be a year where that's a beacon.”

I like this focus. Spending more time with existing customers not only contributes to ARPU growth but also holds down churn. And churn can be dangerous in the ultra small business segment where Thryv operates today – as the company readily knows from the early years of its foray into software.

ARPU growth has lagged as new customer additions have accelerated significantly over the last year. New users tend to start with a single product, but as they further build out the platform and move slightly up market, ARPU still has lots of room to run. On average, Thryv still costs around a third of Hubspot annually.

Importantly, moving up market does not mean leaving the space where Thryv has an edge in product simplicity. The company has no plans to serve larger industry players or even compete with the mid-market Hubspot; they want to serve more of the local service industry owner-operators with “five or six trucks” as opposed to one or two. That segment, however, requires more features. To meet this need, Thryv launched Reporting Center, a platform console that offers users a consolidated view from which to manage the business.

On the platform topic more generally, I want to highlight this quote from the call:

“As far as additional centers going into '26 and '27, we've stopped short of promising any further centers. Now that doesn't mean we won't add any, but what we are going to be really focused on is making it all really work well together, making sure the platform of tools that we have is interoperable with other things in the market… The UIs are integrated. Everything just works well. We're not looking for Frankenstein here. We want a really easy-to-use platform. One of the things that you're dealing with very small businesses, you have to make it kind of consumer grade. It's got to be really simple and clear. You can't challenge people with hard-to-use tools.”

Again, I like this focus on how the end customer actually interacts with the product. Software is built to save people time, and a small business owner’s worst nightmare is spending a lot of time training people to use a new tool. Once the core features are in place (which they should be in a year or two with the impending launch of Workforce Center), it’s more important that everything work well together than to have more powerful features. Powerful features are geared towards a more sophisticated customer segment.

In fact, I think a common trap is building too much and, in doing so, introducing new complexities that abstract the core problem you are solving from the main view. Thryv is keeping the main thing the main thing, which is important to their success long term and a reflection of the team’s experience in serving small businesses.

This quarter is just another step in the right direction. The customer base is growing significantly as the company accelerates its move to upgrade legacy clients. More importantly, millions of small businesses outside the current universe still have yet to make the move to the cloud. Net dollar retention remains around the 100% mark. ARPU growth is in the pipeline with the maturation of existing centers, ramp up of new centers, and penetration of add-on products such as those offered by Keap. There is a lot more wood to chop, and I think Thryv has the DNA to get it done.

2. Upstart | UPST

Context

Investors love predictability, and Upstart is anything but. You have to accept a certain amount of volatility – both to the upside and downside – if you invest in Upstart. I can’t think of many companies whose revenue has declined 30% over the last two years yet still compounded at 32% annually over the last five years.

I own Upstart because (1) I think the fundamental technology thesis behind its founding will prove out over time, (2) the unit economics are solid, (3) the market opportunity is enormous, and (4) I have deep trust in and respect for the management team.

The underlying thesis rides the same wave as my thesis in Pagaya: AI will inevitably disrupt credit, and its deployment will come from AI networks who match banks and other capital providers with varying risk tolerances to borrowers with varying risk profiles and, in doing so, construct a real-time database of actual consumer creditworthiness. As this database grows, early movers such as Pagaya and Upstart will benefit from network effects that allow their models to get smarter, which will allow them to extend more credit and deliver a more compelling value proposition to both borrowers and capital providers.

Great companies focus on making consistent, incremental improvements to their core business engine in pursuit of a mission that results in a large market opportunity. In Upstart’s case, the engine is a collection of AI models capable of sourcing, verifying, underwriting, and servicing borrowers in an end-to-end automated manner. Its mission is to improve the accessibility and affordability of credit for the masses.

Such a mission introduces extraordinary challenges as credit is one of the oldest, largest, and most cyclical industries in the world. But while the last two years have laid bare the impact of such cyclicality, Upstart has continued to make improvements to its engine. Now, as it begins to emerge from the cycle, those improvements are beginning to manifest in the financials.

The building blocks of Upstart’s engine – its AI system – are the features / variables used to assess creditworthiness (likened to columns in a spreadsheet), the actual repayment data (rows), and the algorithms that identify patterns among that data. Since the beginning of 2022, when Upstart entered this cycle, it has increased the number of features by ~67% (including incorporating APR, which drove a step-function improvement in model accuracy) and gathered almost 4x the amount of repayment data across time.

The data corpus is significantly larger today and the algorithms significantly better at predicting the default risk for an individual. To successfully replicate such a system, you have to solve a time series problem – you can’t just build a better model without learning how certain risk factors influence the creditworthiness of a borrower. Learning that requires actually extending credit to various borrower segments and observing the repayments over time.

Upstart has a significant lead in understanding these risk factors’ influence on actual creditworthiness, and not many people are pursuing a similar strategy. Dave Girouard shared a particularly interesting quote in the most recent earnings call (emphasis mine):

“One of our very early Upstarters who went on to join Google's DeepMind and then eventually started his own AI venture fund said something recently that stuck with me. ‘Upstart is building the foundation model for credit. Nobody else is even trying.’

This is a simple yet elegant description of Upstart. In fact, I wish I had said it. But if you're a believer in the transformational power of AI, it's undeniable that the trillions of dollars of credit origination each year represent a clear and obvious opportunity for AI to improve the lives of people everywhere.

Competition among foundational models is fierce and includes highly capable open source models. Upstart’s moat is the proprietary nature of its models, the compounding learning inherent to such machine models, and the difficulty one would have to overcome to replicate the core credit decisioning model, let alone the end-to-end conversion funnel. Upstart is a logical choice to bring AI lending to the mainstream, and the reward for doing so will be massive.

Q4 2024 Earnings

Upstart appears to be back in growth mode entering 2025. After growing fee revenue 13% and contribution profit 8% in 2024, 2025 guidance calls for 45% fee revenue and 37% contribution profit growth. We know from history that Upstart can grow extremely rapidly when the environment is accommodating, so it will be interesting to track how sequential growth rates stack up in 2025.

Upstart’s organizational focus is one of its clearest differentiators. Everything is about a simple mission: delivering the best process and the best rate to every loan applicant. I like how Dave Girouard framed the day-to-day activity of the company on the Q4 call:

“Most of what we do here are just fundamental improvements to risk separation and automation, and those deliver growth. So I think we'll just take the macro wins when we can get them, and otherwise, we will keep cranking away on more accurate models.”

The business is obviously dependent on macro to a certain extent, but the people focus on what they can control, and the past few quarters are evidence that alone can get it done. 2022 and 2023 were anomalies in terms of the speed of rate hikes followed by the rapid increase in defaults among lower income borrowers and, later, higher income borrowers. As those impacts subside, Upstart will be a beneficiary of both an improving macro and a significantly improved business engine.

Upstart’s aim to be the fastest to react to macro rather than the earliest to predict the macro is a good strategy, and it’s clear they have made progress in the department. Girouard shared that, had their current macro tools existed during the prior period of volatility, they would have avoided 55% of excess defaults and returned to full calibration (the difference between predicted and actual default) 12 months earlier.

One analyst asked a rather interesting question about how long it might take to return to the prior peak conversion rate and loan origination volume. Sanjay Datta’s response, though lengthy, is worth unpacking:

“The path back to that scale of business – I mean, the obvious answer is a drop in the risk of the environment. I guess you could sort of proxy that with a drop in the UMI. But I also think that the path back will look different than our original path there because, compared to that time, our models are dramatically stronger.

A lot of that is not obvious because of the high rates and the high level of risk in the environment, so as Dave said, prices are still quite elevated. But the models themselves, in terms of their ability to decision risk between relatively similar-looking borrowers, are dramatically better. And so I think we will not require as constructive an environment as existed in 2022 in order to get back to that rough level of scale.

And maybe a related point is that, as and when we do, our business model itself is much stronger. I think we've been clear that we do not believe our contribution margins will fall back to the level that they were back then. I think we're much more optimized in how we price and how we measure elasticity and how we manage our take rates. And so I think, again, for a similar size of top line business, you should expect us now to have better margins and frankly, a more streamlined fixed cost base.

The only real difference beyond that is the fact that we have undertaken a few bets that are more early stage, and we expect those to contribute over time as well, and there will be some period of time in which we have to incubate that. But beyond that, I think across the board, whether you're looking at our business model or the strength of our actual underlying technology, it's pretty much better across the board.”

Of course, macro tailwinds could accelerate growth, but what stands out to me is Sanjay Datta’s comment on contribution margins. He expects them to remain around the current level, even as they scale the business. That differs from Girouard’s explanation last quarter: “We expect our contribution margins to come back down to earth as our volumes expand.”

Datta could be signaling a change in tune, but realistically, I think it’s just a matter of the degree of change. They will inevitably decline somewhat, but maybe not to the full extent of what was expected previously. Either way, it should be an interesting dynamic to monitor moving forward.

Datta’s last sentence adds emphasis to my initial context, which is that while Upstart has had a difficult few years, it is undoubtedly a stronger company today from both a technology and business model standpoint. One of those technology areas is servicing.

On the Q4 2023 call a year ago, Girouard announced, “We've begun programmatically gathering the data that will unlock the type of efficiency and efficacy gain in servicing that we've long seen on the origination side.”

In the last two years, the servicing product and engineering teams have more than tripled. This quarter, we received some more confirmation that this investment is paying off. A few stats worth highlighting:

• People-related cost per current loan fell 50% since the beginning of 2024

• Roll rates from 1-day delinquent to charge-off are down 15% YoY

• 93% of new loans enrolled in AutoPay (highest level in two years)

• Portfolio-wide, AutoPay enrollment exceeded 80% for the first time ever

As these investments in servicing continue to pay dividends into 2025, it may support improvement in the unit economics of each loan. Servicing and verification cost per loan bumped up in 2024, but the benefits of automation pay off disproportionately at a larger scale.

Another key dimension of the business is the “supply chain of money.” Lending partners are returning to the platform in significant numbers, with originations up 30% QoQ and 76% YoY. Higher credit quality products such as the auto loan and HELOC should drive more of this activity over time.

HELOCs have grown almost 4x over the last two quarters, and auto loans (both refinance and retail), after a long stretch of being stagnant, have grown over 3x since Q1 2024.

Committed capital partners upsized their platform commitments by $1.3B and have represented around 50% of the origination volume since Q2 2024. Upstart is a much more resilient business to external shocks now and is no longer funding-constrained. Growth should now come as a function of internal model improvements and automation – though any improvement in the macro will further bolster its results.

Upstart is a unique company pursuing a worthy mission and demonstrating real progress in its efforts. The unit economics are solid, and we even saw a countercyclical element in the company’s ability to flex take rates during a time of lower liquidity. In 2025, Upstart expects to return to significant growth and GAAP profitability.

All three co-founders remain at the company, along with a significant population of the early senior leadership team. They have survived numerous pivots to the strategy and business model and, each time, emerged a stronger company. Not much could happen in a single quarter to convince me the opportunity is lost, but this quarter has deepened my conviction that opportunity is large and ripe for the taking.

3. Planet Labs | PL

Launch Strategy

History fuels a company’s DNA, so I find stories, memos, or other details about the early years highly informative. This 2016 article by Mike Safyan, who has been at Planet since its founding and currently leads its launch strategy, is worth a read. One interesting takeaway is how the practical application of launch strategy has changed over time.

Planet is vertically integrated across satellite design and manufacturing, but a major dependency is launch – actually putting those satellites into operation. Long ago, Planet hired Chris Kemp (who later went on to co-found Astra) to explore the possibility of entering the launch business and concluded no. I think this was the right choice, and it indicates the focus of the business. Even if not in abundant supply, launch is a commodity, a highly capital intensive / risky business and, at least today, not a very good one either.

While there is a far-out risk that major launch providers decide to stop launching Planet’s payloads, jack up the prices, and/or replicate their business, it’s unlikely. I’ve become more and more comfortable with this risk and, in fact, barely consider it a viable outcome today. Nonetheless, this article explains how the company thinks about mitigating its dependency on launch providers.

Simply put, the strategy is diversification, or as Safyan says, “many eggs in many baskets.” Spread payloads across multiple manifests and multiple rockets to reduce the impact of any launch delays or mission failures. Sounds good in theory, but if we look at the last six missions, all have flown under the SpaceX banner. So much for diversification today.

More than cause for concern, I think this reflects a change in the operating environment. The article is from 2016, a time when a statement like “launch, to put it plainly, is risky business,” made much more sense. SpaceX is now an 800 pound gorilla, and failure is an anomaly at the organization.

Launch prices have not declined as much as widely expected (and may have increased in certain cases, at least recently), but my guess is Planet trades diversification for reliability. Why risk satellites on a less proven vehicle when you can virtually guarantee success with SpaceX? I’m sure there is a willingness to experiment on occasion, and Planet also keeps launch contracts with Rocket Lab (to the best of my knowledge), but frankly I’m not surprised to see SpaceX as the new default. They launched 90% of mass to orbit last year.

Moving forward, I’m interested to see how the advent of massively larger rockets, and potentially dramatically lower launch costs, (e.g., Starship) may change Planet’s strategy. A decline in launch costs does not directly translate to a decline in launch prices, but if Starship successfully lowers the cost to orbit by an order of magnitude, maybe half of that gets passed through to customers like Planet. With launch a significant input to the overall satellite cost, maybe we see a 20% decrease in satellite cost. That either translates into greater capital efficiency, or those savings could be reinvested to expand the constellation and offer reduced revisit time or another benefit. Who knows, but there is vast downstream potential for operators such as Planet if Starship does drop costs so significantly, and Planet is already a capital efficient business.

Capital Efficiency

In the same article, Safyan outlines the daily scan of the Earth only requires ~120 Dove satellites. Many current sources put that number closer to 180, but 180 doesn’t match the company’s historical capital investment. In FY 2022 and 2023, when the company was in replenishment mode (i.e., refreshing the PlanetScope constellation, not building new constellations), capex was only $10M.

To square those numbers with reality, I put together the table below showing low vs. high end maintenance capex estimates for the PlanetScope constellation. Long story short, it makes a lot more sense that Planet operates at the lower end of this spectrum than the higher end given the historical level of capex in times of replenishment.

These low end estimates of maintenance capex also align with Ashley Johnson’s comment at the Needham Growth Conference earlier this year that FY 2025 is an anomaly in that they launched two flocks (36 SuperDoves each) to replenish the constellation; normally it only requires one. At ~36 satellites a year for replenishment, that puts us right around the $10M capex number we saw in 2022 and 2023. And, most importantly, at that level of capex, PlanetScope is an extraordinarily capital efficient business even at small scale, an idea that runs counter to the traditional idea of satellite operators.

Subscribe now

Share

Research Recap January 2025

496KB ∙ PDF file

Download

Download

Recaps are an extension of my investment process, which I liken to a continuous investigation: you accumulate evidence, assess the facts, consider probabilities, and make judgments. A single Recap will never tell the full story, but it should provide a snapshot of thinking at a moment in time.

This first edition lays out an updated thesis for my top three holdings (~60% of my portfolio). Most editions will not be “stock pitches” in this sense – they will read more as a collection of notes, commentary, and analysis – but I thought this exercise would be a useful frame of reference for future discussions. The section on Pagaya is a bit lengthy, but I hope you find it worth the time.

Feedback is always welcome. Disagreements are encouraged. And as always, thanks for reading. If you find my work useful, please consider sharing with a friend.

Subscribe now

Share

1. Why I Own Planet Labs |

Planet is my largest investment, and I’ve discussed my view of the opportunity at length (see here for some of my analysis). While my original thesis could be more organized and concise, many of the points are still valid.

Planet is an early stage category creator. It collects and sells proprietary data from the largest satellite imagery network in the world. The unique value of its data is in its combination of global scale and daily refresh rate. This daily scan is a differentiated offering in the market and will drive the business over the long term.

In the near term, Planet’s tasking business (a complement to the scan) may contribute more substantially to growth. Defense agencies still dominate industry spend, and they have established budgets for specific capabilities in the domain. But, over the long term, I think the compounding value of a live Earth database is what really separates Planet from other market participants.

Planet’s data enables a variety of use cases which provide a tangible benefit to government and commercial customers. The product is sticky, but extended sales cycles have led to challenges scaling the business. For one, data exists a layer below software; it requires specialized resources to assess its impact, implement, and then turn into a useful operational asset. Second, geospatial expertise is rare, and the sheer volume of Planet’s data can be overwhelming. Third, as I mentioned, governments still dominate industry spend, and governments move / procure slowly.

To combat these headwinds and accelerate growth, Planet is (1) developing downstream data products to reduce the need for geospatial expertise, (2) building a platform for developers / users to more easily fuse different datasets and stream data / analytics directly into their preferred workflows, and (3) scaling the sales force. These investments manifest mostly on the income statement.

Planet is also investing (via the cash flow statement) in new data acquisition infrastructure (new satellites / sensor types) to open new markets and unlock upsell opportunities. More data and the fusion of multiple sensors commonly yields a 1 + 1 = 3 effect, which delivers a better product to customers.

Both areas of investment, over time, should support durable growth and increasing operating leverage. Planet, as with most data businesses, benefits from naturally advantaged economics as its cost to acquire data is largely fixed. The rapid expansion of gross margins is evidence of this dynamic.

Further, product and platform investments should improve LTV and reduce CAC over time. Moving up the stack (selling software on top of the data) delivers more value to customers and creates expansion opportunities at a lower cost; self-serve platform capabilities reduce the time salespeople have to spend nurturing and converting (especially lower-value) leads.

Additionally, Planet’s capex spend benefits from an underlying trend of exponential improvements in the cost-performance of satellites. SuperDoves are ~1,000x more capable than their predecessors, producing more data and higher quality data at around the same cost. Pelicans report significantly better performance across every metric (resolution, capacity, revisit rate, and latency) at roughly half the cost of their predecessors (SkySats).

People often question the wisdom of Planet’s investments when they see the size of its losses. I think this view is shortsighted. While the current level of investment no doubt obscures the company’s potential profitability, it also has a viable path to significant ROI and deepens its competitive positioning.

I would go so far as to argue an internet-native business model with a unique value proposition and potential for increasing returns to scale would be foolish to not invest heavily in accelerating the realization of the market opportunity.

Importantly, the balance sheet affords the flexibility to maintain these investments without regard for external opinion. Since going public over three years ago, Planet has only used around half of its proceeds and still has ~$240M in net cash. Management has committed to reaching free cash flow breakeven while keeping a “9-figure” cash balance, and the current trend points to this outcome as achievable.

Competitive analysis is the heart of good investment analysis, and an area where investors commonly misunderstand Planet. Competition, in my view, is not a near-term concern. High-resolution tasking is a competitive market, but the daily scan, which accounts for ⅔ to ¾ of total revenue, is a virtual monopoly. Selling the scan is a question of technical capability (which is constantly improving) and what value it can deliver (which is continuously growing), not competitive dynamics.

The scan has operated without peers for over seven years now, and while some other players are making noises in the same direction, the real alternative today is free data from public missions. More often than not, however, these public missions are not competitive but complementary; they support Planet’s product development. New commercial entrants present a similar complementary opportunity; look no further than SynMax for an example of how partners leveraging multiple data sources can create a better product for customers and grow the total market opportunity.

It’s also worth noting the value of Planet’s archive; would-be competitors can’t go back in time to replicate this asset. And while most analysts assign little value here, I think it’s an incredibly valuable machine learning asset and will support product / platform development efforts for years to come.

The long term opportunity for satellite data rests on application layer companies fusing multiple datasets (both satellite and non-satellite) to deliver a scalable solution to (generally vertical-specific) end customers. Planet’s future enterprise value depends on its ability to arm these partners with the tools and infrastructure to do so, and its strategy is centered on capitalizing on this opportunity.

Under such a scenario, I expect aggregate demand for satellite data, and Planet’s platform growth, to vastly exceed market expectations. Today, however, this is far from reality. Spending remains concentrated in defense and intelligence, and the timeline for change is highly uncertain. The commercial market has even receded in the last few years.

But zooming out, this is a story of inevitable change driven by rapid improvements in satellite performance, the explosion of satellite data, and the advent of AI. An investment in Planet is based on growth in the size of the pie, not Planet taking a larger slice – and I think this endgame is inevitable given a long enough time horizon.

2. Why I Own Xometry |

Xometry is a digital-native marketplace for custom manufacturing. It has pioneered a novel user experience that leverages AI on top of a vast dataset of historical transactions to offer a range of instant prices and lead times from simply uploading a CAD file to the website.

As I define it, “digital-native” means the end-to-end transaction occurs entirely online, eliminating any back-and-forth between buyer and supplier. Legacy marketplaces that facilitate RFQ processes don’t qualify: the second a buyer hits the “Request a Quote” button, they are back in the analog world.

My investment in Xometry is based on three key assumptions:

• Digital-native marketplaces will expand their share of industry transaction volumes.

• Xometry is the clear leader among these types of marketplaces.

• The business benefits from network effects which serve to extend its advantage.

My conviction in the marketplace opportunity in custom manufacturing is partly based on my analysis of Bill Gurley’s framework of how to evaluate digital marketplaces. To recap (just a few of the ten dynamics assessed):

• The industry is highly fragmented on both the supply and demand side.

• Instant pricing and an end-to-end digital purchase process offer a radically superior user experience compared to the manual back and forth typical for custom parts procurement.

• The economics are advantageous. Buyers benefit from a simplified procurement workflow and access to thousands of suppliers; suppliers can monetize excess capacity and improve machine uptime by accessing new sources of demand.

In my original pitch, I cited Xometry’s unique data as the source of its advantage. In hindsight, I was wrong. Data is important but not a differentiator – it’s the cost of entry. Data is a prerequisite to providing a digital-native experience, but Proto Labs Network, Fictiv, and other marketplaces have shown they can facilitate a similar user experience.

What differentiates Xometry is the size and rapid expansion of its network. Let’s consider a few examples. Fictiv is private, so it’s difficult to triangulate precise scale, but the website claims 150,000+ hours of monthly machining capacity; if we assume each supplier has two machines with 160 hours of monthly capacity (40 hours per week), that implies a network of around 500 suppliers. Proto Labs Network claims 250+ vetted manufacturing partners on its website. Both are significantly less than Xometry’s 4,000+ suppliers.

On the demand side, Fictiv’s website notes 18,000+ customers. Proto Labs Network served ~44,000 unique customer contacts (individuals who could be from the same company) through the first three quarters of 2024, a decline from ~53,000 in 2023 and ~56,000 in 2022. Xometry, meanwhile, reports ~65,000 active buyers, growing 25% YoY.

Networks are ultimately differentiated by scale, and Xometry clearly outpaces the competition here. The core marketplace is healthier than ever – the number of buyers is growing, buyers are spending more over time, and new materials, finishes, and processes are routinely added to the menu. If you’re unfamiliar with the terminology, the basic concept is no different than Amazon expanding from books to CDs, video games, and so on.

As Xometry expands horizontally, it can attract suppliers from the extensive supplier database assumed via the Thomas acquisition. And as selection widens, Xometry offers a more compelling value proposition to buyers who can source a greater variety of parts from the same online destination – “one throat to choke”, as Randy Altschuler refers to it. Over time, this should allow the company to continue to attract new customers and capture greater wallet share among existing customers.

Xometry is the largest digital marketplace in an industry primed for marketplace disruption and early in its inevitable digital transition. The scale of its network creates an advantage which should serve to extend its market leadership over time. The founders remain substantial owners of the equity and have shown an ability to execute. The business continues to accumulate share gains amid a tough manufacturing environment, and I see no reason why this trend would slow down moving forward.

3. Why I Own Pagaya |

“What we are building here is one of the most unique infrastructure platforms for credit generation in the United States.” – Gal Krubiner, Co-founder & CEO

Pagaya is a bet on AI’s transformation of lending. My rough thought process is as follows:

• U.S. consumer credit markets are broadly inefficient and inaccessible.

• AI can more precisely measure default risk and expand access to credit.

• Banks are ill-suited to build and deploy the necessary technology in-house.

• Pagaya’s network can effectively fill that technology void and expand its share of loan origination volumes over time.

• The business model and unit economics can scale profitably.

Pagaya is a “riskier” investment in that the range of outcomes is wide; it’s a difficult problem the company intends to address, and many have failed in their attempts. But, investment decisions are based on a risk-reward tradeoff, and I think the potential reward here more than compensates investors for even the (improbable) risk of total loss.

US consumer credit markets are broadly inefficient and inaccessible

Core to the thesis is a somewhat abstract concept: the idea that a significant, creditworthy population exists outside the bounds of traditional lending markets. I could try to illustrate this inefficiency with statistics, but I would rather appeal to logic.

Borrowers face high search costs and a lack of information as they navigate a highly fragmented landscape of lenders. Lenders, meanwhile, struggle to accurately underwrite risk using a credit score as the primary input. Strict market segmentation (e.g., subprime vs. prime) exacerbates this problem by limiting true price discovery; the tens of millions of Americans who are credit invisible, have thin files, or even subprime scores are often simply out of luck.

In many ways, a FICO score acts as a filter today; lenders will only target segments with a 680+ score, for example. But logically, this makes no sense. Why would we limit the inputs to a critical economic decision at a time when vast alternative datasets are available, and sophisticated modeling (that only works when applied to vast datasets) invariably produces a better decision in almost every other domain of business?

It’s no secret traditional rules-based regression models fail to effectively price risk for a sizable segment of the population. Countless companies were founded on this basic premise – but what has proven extremely challenging is executing on the opportunity and scaling a viable business model.

AI can more precisely measure default risk and expand access to credit

It’s difficult to reconcile the extreme bullishness around AI with the broad skepticism of its application to lending. The essence of lending is a prediction of who will pay you back, and who won’t pay you back. AI is a highly effective, infinitely scalable prediction machine.

Jeff Bezos recently shared how he views AI (link to full interview):

Modern AI is a horizontal enabling layer… These kinds of horizontal layers, like electricity and compute and now artificial intelligence – they go everywhere. I guarantee you there is not a single application you could think of that isn’t going to be made better.

Why would lending be the exception? I understand there is no shortage of charlatans in the category – plenty of companies have made empty claims about a better credit box – but it’s difficult to argue with the overwhelming logic behind AI consuming rules-based models over time. It’s inevitable, and we are at the very beginning of witnessing its impact.

It’s impossible to stand here and provide firm evidence that Pagaya is the answer, that it has cracked the code and separates risk better than any other model or lender. It would be foolish to even attempt to make such an argument today. But, I will argue the network infrastructure Pagaya is building is well-suited to execute on the opportunity, and its expansion in recent years speaks to an ability to extend performant credit to an underserved segment of the population.

Pagaya has now originated over $26B in second-look loans. In 2024, it will report north of $10B while capturing ~70% of the personal loan ABS market. That is $26B of loans ($10B just in the last year) enabled by a unique AI model, on top of a unique supply of data, offered to consumers turned away by traditional underwriting models. I think people underestimate the significance of this statement.

The performance of this loan book, in aggregate, has been adequate: some have beat expectations, some have met expectations, and others have fallen short of expectations; but, the credit quality has been good enough; if it weren’t, previous investors would not be lining up to allocate more capital, and Pagaya would not be in the position it is today as the benchmark issuer.

Contrary to popular belief, a more precise model will never eliminate risk, but it should dampen the volatility of outcomes over time. Investors (in the equity) must simply be confident in two things: (1) that Pagaya’s loan performance will increasingly converge on the predicted outcome as the network collects more data and enhances its models and (2) that occasional underperforming vintages will not impair the company’s ability to raise capital. Unfortunately, these are difficult to measure from the outside.

Banks are ill-suited to build and deploy the necessary technology in-house

If Pagaya’s technology allows it to more accurately underwrite a broader base of consumers, wouldn’t banks simply replicate it? The short answer is some of them will, but most of them can’t. Banks and traditional lenders looking to develop and deploy an AI lending model need to first overcome some structural headwinds.

Most banks operate on outdated, siloed tech stacks incapable of integrating and processing the data required for modern AI; those same banks also lack the commitment, budget, and technical staff needed to reconfigure and optimize the system.

Outside of the JP Morgans of the world, most banks also lack a massive volume of training data; the data corpus is limited by the size of the loan book. A network like Pagaya, with visibility into programs across many lenders, can more effectively solve this data aggregation challenge.

I could go on about talent gaps, cultural challenges, etc., but really, it’s simple: API-led, plug-and-play (and compliant!) solutions are a natural fit for how most banks will eventually deploy AI in lending. Networks like Pagaya can aggregate data across a broad base of lenders, spread R&D costs across its partners, and prioritize iteration and constant improvement.

Pagaya’s network can effectively fill that technology void and expand its share of loan origination volumes over time

Before we dive into how the network grows, it’s important to understand the constraint: the mutual dependency of a two-sided network. Pagaya is in the business of connecting borrowers and lenders (and by lenders, I mean capital providers, not its lending partners). If it can’t source borrowers, no amount of capital can grow the business. Likewise if it can’t secure capital, borrowers are a moot point – the business can’t grow.

For the network to expand, it has to first demonstrate a compelling value proposition to both demand-side and supply-side partners. So, let’s start there.

• Lending Partners: For banks, captive auto lenders, and fintechs, Pagaya’s second-look decisioning allows them to attract and retain customers they would otherwise turn away, while offloading the credit risk. Pagaya also increasingly enables partners to offer a broader suite of credit instruments to their customers; according to the company, the most commonly cited benefit among partners is increasing customer lifetime value.

• Investors: Investors come for the ability to deploy capital at scale across diversified credit assets, and stay for continued delivery of an acceptable return.

The strength of the value proposition is most evident from the network’s rapid expansion. As is typical of network effects, this expansion feeds back into growth. More lending partners means more opportunities for asset creation, a boon for investors. More investors translates into an ability to convert more borrowers, a positive for lending partners.

Growth is essential to the investment thesis; a network either grows or dies. The most important input to growth is network volume (i.e., the volume of loans originated via Pagaya). Growing network volume is a function of increasing application flow, improving conversion rates, or both.

Network Volume = Application Flow x Conversion Rate

There are a variety of ways to grow application flow, but mainly, Pagaya can (1) add more lending partners and/or (2) grow its share of volume among existing partners.

Pagaya has excelled in the first department. Against a long stated goal of onboarding 2-4 new partners a year, Pagaya brought in six new partners in 2022; four in 2023; and two YTD Q3 2024. Some people might jump on what looks like a declining trend, but the reality is Pagaya is moving up-market.

The last three lenders to onboard are US Bank (a top 5 bank), Elavon (its payments subsidiary), and OneMain Financial (one of the largest subprime lenders in the US). Another top 5 bank is in the midst of onboarding, and while these partners may take longer to onboard (~18 months in the case of US Bank), they present attractive opportunities to expand horizontally over time.

With a window into >$1T of annual application flow already, signing new partners is not the immediate constraint on growth; near-term growth depends more on ramping up existing partners, an area where the company has also been successful over time.

It’s not until the second or third year post-onboarding that Pagaya starts to really expand its share of volumes and monetize the partnership. Klarna, for example, is only now rapidly scaling volumes after onboarding in 2022. Recent additions such as US Bank / Elavon and OneMain Financial should provide platforms for growth years into the future. The clear trend is a growing share of originations among partners – it just takes time.

New offerings such as the pre-screen product are effective means of expanding the network’s surface area and gaining share of total originations. Whereas Pagaya’s flagship products are focused on new customer acquisition, pre-screening programmatically targets existing customers.

Pagaya’s strategy, over time, is to take on more and more of a bank’s end-to-end lending value chain. We’re not there yet, but as it lands more logos, deepens existing partner relationships, and enhances its credibility in the overall banking sphere, I think the company has a right to expand its share of partner originations even more.

Once again, this expansion naturally feeds back into growth. As the network widens its aperture and assembles a more comprehensive dataset of consumer creditworthiness (across asset classes and up and down the credit spectrum), it should allow Pagaya to optimize conversion rates, the second key driver of network volumes.

For several years now, Pagaya has kept conversion rates sub-1% in order to manage risk. In practice, this means loans are priced higher (with a “margin of safety” of sorts) than the “baseline” model might call for, and as a result, fewer customers accept those offers. This risk management effort has paid off: cumulative net losses (CNLs) for 2023 personal loan and auto vintages are down 20-40% and 30-50%, respectively, versus peak 2021 levels.

Conversion rates, in the long run, are downstream of model accuracy. I think it’s reasonable to expect the core AI to improve as the data corpus grows and specific model instances are tailored to unique application flows. Management once highlighted potential for 20-30% improvements to conversion rates annually, and while that seems ambitious (and does not factor into my investment case), it is worth noting. Such a move would drive immediate, substantial growth, even holding application flow constant.

Stepping back, I think the network will grow, not die. Application flow will almost certainly continue to grow, and I am optimistic conversion rates will improve but am not relying on it to make the investment case. The constraint, or the major uncertainty as I see it, is supply, or fundraising. How much growth can capital markets accommodate?

Here, you have to have a bit of blind faith, but the most bullish evidence is (1) increasing allocations from previous investors and (2) steady growth in the total number of investors.

We will ultimately have to wait and see here – it’s difficult to predict capital markets activity – but capital is a commodity, and one that seems increasingly abundant. Pagaya benefits from the secular growth of private credit as an asset class, and I think it’s fair to assume it can capitalize on that tailwind given its unique value proposition.

The business model and unit economics can scale profitably

The many questions surrounding the business model are valid; the unit economics don’t work as they stand. Risk retention requirements outweigh the fees earned on network volume, so Pagaya is repeatedly forced to raise debt and/or dilute equity to fund its expansion.

Growth has proven counterproductive to the financial model, and when you add to that a worrying trend of rising credit impairments, it’s not difficult to see why the stock has suffered. But, the immediate financials never paint a complete picture, and I think these challenges will prove to be transitory.

Pagaya is at an inflection point in its ability to (1) improve take rates and reduce risk retention such that incremental network volume contributes positive cash flow and (2) manage its credit portfolio such that future impairments don’t damage the income statement to the same extent.

The recent move to diversify funding has led us to this inflection point. Historically, Pagaya has relied on ABS markets for the vast majority of its funding, and regulation requires ABS issuers to retain 5% of the asset pool (with some nuance). With net take rates at sub-4% for most of 2021 to 2023, the company had to put up more and more of its own capital, which was often obtained via unattractive but imperative financing.

From Q3 2021 to Q3 2024, Pagaya cumulatively generated $45M of operating cash flow. Investing cash flow? Negative $1B. However, the economics have changed. Take rates have climbed to 4.3%, with room to go higher. And growth in privately managed funds (as a result of the Theorem acquisition), new forward flow agreements, and more pass-through securitizations has already reduced risk retention to the target range of 2-3%.

All of a sudden, what was previously a business with sub-4% take rates and 5% capital investment is now a business with plus-4% take rates and 2-3% capital investment. Cash flow won’t knock anyone’s socks off in year one, but that’s the start of a real business. Management is resolute that they will deliver GAAP profits in 2025. As it begins to show operating leverage below the line, the financial profile should improve considerably.

By that point, the market will understand the potential and price it accordingly. The window of opportunity exists today because the market lacks faith in the strategy and assigns a low probability of the company becoming a more stable, cash-generative business. Again, I think this is shortsighted and based on a view of the past, not the future.

Personal loans, Pagaya’s most mature segment, already demonstrates a 6.6% take rate with only 2-3% risk retention. The standalone economics work, volumes are still growing, there is even room to build on that take rate, and over time other asset classes will converge to similar economics.

As for credit impairments, some level of impairment is inevitable for a business involved in lending. But, the significant and rising impairments we’ve seen of late are a symptom of one-off decisions and investments made in a time of heightened uncertainty, when management bet the expansion of the network would prove to be more important to the long-term value of the enterprise than being overly judicious about the risk of any individual security.

Take it from Gal Krubiner when asked about the impairments on the last earnings call:

Let's start from the past. What is Pagaya? Pagaya’s business is a network. In a network, you need to make sure the network is flowing all day, every day, no matter what. That's our responsibility to both our partners and investors to deliver to them the best flow and the best return. In 2023, which was a unique time when there was a really big gap, we filled the gap. That is an investment.

We did that because we believe that the investment we made is going to end in a massive outcome, which is the enterprise value you see here today – 31 different partners, US Bank, many others, and at the same time, happy investors from 2023. Every investor you're going to speak with that invested in a Pagaya security in 2023 will tell you, ‘great platform, great returns.’ And these are the investors that are looking now to open their deployment, as you heard David speaking about. So we are the first choice, and we did all of that to get ready for this particular moment in time to make sure we are capturing that momentum very well.

I’m comfortable with this attitude toward the business, especially as ABS markets in 2023 were still digesting the impact of a rapid increase in interest rates and a sharp rise in delinquencies. Pagaya accepted lower spreads and greater risk to grow the network, and it worked. Network volumes grew 14%, and the company added 31 investors. The reality of that risk is now being confronted, but it’s a function of circumstances that are now history.

As the pool of risk retention assets declines as a percent of volume and take rates increase as a percent of volume, even impairments of similar relative magnitude to those suffered from 2023 vintages will have considerably less impact on the consolidated financials.

In the near-term, the stock will undoubtedly suffer if they report another sizable impairment in Q4 (a likely outcome given they will book remaining 2023 impairments then). But again, the time to buy is not when everything looks rosy. The time to buy is when the immediate financials paint a lousy picture, but 18 months from now should look a lot different. I very much believe that’s what the case is here.

Conclusion

Pagaya is building a database of US consumer creditworthiness. That database integrates into the loan origination systems of 31 lenders today (representing ~$1T annual application flow) and will reach more lenders over time. That database also extends across asset classes and scales without limitation. And it enhances the customer experience by providing an instant credit decision in a digital-native format.

The founders are young, mission-driven, and retain meaningful equity stakes. They have brought on experienced executive talent (Sanjiv Das, for one) and have shown a willingness to make difficult decisions in the interest of the long term at the expense of the short term.

Early private investors (Oak HC/FT and Viola Ventures) remain sizable owners after more than two years as a public company, and I bet they know the business better than anyone. The signs point to opportunity – it’s just a matter of looking out beyond the immediate financial picture.

Subscribe now

Share

2024 Annual Letter

285KB ∙ PDF file

Download

Download

This letter is the start of a series that will over time document my investment track record. My goal for this first edition is mainly to provide some context about who I am and how I invest. I’ll introduce my situation, my philosophy, and share a bit about how I interpret strategy and risk.

Regular readers might think I’m beating a dead horse, but I think there is nothing more important than context in any discussion of investing. Context can eliminate misunderstandings and explain why someone thinks a certain way. Too many people don’t bother to ask why.

This letter closes with my historical returns and current portfolio. As always, I encourage you to share your own opinions in the comments, particularly if constructive.

My Situation

Since I was a kid, my interests have always been more accurately classified as obsessions. I either want to spend all my time doing something or none of it. Investing is no different, though I don’t work in the investment business.

I’m 24 years old. Most of my funds are in a Roth IRA, so my time horizon is effectively infinite. I’ve been investing my money for around seven years, but really focusing on it for the last three or four.

In that time, my approach has undergone some drastic changes. I started off trading, did a tour of duty in the traditional value trenches, went after high-growth tech stocks, and eventually indexed a sizable chunk of my portfolio for a while. This experimentation has been invaluable in learning about my behavior in markets and developing an approach suited to my personality.

I invest a small sum of money today compared to what I expect to earn and save over the course of my career. Partly because of this, I’m comfortable with concentration. If losing money steepens the learning curve, that’s a tradeoff I’m willing to make – provided I avoid repeating any mistakes.

Investing is a game – one I enjoy very much. I play to win, but winning is not just about beating the market. It’s about learning and having fun with the process. The day I stop learning or the day I stop enjoying the craft is the day I go back to indexing. Hopefully that day is far off.

Philosophy

I view philosophy as a set of principles that guide your approach to the market. It’s virtually impossible to capture my approach in a few pithy phrases, but nonetheless I’ll try:

1. Keep it simple

2. Think like a business owner

3. Hold a long term view

4. Look for misunderstandings

Simplicity is an anchoring force in my process. Reece Duca, the founder of IGSB, said it best:

We think that the most important thing in the investment business is to keep everything absolutely as simple as you possibly can. We think complexity is the biggest barrier to high performance in the investment business. And so we design around complexity.

The best investment ideas are simple. They can be explained in a few sentences, and they rely on napkin math, not complex models. Simplicity, to me, is about having a clear endgame in mind. It’s about focusing on the few variables with the most influence on that outcome and separating the rest. Ultimately, it’s about knowing what you own and why you own it.

A business owner focuses on the people, thinks strategically, and doesn’t care for the stock market. Do you trust the people running the business to make decisions in your interest? Have they outlined a strategy which you believe will succeed over time? Can they execute? If so, stock price volatility should be a feature, not a bug, of any investing program.

Holding a long term view can only come from asking long term questions. Josh Tarasoff says:

One kind of investment situation I’m fond of is when a company’s best decade won’t even begin for 5 years or more: the endgame is clear, but there is an immediate murkiness as the pieces fall into place. Instead of focusing on the far future, investors commonly try to construct a narrative or a series of events that will occur over the next few months, quarters, or years — what I call a path. People obsess over the path because they crave the comfort of a play-by-play understanding of how their investment will progress.

Most people don’t bother to ask the long-dated questions because they are too bogged down in what happened last quarter or what might happen next quarter. This short-termism is a plague, and I think operating outside the confines of an investment business largely bound to it provides an edge.

In a game where turning over the most rocks can be a recipe for success, it helps to quickly discard companies not suitable for investment. Searching for misunderstandings is a way to accelerate this filtering process. A misunderstanding often implies lower expectations, which can spell opportunity.

Identifying misunderstandings is not as simple as filtering for low valuation ratios. More often than not, it means focusing intensely on what can’t be readily measured or quantified. It means developing an intuition for how the market thinks, understanding where you differ, and trusting your judgment. The process is far from scientific, but I find it’s a worthwhile endeavor.

If most people seem to have a solid grasp of a company’s business model or competitive advantage, I am quick to turn the page. Many investors approach the market from the opposite angle, studying businesses upfront in order to be ready when the price reaches an attractive level.

My own habits are more in line with Stanley Druckenmiller’s “invest, then investigate.” I prefer to look for situations where I can immediately sense the opportunity and get some skin in the game, then continue my investigation before sizing up or exiting the position.

Position sizing has had a detrimental impact on my performance historically, and my thinking has evolved over time. We will discuss it in depth at a later date as it is one of the most important components of any investment program and deserves more time than I can offer today.

Strategy

Strategy is more tactical than philosophy; it should answer the question of how you plan to beat the market. Strategy cannot be static; it has to evolve and adapt, because markets evolve and adapt. Opportunities shift. What should be constant is an alignment with your temperament and goals.

My strategy is less a product of any conscious decision I made and more a function of where I have noticed opportunity in the last few years, and where I am naturally drawn. It can be tackled from a few angles.

For starters, I have a decent concentration in busted SPACs – companies that went public at too high a valuation and have since been left for dead. A few of these entities just might possess solid business models, good leadership, and promising prospects; it will just take longer than most people expected to justify the exorbitant valuations they were once willing to pay. I wouldn’t describe my strategy as seeking out busted SPACs, but it’s an area where I have seen and acted on opportunity.

Another angle is companies that benefit from inevitable change. Again, this isn’t something I wrote down or decided to do; I am naturally drawn to how industries evolve and fascinated by companies doing something novel or different. I tend to seek out pockets of secular change, invest early in companies leading or shaping that change, and wait. It’s a venture capital-esque strategy.

Yet another angle could be companies building a unique supply of data. AI may be king, but data is God. Companies with (1) massive and (2) unique and (3) valuable datasets should accrue significant value as they begin building platforms and applications that have only become possible with recent developments in the domain. Finding companies in such a position is difficult, but promising.

I liken this angle to “training data as a moat.” The concept itself is experimental and weak – it only really makes sense at the brute force layer of any advantage – but it’s an idea I find myself coming back to often. Maybe it earns more merit over time; for now, the investigation continues.

Time horizon is my only edge, so it will continue to be the unifying factor across the strategies I look to employ. But my point with all of this is that strategy is less something you decide to do and more a reflection of where you see opportunity. I don’t believe in strict rules or pigeon-holing where you search for returns. I do believe in chasing opportunity soberly and rationally, and avoiding hype.

Risk

Risk might be the most diluted concept in all of finance. I nearly went crazy in college calculating VaRs, sharpe ratios, betas – it’s all bullshit. Risk is defined by the dollars you put into an investment and your level of confidence that you will be able to pull them out at your time of choosing, even if things don’t go perfectly according to plan.

There is no science to it. It’s an educated guess. We deal with judgment under uncertainty – that’s the nature of the game.

Risk is also relative. If I were to put 100% of my money into a single company right now, almost everyone would consider that inordinately risky. But, if I started from zero tomorrow, my life would not be impacted to any great degree. Of course I don’t want to do that, but risk ultimately depends on the actor. There’s no universal formula.

In general, I think investors are better off acknowledging the prevailing uncertainty of their craft and managing their activity with that in the forefront of their mind. Our chief objective is to manage ourselves in order to take on risk, rather than attempt to measure that risk with any degree of precision. Acknowledge and understand, but don’t try to quantify.

One tactic I use to manage myself is trying to spot qualities of a business that will make me queasy if things start to turn sideways.

A poor balance sheet is one example. A healthy balance sheet helps me sleep well. This isn’t a hard and fast rule – I’ve stepped out of bounds numerous times (Spire as one example) – but it’s a good frame, particularly when shopping among unprofitable enterprises.

Another tactic is to immediately ask, “what is the probability of a zero?” when assessing a business. I find the question immediately frames the risk assessment in the right way, especially if navigating the mine-ridden fields of former SPACs. My natural tendency is to focus more on understanding what can go right than what can go wrong, and this serves as a gentle balancing mechanism.

Risk is all about how you handle uncertainty. Good risk management is knowing yourself, recognizing the limits of your knowledge, and understanding how you react to adverse developments – not calculating a beta and multiplying it by some other made-up number.

Returns

My returns over the past three years are shown below. My portfolio’s calculations are from Fidelity; the performance of SPY and QQQ are from Yahoo Finance.

I chose 2022 as the inception because the losses suffered in that year have been the most instructive in shaping my approach to markets today. Prior to 2022, my activity involved too much experimentation, and my returns probably don’t reflect the underlying decision quality.

This year was an extraordinary one, but it’s only the start of a long journey. Bad years are sure to crop up again. Both skill and luck influence the results of this game, and luck definitely played an outsized role this year.

That’s not to say I didn’t do the work, but it’s difficult to argue the magnitude of return equals the magnitude of improvement in the fundamentals of the companies I own. So, what changed?

In many cases, overwhelming pessimism gave way to maybe-not-quite-optimism, but neutrality. Neutrality carries higher expectations, and 2025 will be an important year for many of the companies I own. A few examples:

• Planet should begin to deliver positive operating cash flow and start to scale operations for the next-generation Pelican fleet.

• Spire will close the sale of its maritime business, and investors should finally receive clarity on the financial front.

• Xometry should begin to report positive cash flow.

• Pagaya expects to deliver GAAP profitability on a full-year basis.

• Upstart expects to deliver growth regardless of the macro backdrop.

Several companies are on the verge of moving from cash-consuming to cash-producing. In public markets, this is equivalent to a move from suspicion to legitimacy. If they can execute, I wouldn’t be surprised if we begin to see some optimism. If they don’t, we could be headed back to pessimism.

It was a good year, but we’re focused on the future. Time is the ultimate arbiter of luck and skill.

Portfolio

Below, you will see the organization of my portfolio as of market close on January 17, 2025.

I view the portfolio as a collection of long duration bets. Each bet is expressed as an investment in a single company, but underpinning each investment is a bet (or numerous bets) on a broader trend, category, or theme which drives my view of the endgame. These broader bets commonly overlap, as is the case with Pagaya and Upstart, or Planet and Spire.

Stock selection is generally based on my assessment of some sort of unique or exceptional quality; in all cases, it’s too early to definitively prove this will translate into an exceptional business outcome, but my core assumption is these companies will continue to improve as they age.

More specific thoughts on individual names will be a feature of the coming Research Recaps. Again, I encourage you to share any thoughts in the comments, and always reach out with any questions.

Thank you for reading. I’m excited to be more transparent about my investments moving forward, and I hope you consider this new format an improvement.

— Tim Gallagher

Subscribe now

Share

The stock continues to be held back, and only some combination of these can provide a rational explanation for why the market persistently undervalues (at least relative to peers) a company that reports such solid numbers.

I’m more positive than most — let me explain why.

The Crocs brand has misunderstood staying power

Readers of my previous articles (investment idea #2 and more analysis) will at least be familiar, but Crocs has a pretty incredible story. Only two years after launch, it broke $100 million in sales; then in 2007, it did almost $850M in sales. For reference, the iPhone launched that same year with sales of $630M (granted, it wasn’t available until June, but the point remains).

Crocs might be one of the most viral consumer product launches in recent history, and the product foundation is extraordinarily simple: a molded clog. This context is at least worth bearing in mind given its recent return to virality.

After somewhat of a lost decade, the brand has had a remarkable run since the pandemic. Crocs will generate around the same revenue from 2021 to 2024 as it did in the preceding ten years. Sales have grown at ~24% per year since 2020 vs. ~3% from 2012 to 2020.

It’s natural to assume the brand’s growth will return to stagnation, just as it did in the prior decade, but I’m not so convinced. Arguments for reversion miss the strategic changes and simplification of the business responsible for its recent success.

My concept of the marketing and product innovation flywheel talks about how continuously refreshing the core product creates an unlimited supply of marketing material to leverage across a wide base of partner brands, influencers, and paid performance channels. This marketing spend is the engine of growth and a strategic priority for Andrew Rees, who joined in 2014.

The strategy, given time, worked, and it has now translated into scale. With scale, higher marketing spend is here to stay. This fact underpins a good chunk of my belief in the brand having some kind of staying power — staying power which I think the market underestimates.

Crocs sells over 100M pairs of shoes in 80+ countries, balanced evenly between wholesale and direct channels. It has established relevance at global scale, created a unique association, and seems highly unlikely to disappear from the storefront or lose consumer mindshare now.

Recent results also refute claims of irrelevance.

Wholesale in North America has been the one weak point, but the declines have been marginal, and management is confident the brand will continue to grow in North America over time. The core clog continues to grow, and sandals is early in penetrating a large category.

Wholesale’s weakness in North America doesn’t take away from the fact that Crocs is a well-managed brand producing reliable mid-20% operating margins, most of which converts to free cash flow.

I understand the fad risk and the ease with which people can extrapolate marginal revenue declines in one channel in the most mature geo, but I’m not convinced. The foundation is still solid.

China, India, and other large markets are very early in their growth story, and the brand has real momentum abroad. There’s not much to dislike about the core business – there’s actually a lot to like – and management is top-notch.

Hey Dude is just getting started

The Hey Dude acquisition is one of the most commonly cited criticisms of management, and while there is some validity to the argument, I think it overlooks the very real possibility it is simply too early to judge.

No data point proves my line of thinking is correct, but my instinct is based on deep trust and respect for Andrew Rees and the management of the company. I understand their intentions with the brand, its long-term potential, and I believe there is a clear path to executing on that plan over time.

Even the best-laid plan encounters some obstacles, and Hey Dude faces its share today, with several consecutive quarters of declining sales across channels.

Management’s stance on the brand has remained resolute, however, and their conviction in the investment ultimately creating value for shareholders has not changed. I think they have earned the benefit of the doubt.

Crocs ten years ago is a decent proxy for the strategy employed at Hey Dude today: clarify and unify the brand’s messaging, focus on strategic wholesale accounts, clean up the global marketplace presence, sharpen distribution, and develop a unique identity / association.

With Crocs, it worked. I struggle to see why it can’t or won’t work with Hey Dude, which benefits from a larger category to sell into and more wearing occasions to market to.

Financially, the immediate returns have not been good, but it also hasn’t been disastrous. The parent company has already paid down over $800M of debt from the acquisition, and Hey Dude has contributed over $500M of operating income compared to ~$2.2B of operating cash flow at the parent over the same period.

We also know the brand can generate attractive profit margins.

It has not been a home run by any stretch of the imagination, but it’s hardly a strike out. They’ve fouled off a few pitches, but they’re still at the plate. Give the investments in brand marketing and distribution some time to play out, and we could be having a very different conversation in 2-3 years.

There is always a possibility that Crocs’ polarization was the essential ingredient in its success, which would make it difficult to replicate the same playbook at Hey Dude. All publicity is good publicity, and the public’s love / hate relationship with Crocs no doubt strengthened its consumer mindshare over time.

Hey Dude is not such a polarizing brand, but I do think it has distinctive qualities. I’ve even received a few remarks while wearing Hey Dudes out and about, and that’s far from a regular occurrence.

To be sure, it’s anecdotal and probably means nothing, but it’s unusual. The average customer owning four pairs is also unusual, and I like unusual. These facts alone are no reason to invest, but they add a dimension to the conversation.

Several quarters of declining sales are by no means a death sentence to a brand managing a hangover from rapid growth over the last few years. With the return of Terence Reilly to lead Hey Dude, the brand has a sensible management team guiding its trajectory, and I’m excited about what it can do.

Conclusion

I think Crocs has a core franchise which stays stable in North America, grows steadily internationally, and continues to produce reliable cash flows. This cash flow funds international investments and occasional buybacks at sensible prices.

Hey Dude is still an attractively priced option. It’s profitable but has returned to Earth after rapid growth pre- and post-acquisition. The question now is whether management can right the ship and generate an acceptable return on the significant investments in the brand. That’s a bet I’m willing to make.

I continue to see a favorable probability of earning market-beating returns, and I look forward to updating you if anything changes that stance.

Subscribe now

Share

Tags:

The decision runs counter to my long-term orientation, but not every company, even a winner, deserves unbridled trust. Concentration requires conviction, and in this case, Spire’s representation grew to a level exceeding my conviction.

The story is far from over — in fact, it’s just beginning — but I have too many unanswered questions for it to remain such a significant part of my portfolio.

The founder, who took the business from zero to one, is moving into an Executive Chairman role, and public explanations for why lack rigor. The financials remain unclear. And a few negative customer developments raise questions about the company’s ability to execute.

Make no mistake: I’m still optimistic about the company’s prospects, and I remain a shareholder, but I have more questions than answers at this point. It makes sense to take some chips off the table and re-evaluate as more information becomes available.

The Original Thesis

In June 2023, Spire was in a tenuous financial position, and the market price reflected that reality. My take was simple: the business would not go bankrupt, it would continue to grow, and the moderate dilution needed to stabilize the balance sheet would not prove disastrous.

My initial pitch concluded:

Spire is a misunderstood, beat-down space stock that’s been lumped in with a bunch of crappy deSPACs. Companies with similar growth, less defensible business models, and worse long-term economics regularly trade at 4-6x revenue (if not higher!). Spire trades at 1.2x 2023 revenue guidance. It’s only a matter of time before the stock reaches a more reasonable level — or the company goes bankrupt. My money is on the former.

I may not have expressed it as such at the time, perhaps due to my own ignorance, but the argument was inherently short-term. The thesis was based on a reversion to a more “typical” multiple; underlying this reversion was investors’ recognition that the odds of bankruptcy were remote and the potential for success significant.

Investors have since come around to that idea. The fundamentals have improved modestly (though we have a limited window into the current financials), but perception has changed dramatically.

Today, the company trades at ~4x revenue, three turns higher than at the time of my pitch, and the stock is up ~300%. Multiple expansion has driven returns.

A Longer-Term View

This change in perception has produced immediate profits, but the longer-term thesis, which draws more of my focus, remains a developing story.

Briefly, let me expand on a few defining features of the company:

• Unique proposition: Spire builds, owns, and operates a fundamentally unique satellite constellation that collects a proprietary, cross-functional dataset.

• Defensible architecture: The technology is difficult to replicate across time, capital, and talent supply. Even with all the right ingredients, it would likely take years to replicate the satellite system alone.

• Flywheel: The data advantage compounds with each day the market lacks a comparable capability. More / better data improves product and model development while customers guide the roadmap. AI accelerates this process.

• Attractive economics: The business is capital efficient and highly profitable at scale. Costs are largely fixed, and maintenance capex totals just $5-7M per year, advantaged by exponential improvements in satellite performance.

Key to understanding Spire’s economic model is understanding how it was constructed: “The very core idea of Spire is shared infrastructure amortized over multiple solutions."

There are many positive attributes, but governance is not one of them. I’ve never been a fan of the husband/wife dynamic at the top, but I respect the vision and execution Peter Platzer has repeatedly put forth.

Given the company’s relative immaturity, alignment with leadership is essential for any shareholder. Platzer’s sudden departure raises a large question to which I have no good answer; it simply doesn’t make sense.

His frequent talk of building a generational company is fundamentally at odds with his decision to take a backseat role, and I have yet to fully form an opinion on his wife, Theresa Condor, who will assume the CEO position.

There is not much public material from or about her, and I look forward to the first few earnings calls she leads.

Conclusion

The lack of clarity behind such substantive changes makes me uncomfortable. By no means is it all bad news, but my exposure to the name has reached too high a level for my comfort.

We haven’t seen financial statements since Q1 — and even those will be restated due to revenue recognition policies for Space Services. At least two customer relationships have soured. And, of course, leadership shuffles hinder visibility into who really drives decision making.

There are positive signals as well. The maritime sale streamlines the business and cleans up the balance sheet; Q3 delivered the highest bookings ever; positive cash flow is around the corner; and the core satellite system remains unmatched.

I’m optimistic about the company’s prospects, but I’m searching for reasonable answers to basic questions at this point. If the long-term story continues to play out, there will be plenty of money to be made as clarity returns to the business, strategy, and team.

Subscribe now

Share

Spire Global reported some unexpected news this week: it’s selling the maritime business unit to Kpler.

For those unfamiliar: Spire is a satellite data subscription business. It builds, owns, and operates ~100 satellites that collect RF data for maritime (tracking ships), aviation (tracking planes), and weather (tracking the atmosphere) uses. Customers subscribe to data feeds, not unlike how you subscribe to Bloomberg.

People like to think of Spire as a satellite operator, but no satellites are changing hands in this deal. Spire is selling a $40M book of business, exclusive rights to a contract with L3Harris (granting access to real-time AIS data from an Iridium Next AppStar payload), software IP, and dedicated employees.

Much of what will be sold was acquired three years earlier for $129M (exactEarth). So, with a sale price of $241M, almost a double in 3.5 years. Granted, it’s not apples to apples, but not too bad.

The news caught me by surprise. I had no idea Spire was looking to sell maritime. I had no idea the business operated in a way that even allowed it to sell the maritime unit. I learned something, and as it turns out, they weren’t looking to sell; they received an unsolicited bid, then ran a competitive process.

In all, the company seems to have negotiated a pretty favorable deal. It keeps the maritime US government contract, all of its technical infrastructure, and gets paid $7.5M (included in sale price) for services over the next year. Maybe that extends beyond a year; the potential is there for a longer-term relationship.

My initial thoughts are positive; I like the sale because it removes (significant) balance sheet risk, taking out $115M of debt and a $16M annual interest payment. On the other side of this deal is a more focused business with ~$110M of net cash, a far cry from its tenuous financial position today.

Some numbers

Still, we have to understand exactly what is being sold, and what it’s selling for. What does the maritime business look like?

We know revenue was $40M in the LTM period, but its evolution in recent years is more important. Management couldn’t provide any answers on the call (due to impending restatements), but we can try to make some sense of what we have.

A decent starting point is exactEarth pre-acquisition. Three years ago (LTM Oct. ‘21), exactEarth alone did almost $24M of revenue. With a few assumptions, we can put together this little table:

My unscientific estimates yield a maritime business growing top-line ~10% and gross profit faster. At $40M of revenue, it’s a decent asset, but it’s sub-scale, unprofitable, and not growing very quickly; ~6x revenue seems like a good price for the seller, especially when accounting for the immediate balance sheet relief.

Understanding the tech

One of my immediate concerns was whether selling the maritime unit would decrease the constellation’s capacity utilization. Having owned Spire for over a year now, it’s embarrassing to admit my shortcoming as an analyst.

In theory, I understood Spire’s satellites were multi-purpose, but I didn’t quite internalize what that meant.

Peter Platzer: “LEMUR stands for ‘Low Earth Multi-Use Receiver.’ So every single one of our spacecraft has multiple payloads that run, to the extent allowed by power, in parallel. But what it means is that if, for whatever reason, we decide to produce less AIS data going forward because maybe we don’t need as much for the government business, then the same spacecraft, the same design, will produce with that available power other types of data like weather data, aviation data, RF geolocation data.”

Essentially, power constraints force the sensors in orbit to constantly cycle duty. I’m not sure exactly how the duty cycle is determined, but the constellation manages to accomplish a lot in aggregate; it tracks every ship and airplane 200x a day and collects 20,000+ weather profiles daily.

Reducing AIS coverage means they can allocate more power to the remaining sensors and reduce electromagnetic interference. ADS-B doesn’t require much power, but RF geolocation and radio occultation require a lot and benefit a great deal from less interference.

Spire has long stated its plan to reach 100,000 weather profiles daily. Longer duty cycles for radio occultation sensors could accelerate this outcome, while fewer active sensors should improve the overall quality and reliability of the data they do produce, at least from what I understand. (Let me know if that’s incorrect.)

Thinking strategically

Since inception, Spire has seemingly taken a quantity over quality approach to data collection. If it reaches 100,000 weather profiles daily, Spire’s brute force methods will continue to drive separation from competitors.

From this angle, a potential strategic rationale becomes more clear. Focusing on signals that require lots of power and lots of processing (i.e., RF geolocation and radio occultation) could be a tactic to develop defensibility and make the system more difficult to replicate.

This chain of reasoning opens the possibility of shopping the aviation unit next (at the right price) to redouble their focus on the more complex and defensible RF geolocation and weather units.

For my money, I think that’s unlikely given the diminishing returns of eliminating the low power ADS-B signal. Plus, the EURIALO contract is a huge commitment (though that might be housed in Space Services?). Either way, it’s unclear, and this is pure speculation. We’ll have to wait and see.

It may seem like too much reading between the lines, but I think it makes sense. Peter Platzer is a strategist with an indefinite time horizon (Spire is his life’s mission), and he thinks deeply about how to build the company intentionally.

I struggle to understand why he would’ve acted so opportunistically if not to accelerate his plan. He still owns 12% of the company, and executives/board members own another 5%. The story below is worth reading in the context of this transaction.

What remains

When all is said and done, Spire will emerge from this with a healthy balance sheet, $75-80M(?) or so of revenue, and mild(?) losses. It’s an unusual situation because the size of the Remain-co is so uncertain. The latest financials are from Q1, and even they can’t be trusted because of the impending restatements.

With persistent uncertainty and an elevated stock price, I caught myself thinking about selling this week. That’s generally not how I operate, but the position has now grown to almost 20% of my portfolio, and it’s not exactly a sure thing.

Competition in the space (ha!) is going up, not down, and the market can be slow-moving and somewhat bound to government budgets. I learned this lesson with my investment in Planet Labs (which I still think is a good bet).

However, when I step back, the company has exceptional characteristics. In ten years, it has built a truly unique asset capable of supporting long-term growth. It is selling a piece of the company for $240M. A talented founder with skin in the game remains in charge, and for the first time in a while, the company has the balance sheet to invest from a position of strength.

I say let the reinvestment wheel turn. Time is on our side, and I’m confident the enterprise value ultimately created here will far exceed what was just monetized.

Subscribe now

Share

Tags: Spire Global

I’m not looking to buy more, but I’m also not looking to sell. One thing is clear, though: Spire has a ways to go in terms of transparent investor communication. The image below from Reddit is the most straightforward response I’ve seen and fails to mention NorthStar.

NorthStar

I won’t cover the details in depth (read this article to get up to speed), but as I understand it, Spire lost a satellite and failed to keep contractual service levels. The satellites are producing a semblance of usable data, but they are refusing to deliver it without payment; NorthStar is seeking an injunction to prevent Spire from turning off the flow of what little data is viable.

Bad news all around. It raises questions about how Spire treats customers; it could bring considerable financial repercussions (Spire is on the hook to replace the failed satellites); but the reputational damage is most important.

This is a direct hit to its ability to market and sell the Space Services solution. Space Services is an infrastructure business — it sells reliability. With Spire at fault for the failures and a major customer relationship on the verge of disintegration, it looks to be a losing proposition long-term.

Coming on the heels of Sierra Nevada’s decision to use Muon Space for their second round of satellites (a loss for Spire), the prospects for the Space Services segment seem to have deteriorated meaningfully in the last month.

That said, Spire’s other book of business seems ok (to the best of my knowledge). It has a lot of experience in the space and leadership focused on continuous improvement; there’s still an opportunity for success.

Accounting restatements & covenant violations

Spire hasn’t yet filed its 10-Q due to revenue recognition issues affecting $10-15M of Space Services contracts. As a result of the filing delay (and potential EBITDA impact), the company breached covenants with its lender, Blue Torch.

One can assume (maybe incorrectly) these problems relate to $14.5M of upfront fees paid by NorthStar. This basically eliminates the possibility that it was an intentional effort to mislead investors and juice numbers; I don’t think anyone was budgeting for a system failure.

Blue Torch could theoretically exercise control to get their money back, but that’s unlikely. They’ve worked with Spire on amendments in the past, and they don’t want to sell assets — they want income. Spire defaulted on a technicality — not from missing a payment. A penalty fee, warrants, and/or added protections make more sense to me, but what do I know?

My natural inclination is to apply a positive spin, so I’m beginning to think of this as an unfortunate consequence of an innovative business model. Space Services is a relatively new concept; operational failures are bound to raise some questions about revenue recognition, but no impact is expected to cash flows.

In time, I expect it will be reduced to a footnote in the company’s public filings.

Closing thoughts

While these are incremental negative data points, they do not materially reduce the probability of Spire producing fantastic long-term investment returns.

The company’s core differentiation — three unique, complementary data feeds only possible to collect from space — is intact. The opportunity there remains large.

It’s safe to say Spire is a moderately smaller business than previously reported (even if the revenue in question is deemed technically valid, it would be foolish to account for it; NorthStar isn’t staying with Spire long-term), but this is a game of expectations, and expectations remain low.

Certain periods of elevated uncertainty are bound to push nervous investors out, but I believe the fundamental investment case and potential for outsized returns hasn’t changed much.

Note: I first wrote up Spire as Investment Idea #1.

Subscribe now

Share

Tags: Spire Global, Briefs

It’s not a Glassdoor review you dream of reading about your largest investment, but it’s not all bad.

Exciting things are happening

Planet is operating on the leading edge of a powerful technology curve with important implications for a variety of actors. People are curious — the data they produce is unique — but the data’s value (in terms of people willing to pay for it) is still up for debate.

Staffing up did not drive revenue growth

“The GTM did not align with the market demand.” As evident from the financials and the layoffs, Planet simply hasn’t met expectations. It raised a ton of money, ramped up the sales force, and couldn’t justify an ROI. Not great.

But, the commercial market is still incredibly immature. Government demand is steadily rising and importantly, market expectations have changed drastically. The long, long term potential of the business hasn’t changed much.

Partner-centric GTM is good for business

“The Direct B2B aspect of Planet data is yet to be validated.”

It’s too expensive (time and/or cost-wise) for users to extract value from Planet’s data today. Partners bridge this gap by building applications. You can sell applications more easily than you can sell data.

This was always Planet’s vision: “Planet creates data and tools, partners build applications, and people take action.” They may have veered off course in the post-IPO search for rapid growth, but it appears they are getting back to basics.

Acknowledging the company’s recent struggles and the reality of the geospatial data market, my confidence in the data’s value hasn’t changed much. A reasonable outcome of the shift to partner sales could be slower, more durable growth.

Partners have already built some compelling applications (see RAIC Labs and SynMax for two examples), and this figures to be just the beginning as improvements in satellite data and AI continue. AI is an accelerant to Planet’s business as it makes it easier for partners to build applications.

Management has room to improve

To put it gently. “Advice to Management” is indictable — it’s just a shitty thing to do and no doubt had a material impact on culture.

But, in a crudely capitalistic sense, it was necessary. They hired a bunch of people to stimulate demand, and demand didn’t materialize. Being unprofitable, they had to make a choice — a tough one, but probably the right one — to protect the financial resilience of the business. The business and the organization have to scale together, and Planet isn’t the only company who had to right-size for reality.

A closing thought

Planet is still immature. The technology is more and more de-risked, but the business execution challenges are just beginning. The market is emerging slowly, management is inexperienced, and my talk track is mostly potential. This Glassdoor review shares more of the reality on the ground.

FYI: This is part of a new section, Briefs, which I will aim to publish 1-2x a week. The idea is to explore unique investment findings or ideas in ~500 words or less. It will focus on how I filter more timely information into a long-term investing lens.

Constructive criticism always encouraged. Consider subscribing if you enjoyed it.

Subscribe now

Share

Tags: Planet Labs, Briefs

But before we do, let’s revisit an important point: the power of Planet’s business model comes from the unique daily scan. Management emphasizes this ad nauseum for a reason — it’s what makes Planet unique. No other player provides the same dataset, and its value is what’s most misunderstood about the business.

Long duration growth is a function of layering complementary datasets on top of that core, which translates into greater customer value. Pelican is a significant upgrade to the first complement (SkySat), and Tanager is an entirely new layer capable of opening up new markets.

What’s often overlooked is Pelican is more than an order of magnitude more capable than SkySat, at half the cost. This type of performance curve is rare, and it is the fundamental driver behind the business. Expect this to continue moving forward.

All three datasets as a whole are much more valuable than the sum of the parts. The synergies from multiple constellations together is exactly what creates defensibility in the business model.

As more datasets (including other sources, hence the emphasis on partner sales) join the mix, the entire ecosystem becomes more valuable — and Planet’s position more entrenched.

The endgame is a global network of satellites collecting, combining, and transmitting data in near real-time to augment or automate traditionally manual workflows in a variety of industries. Planet’s mission is to make this vision reality.

The bet is long-term by nature — who knows what the stock market will think about the prospects for satellite data next quarter? A network takes a long time to build, but management explicitly outlined the journey they’re on in “Charting Planet’s Second Decade.”

It makes a lot of sense to me. And if the title doesn’t give it away, this is a team that thinks in decades, a rare commodity in a market that thinks by the quarter.

Space systems

Planet has previously cast aside questions related to whether it will pursue a “space systems,” “constellation-as-a-service,” or whatever-you-call-it model. The fact there’s no clean definition alone indicates the maturity of the industry.

In this call, Marshall shared a new perspective on the opportunity.

Will Marshall: The Tanager program, which is funded through our partner Carbon Mapper, represents a great example of the opportunity we see to provide customer or partner funded missions, leveraging our space systems capabilities and IP to scale the business efficiently. We view this as an attractive model we can use with our government relationships going forward.

Spire, Rocket Lab, and several others already pursue such a business model, but this idea is new to Planet. Frankly, I see two sides to the change in philosophy.

On one hand, the simplicity and focus of Planet’s mission drives the company forward; any distraction poses a risk to execution. On the other hand, Planet faces limits to scaling new constellations given demand uncertainty and capital constraints. This business / funding model addresses those issues while likely accelerating the advent of the endgame satellite network.

It’s also a great example of how Planet is iterating and learning the market alongside customers. Unanswered questions still surround what buyers want, how they want to buy it, and how Planet can deliver on those demands economically. It appears feedback has led the company to this line of thinking.

I don’t find this surprising. Elsewhere in the market, Spire has demonstrated commercial success with this model. SpaceX has entered the fray with Starshield, and Rocket Lab is working with the SDA and commercial entities such as Varda in a similar capacity.

There are nuances to the specific models pursued by each, but I see no reason why Planet can’t compete effectively with its reliable satellite data infrastructure and deep relationships with government entities.

Clearly, multiple parties see the market opportunity emerging. It will be interesting to see how this develops over the next few years.

Platform + the commercial market

The platform has been and always will be the cornerstone of building out the commercial market. The vision outlined in “Charting Planet’s Second Decade” is for a platform that enables partners to build applications easily by leveraging Planet’s data and tools alongside other data sources.

Two years in, they’ve now launched the platform (thanks to the Sinergise acquisition). The next step is progressing alongside Planetary Variables, building tools and workflows that allow it to scale to customers’ needs.

In the government market, technology alone can get you pretty far. In the commercial market, distribution and product win, with ease of use a gating factor. That’s what the platform is built to address.

Ashley Johnson: It's really about leading to a partner-first model to enable us to scale that side of the business… A big part of that is enabling partners to be able to self-serve and build solutions on top of our data, and our strategy is focused on enabling all of that through our platform.

So making it easier for partners to work with our data, test our data, giving them a sandbox environment, giving them more of a self-serve experience in working with our data to test their solutions and then enabling them to more easily scale on top of the platform, which reduces their total cost of ownership working with Planet because they don't have to then download and extract the data and try to predict where their end customers are ultimately going to need data. But rather, they can access the data and work inside a Planet environment.

The benefit to us is that it also gives us the visibility to the end customer through that motion. We can see as the partner is engaging and expanding the business, not only the revenue benefits, but the type of usage data that will enable us to provide feedback into our own product development life cycle.

Simply put, the platform speeds up the all-important customer feedback loop. If Planet can execute on this, it stands a good chance of winning the market. And in ten years, the market will be significantly larger than it is today.

It’s early days — the platform was launched two months ago — but I view it as a positive. It could very likely drive a return to growth and meaningful acceleration in the commercial market over time. It remains day one.

When Will Marshall spoke of how Planet is misunderstood at the investor day, I think this is what he means: Planet’s business model (a vertically integrated satellite data platform built on the internet) has never existed before at scale.

Scale is key here, because the reinvestment opportunities this business model unlocks are enormous — which is why Planet is spending so much. They’ve clearly laid out their investment priorities — satellites, software, and sales — and I believe those are the right areas to be focused on.

The last few years have seen a shift in that Planet is going after larger customers. The net result is sales cycles have lengthened, or in other words, customer acquisition cost is higher. But, if the future is anything like the past, lifetime value will also be much higher.

This is a business with great unit economics, a large opportunity ahead of it, and it’s spending money to build a new market and accelerate growth. These are sticky, valuable future cash flows they’re chasing — but you have to give it time.

Really it comes down to driving scale. This is the story of satellite data meets the internet, and the internet is the land of increasing returns to scale.

Agriculture

Just a quick note here. I continue to believe agriculture is one of the largest and most attractive verticals for Planet’s data to unlock value at scale. A quarter of the Earth’s landmass is cropland. Planet is the only company collecting data on every field, every day.

That information can be delivered as insights to any farmer with internet access. Establishing the necessary connections is difficult, but there are no technical limitations that prevent this from occurring over time.

In terms of the present struggles, I found Marshall’s comments useful context:

Will Marshall: Fundamentally, our data can enable improvement in crop yield and decrease in inputs, which enable real efficiency gains across that trillion-dollar sector. They are having struggles in general as a sector, facing pretty strong headwinds, but fundamentally, those facts remain true.

The problem, if there was any, is that they were using digital ag platforms that they were largely giving away, which wasn’t an aligned incentive model, and it's the kind of thing they cut when they're having hard time.

Actually, now we're finding several partnerships, some of which we've talked about, in fact, several of the big ag companies have even released videos and things showing use of our data in these ways, but they're reforming their digital ag platforms such that they align incentives.

That is, when the farmer benefits, they get the money. When they get the money, we get the money. When you align incentives like that, we can really imagine that scaling, so as Ashley was saying, we're keeping those relationships strong so they can come back up.

Again, it relates back to learning the market, just as they are in the government. Planet’s data was being used widely, but not in a way where the buyers were able to capture any excess economics. As they transition to a sustainable business model, Planet will be a natural beneficiary as the underlying enabler of this productivity.

Utilities

Planet announced Eletrobras as a new customer win in the quarter, adding a third utility to a roster that includes PG&E and another unnamed Fortune 500 utility.

Why is this important?

Eletrobras is the largest utility in Brazil, accounting for almost 40% of the transmission lines in the country. It’s a great foothold on which to scale a repeatable use case and expand to capture the other 60% of transmission lines.

PG&E, the largest utility in the US, provides the same foothold here at home, and the contract just expanded last quarter. Importantly, PG&E is driving results: they experienced a 70% reduction in fires from overgrowth.

These customer wins, and the benefit of the data in tangible use cases, give weight to the success of Planet’s solutions in future sales processes.

Planet now serves the largest utilities in both the US and Brazil. Globally, utilities are a huge opportunity. Thousands of utilities cover the world, with around 3,000 in the US alone. All could benefit from automated monitoring of encroachment.

If the size of the PG&E contract is any indication of value, the opportunity here could be measured in the billions, and it remains largely ignored by analysts.

I understand we’re talking in TAMs here — I’m a consultant — but the fundamentals underlying the opportunity are clear to see. Rest assured, if there is a scalable use case and money to be made here, someone will do it.

Who is better positioned to create, and capture, this market than Planet?

Government pilots

Last quarter, Planet mentioned it had several seven-figure pilots underway with US defense agencies. Over a million dollars for less than three months of work is not pocket change (even for the government) in this industry, and Will Marshall provided some color around the opportunity here:

Will Marshall: We're pleased to share that we successfully completed two of these seven-figure pilots and anticipate additional follow-on pilots from these programs. These pilots require broad area monitoring, detecting, and reporting and reflect a growing trend towards acquiring focused insights from our global data. We're also pursuing additional larger pilots with other government agencies and believe our unique daily scan positions us favorably to win. We believe all of these pilots have the potential to convert into very large operational contracts over time.

It’s worth reiterating: these pilots are built on top of the unique daily scan. No other provider captures a comparable dataset.

If we take Will Marshall at his word, which I do, the pilots are progressing well, and Planet is demonstrating a scalable way for these customers to extract value from its data. With potential for these to convert into significant (have to guess $10M+) operational contracts over time, this is important work.

At a high level, it appears the defense department is looking to build capabilities around Planet’s data and integrate those into its standard working ways. This is sticky and large dollar business, which could propel substantial (but chunky) revenue growth when realized.

Abraham Thomas (who I turn to for a lot of my data business understanding) says, “The more time and resources a buyer spends on a dataset, the stronger a signal it is that the buyer thinks the dataset is valuable” (emphasis his).

The US government is clearly spending a lot of time and resources on Planet’s dataset — only time will tell how truly valuable it is to them.

Governments move slowly. Everyone understands this, yet they become frustrated when that’s how it plays out. There is no doubt Planet’s growth profile hasn’t materialized as quickly as planned, but that doesn’t mean it won’t happen.

The price doesn’t ask much.

If or when it does happen, popular opinion will swing quickly, and the investment opportunity will close. Predicting when this will happen is a fool’s errand — I prefer to just wait.

I enjoy watching Planet develop and learning more about it over time. If you don’t share that perspective, I’m afraid this investment might not be for you.

Subscribe now

Share

Tags: Planet Labs

Last year, I highlighted my brief experience with Matterport:

In one instance, I bought a business at ~20x revenue and watched it rise to over 50x revenue. I even bought some more on the way up because I felt my thesis was vindicated — the market had recognized I was right. The trouble is my thesis was supposed to play out over 10 years, not 10 months.

Over time, I watched it fall to a (still rosy) ~7-8x sales. I sold out and lost ~70% of the total investment…

The events took place over less than a year from 2021 to 2022. Nothing went wrong with the business. I simply overpaid for the stock and sold when the mistake became a mental tax.

After selling, I didn’t think about the company for a while. It was the first time an investment ended in a substantial permanent loss, and I wanted to escape the pain of such a mistake.

What hurt most was a recognition that I knew I overpaid. Writing around the time of my purchase (on an old Seeking Alpha account), I directly acknowledged the lack of a ‘margin of safety’, before casting it aside as irrelevant in this case:

There is no denial that Matterport is a richly valued company… Such an expensive valuation certainly decreases the margin of safety for any investment, yet I do not believe it impairs the multi-year investment thesis for investors willing to hold through years of a volatile stock price.

Being willing to ignore volatility doesn’t excuse overpaying for the business. Overpaying for the business is a dangerous practice, and this is a lesson learned. In hindsight, the valuation did impair the thesis.

My excitement about the long-term prospects of the business tricked me into thinking otherwise. The problem with my assessment is that any prospects for return were dampened by the years, if ever, it would take for the valuation to be justified by the cash flows of the business.

Put simply, my fear of missing a winner impaired my judgment. Emotional extremes are a danger to good investing. The challenge, and advantage, is in remaining emotionally detached from decisions and results. An even keel is best.

A winning bet

Over time, I accepted the experience for what it was — a mistake. With a few more years investing behind me, I decided to take another look at Matterport. Revisiting the same company with a fresh perspective can offer unique insights.

I did not uncover any unique insights, but I reached largely the same conclusion as a few years prior. The thesis, which centered on the unique compounding value of the dataset, wasn’t wrong. In fact, it had progressed rather smoothly. The mistake was purely in execution — in overpaying.

Most importantly, the circumstances had changed. The stock price now reflected significantly reduced expectations, and with half the market cap in cash, the prospects for return had changed dramatically. I had reason for argument.

I invested again around six weeks ago. Shortly after, CoStar announced it would acquire Matterport. The transaction caught many by surprise, including me, and while the timing was pure luck, true to the thesis, CoStar wanted the data:

Over the years, Matterport has curated what is considered the largest and most precise collection of spatial property data worldwide… Hundreds of thousands of new 3D digital twins for properties around the world are being added to this impressive database each month.

…

We intend to go all in on 3D digital twins, adding more digital twins to Apartments.com, LoopNet, Homes.com, CoStar, Land.com, BizBuySell, Real Estate Manager, STR, Belbex, OnTheMarket and others. We intend to add Matterports as one of the benefits of Homes.com membership. We believe adding 3D digital twins for Homes.com members will increase the leads we deliver, increase customer satisfaction, increase renewal rates, increase sales, and increase site traffic further.

We have thoroughly researched the many 3D digital twin solutions out there and have concluded that Matterport is the best solution for our clients' needs. Given the fact that we intend to make a much greater commitment to capturing 3D digital twins, we decided to capture the value of our increased volumes by acquiring Matterport.

As we make Matterports more ubiquitous, we believe others will buy more Matterports, making the company more valuable. We believe that we can accelerate Matterport sales to non-CoStar Group advertisers by increasing Matterport's investments in sales and marketing.

- Andy Florance, CoStar Q1 2024 earnings call

In the end, the idea played out, though much earlier than I would have guessed, and at a price that would have still resulted in a loss on my original investment.

I won’t explore the acquisition in depth here, but in short, I think it’s a good deal. Matterport shareholders get taken out at a reasonable price (though significantly less than the juicy SPAC price), and CoStar can use its dominant market position to accelerate investment behind a good asset with huge potential.

I sold my stake soon after the announcement. The stock is now on a timer, which runs counter to my strategy of putting time on my side. Plus, I’m happy to deploy that money elsewhere given what I view as an attractive opportunity set today.

A lesson learned

The experience leaves an important lesson. On one end, a bad decision produced a bad result. On the other end, a good decision produced a good result. The difference? Valuation. And a bit of luck.

Valuation is the difference between good and bad returns. Luck plays a role in every investment outcome. These are two rules to the game.

In my process, I look at valuation as a catalyst for action — mostly to buy, less so to sell — but nothing more. I don’t believe much in ‘intrinsic value’. I believe in market efficiency over the long run, and better businesses outperforming worse businesses over time, given a reasonable entry price.

But, disregard valuation, and you rely a whole lot more on luck.

Thanks for reading. If you enjoyed this piece, hit subscribe or share with a friend.

Subscribe now

Share

I recommend reading this article alongside my previous analysis of the industry and specific marketplace dynamics.

Subscribe now

XOMETRY -

• Stock price (as of April 5, 2024): $17.86

• Market cap: $846 million

• Enterprise value: $878 million

At first glance, Randy Altschuler is an unusual candidate to build the next great marketplace. He ran for Congress twice, in 2010 and 2012, and lost both times. But he has a few wins to his name as well.

Altschuler is an entrepreneur. He left Blackstone in 2000 to co-found OfficeTiger, a business process outsourcing company. In 2008, he sold it to RR Donnelley for $250 million. A year later, he co-founded CloudBlue Technologies, essentially a digital waste management business. He sold it to Ingram Micro (public co.) five years later for an undisclosed price.

In 2014, he co-founded Xometry with Laurence Zuriff. Zuriff is a 20-year hedge fund veteran serving on the Center for Strategic and Budgetary Assessments. He’s still Chief Strategy Officer, and the pair collectively own ~15% of the company.

Altschuler and Zuriff are jockeys I’m happy to bet on. They’re proven operators who can execute a business strategy and articulate a clear mission. They’ve made a lot of money in the past, and their motivation goes beyond riches. They take a long-term view to building a service that provides value to a huge industry.

The jockeys are compelling, but the horse is what’s most interesting.

It’s easy to get bogged down in the details of an investment thesis. But simple is best, and the bet on Xometry is simple — so we will keep it simple here.

It’s a marketplace story. The stock is caught up in this year’s guidance and the adjusted EBITDA timeline, and it has suffered as a result. But these things are generally unimportant and this lens ignores what is important — Xometry is a healthy marketplace functioning at scale with early hints of network effects, and it operates in an enormous category uniquely suited to marketplace involvement.

Xometry’s marketplace is thriving. The network is expanding at record pace, buyer acquisition costs are declining, and existing buyers are spending more. A new focus on driving engagement among enterprise buyers is showing early signs of success, and there is plenty of room to further expand wallet share over time.

Recent products such as Teamspace have been met with enthusiasm, all serving to increase marketplace stickiness, which is already impressive — existing customers account for 96% of revenue in any given quarter. And the velocity of product extensions (new processes, materials, and finishes available for instant quoting) is likely to accelerate with the recent Google Vertex partnership. This should enable additional wallet share expansion.

The U.S. business has more than doubled in the last three years. The company launched in Europe in 2019, Asia in 2022, and the UK in 2023. The international business has 20x’d since 2020. It’s now a $60 million contribution, having doubled in each of the last two years.

The future appears bright, but expectations remain low. Custom manufacturing is a $260 billion industry. If in 10 years, Xometry captures just 2% of the market, it will be a $5 billion-plus business. The current valuation, at $850 million or so, ignores the distinct possibility of great success. And, run properly at scale, the marketplace model naturally throws off cash flow.

What protects Xometry from competition? Really, data. The marketplace is built on a proprietary dataset that uses millions of prior transactions to offer an instant price on a custom product. This dataset compounds each day, improving pricing and as a result, gross margins. This in turn drives a greater value proposition to buyer and supplier, gradually moving the market towards efficiency.

Marketplaces are great business models at scale. When they work, they work well. Thus far, Xometry’s results indicate its model is working, and it is rapidly scaling the business. Network effects take time to build, but the leading marketplaces eventually separate from the competition. I have seen little evidence that Xometry can’t build on its competitive advantage in the next decade and further distance itself from competitors who lack comparable scale.

All of this is a direct function of AI — something everyone wants to talk about nowadays — but it bears none of the hype. That’s best-case scenario. AI-enabled applications (in Xometry’s case, think products, materials, and processes) built on top of a unique, proprietary dataset is, in my estimation, a recipe for a durable business. I expect many years of growth in the future.

If Xometry can sustain a 20% top-line CAGR in the next decade, a prospect I consider increasingly likely given the specific dynamics of its marketplace and the compounding utility of its dataset, it will command just over 1% market share. In this scenario, the returns to investors would be excellent, and the prospects for the next 10 years even more attractive.

Ultimately, the proposition is simple. You can buy an AI-enabled manufacturing marketplace built on a unique, difficult-to-replicate dataset. The company is growing quickly, still losing money, but has attractive economics at scale. It is tackling a $260 billion category where it can sustain share gains over a long time and remain a small piece of the pie. And it is run by two sensible and capable operators who think long-term and share ownership of the business.

I’m a buyer.

Thank you for taking the time to read. Please join the discussion and comment with thoughts of your own — especially if you disagree. And if you enjoyed this article, hit like, share, or subscribe to support my continued work.

Subscribe now

Share

The traditional procurement process for such parts is costly, time-consuming, and somewhat constrained by geography. Buyers have to request a quote from various suppliers, and these quotes can differ significantly with no clear reason for the difference. From my brief stint in a factory, I know the process can often take days or weeks to reach a resolution.

This manual outreach process also limits the number of quotes a company can request. In effect, the market lacks a real price discovery mechanism, leading to widespread inefficiency. It’s one shop’s guess versus another shop’s guess, and any number of factors can influence those estimates. Information is scarce.

Xometry’s aim is to centralize price discovery and bring the procurement process online. It has built a marketplace menu with transparent pricing and lead times for a range of manufacturing processes and finishes. Importantly, it does not produce these products itself; as a marketplace does, it simply connects buyer to supplier and sets the terms for transaction.

The heart of the marketplace is unique data from millions of prior transactions. This data feeds an AI model that continuously learns from new transaction data (volume, process, material, location, etc.) to provide an instant price and lead time for any product (within the constraint of supported processes). Buyers can simply upload a CAD file and receive an instant quote.

The efficiency this enables should not be understated. SpaceX, Tesla, NASA, BMW, Amazon, and many of the largest buyers in the world use Xometry for one reason — it’s a vast improvement to the manual alternative.

This fact alone does not mean Xometry is a good investment. We have to examine factors unique to the company and industry more broadly to better understand the long-term opportunity.

For a useful framework, we turn to the king of marketplaces, Bill Gurley. More than a decade ago (in the article “All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces”), he outlined ten factors worth analyzing about any marketplace opportunity.

In this article, I’ll step through each one and analyze how it applies to Xometry. Spoiler: Xometry scores well.

1. New Experience vs. the Status Quo

Gurley writes, “Great marketplaces do not simply aggregate a market; they enhance it. They leverage the connective tissue to offer the consumer a user experience that simply was not possible before the arrival of this new intermediary.”

There is little doubt Xometry’s user experience is superior to manual quoting. Buyers instantly access a network of thousands of suppliers without having to reach out to individual suppliers and benefit from transparent pricing and lead times. It’s a novel experience.

Xometry’s instant quoting engine also meets buyers where they are. It integrates into CAD workspaces (Autodesk Fusion, SOLIDWORKS, and Onshape) and procurement systems (Coupa, SAP Ariba, and Microsoft Dynamics) to further streamline the workflow for engineers, designers, and purchasing managers.

Gurley references the “wow” factor as a key ingredient in marketplace success. Xometry’s “wow” factor is an ecommerce-like buying experience for bespoke manufactured products, with an ability to integrate directly into their preferred workspace. Such a capability has never existed before.

2. Economic Advantages vs. the Status Quo

Gurley writes, “If you can positively change the economics of an industry, you will find the participants on both sides rooting for your success. This gives you a huge head start when it comes to tipping the marketplace.”

It’s difficult to triangulate precise data on the economic opportunity Xometry enables, but it’s reasonable to assume the marketplace has a positive impact on both buyers and suppliers.

Buyers benefit from lower costs — both direct and opportunity costs of supplier negotiations — and a simplified workflow. Pricing is influenced by thousands of suppliers, which presumably drives lower prices and faster lead times. Buyers also do less work — simply uploading a CAD file answers the often-uncertain questions of, “how much does it cost?” and “when can I get it?”

Randy Altschuler uses “one throat to choke” as a euphemism for what Xometry offers buyers. What he means is that Xometry strives to be the one-stop-shop for a variety of manufacturing needs which would usually require buyers to deal with many disparate parties. Put simply, Xometry abstracts the complexity from custom parts procurement.

Suppliers benefit from greater opportunity, capacity utilization, and workflow support tools. Traditionally, machine shops have been somewhat constrained by geography. Altschuler references the small machine shop in Detroit which is bound to automotive cycles. With Xometry, that shop is no longer limited to local opportunities. It can reach buyers anywhere in the country (or world, for that matter) and spend less time quoting and more time manufacturing products.

Xometry also offers Workcenter, a manufacturing execution system, for shops to manage end-to-end requirements for both Xometry and non-Xometry jobs. The Thomas acquisition brings advertising services on the largest manufacturing sourcing site in the U.S. And the company offers financial services such as Advance Card and FastPay, which offer suppliers faster receipt of funds than the usual net-30 or net-60 terms, improving cash flow dynamics.

3. Opportunity for Technology to Add Value

Technology is the heart of Xometry’s marketplace. Without unique technology, the business would not exist. More data propels the marketplace forward, driving better pricing and lead times and improved opportunities for suppliers.

While Xometry is not a regular in conversations around AI beneficiaries, it most certainly is one. AI is the fundamental enabler of the marketplace, and without it, no value would be created.

4. High Fragmentation

Without fragmentation on the supply and demand side of a marketplace, it’s difficult to scale. Suppliers would obstruct the intermediary, and buyers would leverage their power to “obliterate” (Gurley’s words) its relevance. Fortunately, supply and demand for custom manufacturing is highly fragmented.

Xometry estimates there are over 200,000 machine shops in the U.S. alone; these shops have <20 employees on average. The company also recently expanded into Europe and Asia, growing the global supply pool. (The Tridi acquisition, for one, opened up a network of vetted suppliers in Europe.) Ultimately, there’s no telling how many small machine shops there are in the world — all of them have access to the internet and shipping capabilities.

Likewise on the demand side, the number of buyers is incalculable; anyone involved in the production of anything needs custom parts. Xometry is working to develop enterprise solutions to drive engagement among the largest buyers, but a very long tail of buyers remains outside of the network today. No individual entity has significant bargaining power.

5. Friction of Supplier Sign-Up

Gurley writes, “In some markets signing up suppliers is relative [sic] easy. In others, it can be a painfully slow process that requires lots of touch and local presence.” Xometry’s sign-up process is the latter: a high-touch, high-friction process which “increases the costs associated with supplier aggregation.”

Manufacturing is not like driving. Logically, suppliers shouldn’t be able to simply sign up as they would in the Uber app and get underway. Different shops have different machines and capabilities, and Xometry needs to know the specifics of each supplier to ensure the proper functioning of its marketplace, not to mention ensure quality.

The supplier qualification process includes all the items you would expect and a few more. Xometry requires the partner to manufacture test products to assess quality and at times performs factory checks and other forms of quality control.

This slow and steady approach delays the network’s expansion and carries higher costs, but it’s essential, especially in manufacturing. Without quality, Xometry would not be winning more business. A strict vetting process is the first step to ensuring quality, and quality drives buyer retention, which is critical for the demand equation, the “more critical” aspect of a marketplace per Gurley.

Besides, this methodical approach is not strictly a negative — it’s a barrier to entry. A competitor would need years to build a vetted network of thousands of suppliers globally, not to mention accumulate the necessary transaction data, as Xometry has done.

Overall, the pace of new supplier additions is respectable: last year, the company added 900 suppliers (+36% YoY) to reach 3,429. That’s a rate of roughly 17 suppliers added per week — not too shabby considering the work required.

6. Size of the Market Opportunity

At the time of IPO, Xometry estimated its addressable market to be $260 billion based on the six manufacturing processes available on the marketplace. As the company extends support for new capabilities (accelerated by the Thomas acquisition and the partnership with Google Vertex AI), its addressable market should approach the total $800+ billion global custom manufacturing market.

The size of the opportunity is no doubt attractive. But the more important questions surround specific industry dynamics. Will market participants really use and benefit from what a marketplace brings to the table?

I would say the evidence overwhelmingly points to yes. We’ve spoken about how Xometry resolves the challenge of managing a costly, labor-intensive buying process. Custom parts procurement is a vital but non-core ingredient in output, yet it’s a frequent bottleneck. There’s a reason sophisticated buyers (SpaceX, Tesla, Amazon, etc.) turn to Xometry (and steadily grow marketplace spend); the menu solves a problem.

Likewise, we’ve spoken about how Xometry allows suppliers to spend more time manufacturing and less time prospecting for sales. Why would a small machine shop owner with limited resources want to waste time responding to inquiries when they can accept jobs that already fit their capabilities with a single click? They want to make parts, not run a sales process.

Custom manufacturing seems like a natural marketplace opportunity. The lack of suitable technology and data constrained price transparency in the past. Xometry recognized this early and has crafted an effective solution. Now the process of scaling begins in earnest.

7. Expand the Market

Logically, if a company didn’t need custom parts in the past, are they really likely to buy one now, just because the process is easier? I would think not. So I tend to think of Xometry as a market penetration play over a market expansion play.

But who knows? Maybe Xometry does expand the market. Either way, the existing market is more than enough for Xometry to reach multiples of its size before making a real dent.

8. Frequency

Frequency begs two questions: how often do customers buy? And when they do buy, do they establish direct relationships rather than returning to the marketplace for repeat orders?

The evidence points to a consistent purchase cadence and a steady commitment to marketplace use: 96% of revenue comes from existing buyers. This data point satisfies both conditions — buyers order frequently, and they come back to the marketplace for their needs rather than going direct to the supplier.

Cohort analyses support this point. Every customer cohort has exhibited steadily growing spend over time. The slide below, to me, is the single most powerful point of evidence for Xometry’s continued success.

9. Payment Flow

Gurley writes, “…it is much easier to extract reasonable economics when you are in the flow of payment. The supplier not only looks to you as a provider of revenue, but they receive that revenue ‘net of the fee.’ Contrast this with a marketplace where you add value first, and then send a bill to the supplier at later date for services rendered. In this latter case the marketplace appears as an expense, and it’s easier for the supplier to view it is a ‘tax’ versus a distribution relationship. Cash is king, and if you bring the cash, you are king.”

Xometry is the principal in every transaction on its marketplace. Buyers pay Xometry, and Xometry pays the suppliers net of its cut. In this way, the company can be considered a “distribution relationship” rather than a “tax.”

Its business is spread-based; it assumes pricing risk and loses money on some transactions — particularly those that require newer finishes or techniques where it owns comparatively less data. But net-net, it targets a 30-35% take rate (gross margin) long-term.

I would hardly consider this excessive for an industry where quotes can easily differ 100% or more. For comparison, Uber’s gross margins were 33% in 2023 (note: this is not an apples-to-apples comparison, but an instructive point nonetheless).

10. Network Effects

Everything in marketplace land comes down to network effects. If the service improves with more users, it’s a self-reinforcing growth formula. And as I’ve said before, “Growth that doesn’t reinforce itself is inherently tenuous.”

Network effects appear to be in play, but it’s early innings. The story goes something along the lines of:

• As Xometry expands its geographic presence and extends support for additional manufacturing processes, it should attract more buyers.

• More buyers bring more opportunities for suppliers; more suppliers again improve the value proposition for buyers.

• More transactions enhance the pricing model, moving the market rapidly towards efficiency and “perfect information.”

• And the cycle repeats.

That sounds like a self-reinforcing growth formula. And there are early hints of network effects. Active buyers and suppliers have grown at record pace recently; as word spreads, we could see the pace of additions continue to accelerate.

But I try to avoid too bold or too specific predictions. We’ll have to wait and see.

Conclusion

Gurley, not one to miss a step, ends with an ode to the importance of execution. Plenty of marketplaces with high scores across these metrics have failed to build a durable business. Xometry’s success is far from guaranteed.

In 2023, Xometry did almost $500 million in revenue, less than ten years from its founding. Ten years from now, I expect the picture will look quite different. And at a sub-$1 billion valuation, even moderate success seems far from priced in.

The question is: can Xometry execute on the opportunity ahead?

I think so. The team is laser-focused on the long-term, has proven operational chops, and is led by two co-founders who retain significant ownership. But again, only time will tell. Marketplaces are a tough business.

Share

Subscribe now

What I intend to accomplish governs how I invest. I could index my money and guarantee an attractive compound return. So why spend the time? (And it’s quite a lot of time.)

1. The opportunity exists to do better. Markets aren’t efficient. Enough evidence proves individuals can earn superior returns if they repeatedly demonstrate good judgment and patience. Not easy, but doable.

2. I own the risk of participation. I’m 23 years old. I invest my own money. I can afford to take a risk, and I want to play the game. To my mind, the prospect of long-term outperformance outweighs the possibility of underperformance. A slightly better return, compounded over many years, can produce an order of magnitude difference in results.

3. I believe I’ll succeed. An old saying goes something along the lines of, “if you don’t think you can win, you’ve already lost.” The stock market is a competitive marketplace, but the quality of my judgment will ultimately determine the level of my success. I have faith in my ability to do well.

4. I enjoy the game. Some play the game professionally. I don’t — so I’m free to walk away at any point if my reasoning changes. But it likely won’t. I enjoy the competition, the challenge, the psychology, the research, and the real-life stakes.

Away from the index

The last few years have seen a drastic change in my approach to investing. I went from indexing around 70% of my money, dabbling in individual stocks, to 100% concentration in six companies (two representing >60% of my portfolio).

Two factors influenced this change: greater confidence (having had a few years in the game) and an improved opportunity set (or at least what I perceived as one). Said differently, I learned how to handle my emotions in the context of the market, and I discovered compelling arguments where I was (am) comfortable parking money for an extended period of time (call it 7-10+ years).

Some of you might think this concentration comes with excessive risk. Fair. But diversification naturally drives towards an average outcome — exactly what I’m trying to avoid. Concentration heightens the range of possible outcomes, which I’m fully comfortable with. Real risk can only be known with hindsight. I expect the concentration and duration of my investments to be the difference-maker in my returns over time.

Confidence

Throughout this shift, I’ve continually wrestled with the fine line between conviction and foolishness. The wisdom of my decision is impossible to know in advance, but it requires a steady commitment nonetheless.

To be a great investor, you have to be confident; disagreements are inevitable. But you can’t be too confident. You have to be acutely aware of the limits to what is knowable and willing to change your mind when the facts change.

But what are the “facts”? When do they change? How do you determine if it’s time to double down or throw in the towel?

These are challenging questions — every investor can answer differently. The “facts” are whatever you believe them to be; the story is what keeps you at the table. This is the inherent difficulty of investing (felt most acutely by those, like me, who lack experience): you have to make decisions under uncertainty.

Remember Bill Ackman’s experience with Netflix. He bought over $1 billion worth of shares in January 2022 for what was intended to be a long-term investment. Less than three months later, he sold the entire stake at a $400 million loss. His opinion was the facts had changed, the story didn’t hold up, and the answer was to sell.

But the facts didn’t change, despite appearing to at the time, and the story remained intact. Today, his investment would be worth ~$1.5 billion. This isn’t to pick on Ackman — his track record speaks for itself — but it’s one demonstration of the difficulty and uncertainty involved in every investment decision. Even the greats make the wrong decisions.

What I’m getting at is simple: There’s no science to the game, and answers are rarely found from an examination of the most recent quarterly report. Investing is a game of judgment, and you’ll undoubtedly be wrong from time to time.

Embracing this fallibility is important, at least to me. Recognizing mistakes are inevitable means I’m more comfortable standing by my judgment when others question its wisdom. Why would they know the future any better than me? At least this way, when I’m inevitably wrong, I’ll be wrong on my own account — not because I took someone else’s ideas for my own or caved in to the pressure of the market.

Besides, if you’ve done the work, it pays to be confident. Trusting your judgment is a prerequisite to long-term investing success, though it’s equally important to recognize it’s all part of a maybe-futile exercise in predicting the future.

Ultimately, there is no solution to our dilemma. We have to tread that fine line between conviction and foolishness and simply do our best to accept and integrate valid counterpoints to our arguments.

This is what I consider doing the work: after developing an argument, we have to continuously seek new information to disprove that thesis. Only doing the work provides a reasonable basis for confidence in our judgment.

Long duration arguments

Long duration arguments with the market differ from short-term arguments. Long duration arguments involve a core misunderstanding around the durability of a business. Short-term arguments involve a disagreement over what will be reported vs. what is expected by the market in the near-term.

Short-term arguments can be lucrative and a source of rapid returns. But they add complexity. And frankly, who cares about next quarter or next year? For those of us who are more fundamentally-minded and investing truly patient capital, we’re talking about impacts to 1-5% of the intrinsic value of a business. The terminal value is the ultimate arbiter of value.

If a significant adverse development occurs that’s likely to impact the long-term viability of the business, that changes the story. But if the company misses consensus for the quarter, who cares? How many times has Apple missed estimates in its life as a public company?

Short-term arguments are not my game. My game attempts to minimize the number of inputs to a decision and focus on the few that matter. Long-dated arguments take years to manifest in the market’s opinion of a company and require a certain commitment to what may be a controversial take at the time.

Long duration arguments are simple at heart. My thesis in Planet Labs is predicated on a basic idea: the market fails to appreciate the compounding value in a daily scan of the Earth and the advantage conferred on the only (first) player to operationalize the capability. It’s an argument for the undervaluation of long duration growth. Only time will reveal the validity, but I’ll be along for the ride.

Costco is a more concrete example of a successful long duration argument. For a long time, it was a low-margin retailer with a limited SKU count. But what was commonly interpreted as the bug turned out to be the defining feature of the business model. The case with Amazon is similar. For years, it was an unprofitable online retailer with no competitive advantage. Only later did the market discover its source of durability came from a confounding level of investment in its fulfillment network.

The market often makes these mistakes with unique companies. Its viewpoint is bound to the expectations embedded in consensus analyst forecasts. If those forecasts are not met, the impact is extrapolated to a longer period of time. But one quarter or one year rarely impacts the long-term durability of free cash flow.

Operating from a different perspective

To develop an argument, I take the exact opposite view of the market. Rather than ask the same questions, I come up with my own and pursue them to an end. I build a unique viewpoint based on those questions and compare that to what is commonly accepted by the market. If they’re the same, it’s onto the next idea. Playing someone else’s game is not a recipe for making money. But thinking from a different perspective, and a longer-term one, just might be.

Instead of applying a magnifying glass to the quarterly report, I zoom out. I recognize its (in)significance in the broader context of the company’s lifecycle. Where is the market’s attention focused right now? What might be missing from that lens? What’s unique and/or misunderstood about the opportunity?

This philosophy comes after several years of experimenting with short-term arguments and plain old guesses. It suits my unique circumstances, given a multi-decade investment horizon, and I’m confident this approach will produce acceptable results over time. But not too confident. Things can change. It’s a probability game after all — everyone’s just playing the odds.

Share

Fortunately, it doesn’t matter what the stock price says. What’s important is that Planet is a better business in every way today compared to a few years ago. It is still the only company producing a daily scan of the Earth. Its product is vastly improved. The customer base is much larger. Gross profit is multiples of what it was. And the company successfully raised hundreds of millions of dollars to support large investments in its future.

If you own Planet to make a quick buck, this isn’t the article for you. If you own Planet to make money over a long period of time, I encourage you to disregard the headlines. Ignore the widespread criticism of management. Most people are not interested in the business. They’re focused on the stock.

Sticky cash flows & self-reinforcing growth

What’s often misunderstood about Planet is the asymmetry of the long-term investment opportunity. This a story of category creation, and the category is likely to turn into a surprisingly large one.

Planet sells a now-critical dataset to a thousand customers around the world. There is a larger universe of companies, who look a lot like existing customers, that Planet has yet to reach. Most of these customers have large budgets for exactly what Planet offers. Its data has proved an economic benefit to various industries, and customers have responded by steadily increasing their spend.

These same customers inform Planet’s roadmap. They share which kind of data they would like more of and contribute ideas about how they could extract more value from it. This is a customer-led, self-reinforcing growth formula.

Planet’s job is to execute on that customer input and contribute some ideas of its own. Thus far, it’s proven more than capable. Net dollar retention rate consistently exceeds 100%, and the average number of products per customer is growing steadily. Planet is becoming integrated deeper into their workflows.

The unusual stickiness of data businesses is the heart of the investment case. Data exists a layer below software, so it’s harder to implement (or sell), but it’s harder to rip out. Once it’s in, it generally stays in.

Whereas the value of software tends to decline over time, the value of data tends to increase. As a result, software economics tend to degrade while the economics of data tend to improve over time. This is an important distinction.

Planet doesn’t report explosive top-line growth because it sells data methodically. It has to understand how customers get value from it and work with them to improve. From there, you can build products, create a repeatable sales motion, and accelerate growth. (Accelerating growth is the fourth fundamental truth in “The Economics of a Data Business.” I recommend reading the whole piece.)

Planet is in the early stages of acceleration. The company is just three years into its rebirth as a “product” company, catalyzed by the SuperDove upgrade. An order of magnitude more performant than the original Dove (at the same cost), the new satellites are built specifically for machine learning purposes. In short, the data they produce is a lot more valuable.

SuperDove (not to mention Pelican and Tanager) demonstrates the power of a feedback loop that extends to space system design. Vertical integration allows Planet to move quickly when addressing customer feedback. And all things equal, a greater pace of change (or speed of development) generally increases the probability of success over time.

Planetary Variables are the latest development on the product front. These are horizontal building blocks of data on which businesses can be built. As an example, SwissRe and AXA are building an end-to-end drought insurance business on top of this data.

Elsewhere, large agriculture firms like Bayer, Corteva, Syngenta, etc. are using Planet’s data across nearly every part of their business. Civil governments are building regulation on top of Planet’s data. Utilities are monitoring hundreds of thousands of miles of the grid with Planet’s data. And global NGOs are tracking global deforestation with Planet’s data.

These all provide a foundation for sustained growth over time. Programs like these are not built all at once; they scale over time. And Planet is a key piece of the infrastructure that enables it all. That’s an excellent position to be in.

Subscribe now

Increasing returns on capital

A lot of investors overemphasize revenue growth. It’s important, to be sure, but I’d say gross profit growth is more important, and the capital required to deliver that growth is the most important consideration.

Planet has grown gross profit at a 64% CAGR over the last three years. Not many companies can report that kind of number with revenue growing at only 24% annually. It demonstrates unusual operating leverage.

Revenue has more than doubled since 2020, while cost of revenue has remained roughly flat. Planet collects the data only once — it’s a fixed cost — but can sell it to anyone at zero marginal cost. Gross margins expand rapidly as a result.

I estimate PlanetScope is already a 75% gross margin business at only ~$150 million in revenue (using conservative assumptions). Over time, the entire business should reflect a similar gross margin profile.

(Available data is in blue. My assumptions are in red. $218 million is low end of revenue guidance. 52% is low end of gross margin guidance. Each constellation’s cost of revenue is assumed to grow in line with the total.)

This latent profitability is one reason why the company is investing so heavily below the line. Management understands the margin expansion opportunity built into the gross profit line.

My point is simple: the company could likely be profitable today if absolutely necessary. The unit economics are sound, the constellations are automated, and there is minimal cost or risk involved in scaling the core business operations.

Instead of taking these profits, Planet is investing in the future. Doubling the sales team. Acquiring skilled software developers (via VanderSat, Salo Sciences, and Sinergise acquisitions). A lot of this investment is in talent, and that strategy tends to pay off. The leadership of acquired companies are sliding into senior product roles to do exactly what they were doing before, with better inputs and more resources.

Planet is also investing in future data acquisition infrastructure (new space systems like Pelican and Tanager). This is core to Planet’s edge — an ability to design and build constellations quickly. More data yields greater customer value, which supports the aforementioned feedback loop.

All in all, these are good investments, and sometimes the company isn’t fronting the whole cost. Other people want access to the data enough that they’re willing to bear a portion of the upfront cost; Planet received over $40 million to fund the development of Tanager, for instance.

These partners will have free access to a subset of the data, but this doesn’t really impact Planet; it still owns the satellites, and it costs them nothing to give away data. Whatever they do sell, they make damn near 100% incremental margins from. And the structure is even more advantageous for Planet because the combination of new data with its existing data makes both more valuable.

I would go so far as to say it might be imprudent to not be investing at such a pace, in light of the significant amount of cash lying around and the large greenfield opportunity ahead. And we can be reasonably sure these investments will produce attractive returns over time.

We can’t yet gauge operating-level returns on capital given the ongoing level of investment. But we can try to assemble some numbers. Management has shared that SuperDoves are built with a useful life of 3 years and pay for themselves in the first 3-6 months. Pelican and Tanager are built to <1 year payback periods, with a useful life of 5 years. For the sake of argument, we can see what returns on capital look like using gross profit as the numerator.

The graph tells a compelling story of increasing returns. The 2024 decline reflects the investment in Pelican, which will start to bear fruit this year and should begin to produce positive momentum next year. At such small scale, these returns indicate a rare capital efficiency. Given time, they should translate into attractive metrics at an operating level.

Share

The marketplace

A lot of people think Maxar and BlackSky are Planet’s main competitors. They are, for a certain segment of the market (mainly defense & intelligence). But most customers pay Planet for the daily scan, and that’s the more interesting market opportunity long-term. It’s Planet’s category to create, and it’s unhindered by capacity constraints (unlike high-resolution tasking).

Even for D&I, Planet brings a unique offering to the table: worldwide search. Agencies can go back in time to search for specific things — military evolutions, nuclear silos, activities at a hub, you name it. Synthetaic (Planet’s partner) has created an incredible tool called RAIC that enables this capability. I recommend checking out Kevin Weil’s demo of the program at last year’s investor day.

Back to my point: PlanetScope’s competition is not Maxar or BlackSky. Its competition is free data from public missions. Customers are more often combining Planet’s data with free data than with other paid satellite data. We see evidence of this in European regulatory programs. We see it in many agriculture customers. We see it in many civil agencies. And we see it in the insurance companies.

Free satellite data programs have produced great returns for the public despite exorbitant costs. In 2017, the Landsat program produced an estimated $3.5 billion in economic benefits, up from $2.2 billion in 2011 (8% CAGR). Despite an $800 million upfront cost (enough to operate PlanetScope for over 35 years), this is an attractive return.

Planet’s fundamental innovation is in developing satellites at a low enough cost that customers can justify spending money on the data, rather than settling for free data. Naturally, the company expects to keep some of the value it creates. Given Planet’s data is orders of magnitude better than Landsat, it will be interesting to see the economic benefit it ultimately produces.

This is all a positive market development. It enables the creation of a new business model with profitable unit economics. And at the end of the day, business is the engine of progress. I regret to inform the socialists that profits spur positive change because sustainable profit growth depends on an ability to provide customers with more value over time. Jeff Bezos knew this better than anyone.

Planet recognizes this fact, which is partly why it’s structured as a Public Benefit Corporation. It can scale its business while doing good for customers and the world. I’ve heard claims that the PBC designation indicates management doesn’t care about profits. That’s categorically false. Management absolutely cares about profits and has repeatedly said so. I take them at their word.

Why? Because they recognize the longevity and success of their company depends on the ability to fund itself. They’ve always said they intend to be a profitable business, and the unit economics support that claim. But instead of capturing profits today, they are investing to build out the market and capture share sooner rather than later.

This all may sound a bit utopian, but it’s not unfounded. A larger theme is at play, which enables the creation of this new business model. Satellites are a massively underutilized technology, and the industry is at a tipping point. Planet is one of the companies leading the charge.

Subscribe now

A satellite revolution

Satellites are at a unique point in time. People have started to view them as computers, and develop them like computers. Early launch, rapid iteration in space, and continuous replenishment. New satellites are much more powerful than predecessors at the same cost — Moore’s Law now applies to space.

But while space is more open for business today, it’s no easier to operate in orbit than it was ten years ago; the same harsh environment exists. Planet’s success comes not just from the founders’ early recognition of a changing order in space, but the company’s ability to execute — to build something new and valuable.

Planet sees the demand for its data, recognizes the longer-term opportunity, and is scaling investment rapidly. In the end, I expect this proves a smart tactic. If the market really emerges, and I very much think it will, a land grab will ensue. They’re in pole position to win this land grab, especially in electro-optical sensing. Hyperspectral is on its way, and if Planet executes the Tanager program well, it could very well be a winner in that market as well.

I find it an interesting and useful exercise to speculate about the future of the satellite data industry. There is little doubt the end state is a multi-sensor, near real-time network with a variety of winners. But what determines those winners? Where does the market segment?

One theory of mine is that each type of sensor (electro-optical, hyperspectral, SAR, AIS, ADS-B, radio occultation, etc.) will form some kind of duopoly. We know data lends itself to this market structure, so it would make logical sense. I also expect many of the winners to operate horizontally across several different types of sensors. There are natural synergies to operating across multiple domains in space.

I don’t know the future any better than you do, but it’s a viable outcome. More importantly, I think the total level of demand for data produced by these sensors will take the market by surprise. In many ways, Planet is a category bet just as much as a company bet; it will naturally benefit from growing consideration of satellite data for years to come, regardless of the eventual end state.

Recent struggles

Planet’s recent struggles are revealing. Obviously, sales execution could improve. But the interesting takeaway is how the unique horizontal application of its data across industries and use cases created the problem in the first place.

A wide variety of customers want the data, and many use it in disparate ways. This makes it difficult to standardize products and scale a sales motion. By focusing on a few core verticals now — civil government, agriculture, and defense & intelligence — Planet can start to develop more of a solution set.

It’s still working to reach other customers through an extensive partner network; it’s simply trying to avoid diluting sales resources in the process. The sales organization is still pretty lean, having been assembled mostly in the last few years. The new self-serve option (with transparent pricing) on Sentinel Hub is also a way to reach these smaller customers without stealing sales resources.

Investments like Planetary Variables also support improved sales execution. Product-izing the data is key to streamlining the contracting process and expanding the market. SwissRe and AXA wouldn’t be customers today if Planet hadn’t built Soil Water Moisture. PG&E wouldn’t be a customer without Forest Structure. The Brazilian Federal Police wouldn’t be a customer without Road & Building Detection. The list goes on.

Building a repeatable sales motion is difficult in the first place; the product being data that has never existed before adds a layer of complexity. But Planet is adapting to the market’s demands while sticking to its long-term strategy of (1) build new space systems, (2) product / solution-ize the data, leveraging partners where appropriate, and (3) scale the sales team. All of this should contribute to positive outcomes over time.

Putting it together

Long-lasting companies are built on positive feedback loops. If growth doesn’t reinforce itself, it is inherently tenuous. Planet is a positive feedback loop beneficiary, with growth likely to endure for years to come.

A largely fixed cost structure means revenue growth translates into steady profit (free cash flow) growth over time. Today, the potential profitability of the business is obscured by a level of investment many doubt the wisdom of, but few take the time to understand. These investments are informed by customer feedback and are set to generate increasing returns over time.

At a roughly $325 million valuation (less than a third of its 2015 Series C, and less than 3x gross profit), Planet presents a compelling investment opportunity. The company faces zero near-term financial risk with highly asymmetric potential.

Keeping tabs on the thesis

To close, I’ll share how I think about monitoring the thesis. First, I think it’s counterproductive to keep too close an eye. Focus on major developments in the business, not the stock. Don’t get caught up in the weekly, monthly, or quarterly news cycle.

The dominant theme of this investment is that things will take time to play out. This is exactly what creates the opportunity. If everything was happening at once, the market would recognize it — and price it more accurately.

Follow the storyline each year. Listen to management’s commentary each quarter. There’s no need to overanalyze a single quarter’s financials — the entire valuation rests in the terminal value anyway.

I focus on three key metrics each year:

• Net dollar retention rate: Indicates Planet’s success in executing on the all-important feedback loop. Over 100% is necessary. (Note that Planet reports NDRR in a weird way; the full-year number is what matters.)

• % of customers with >1 product: Measures Planet’s ability to further embed its data into customers’ workflows. We want continued expansion, but it may depend somewhat on the pace of new customer adds.

• Gross margin: Tracks the economic model is working. Upwards movement is a green light, but expect some variability with the upcoming deployment of Pelican and Tanager.

Of course, I also want to see a steady progression towards positive free cash flow. But the truth is, with $320 million on the balance sheet, I’m just not too worried about it. They’ve got a >3 year runway at LTM cash burn, and they could probably be cash flow positive tomorrow if needed. Let ‘em invest for now.

This article will enter the archive of Investment Ideas, actionable stock picks intended for multi-year horizons. The performance of every idea (updated monthly) is here. These are ideas, not advice. Do your own research. Don’t take advice from me. I own the stock.

— Price at publication (as of March 1, 2024): $2.25

Subscribe now

Share

Demand for Planet’s data is heating up in civil government. Management has repeatedly emphasized this development over the last year. But so far, the result of this shift has been longer sales cycles and slower growth as Planet adapts to the different requirements of selling into these organizations.

From a near-term lens, the financial impact is obviously not good. Slow growth and high cash burn are a dangerous combination. Fortunately, Planet’s balance sheet provides it the flexibility to take the long view. If you do take this longer view, the focus on civil government could (and in my view, likely will) produce a positive economic outcome. The stock does not appreciate the probability of this result.

Civil government customers are sticky. Many are building regulatory programs or other workflows on top of Planet’s data (see examples in the US, UK, Brazil, UAE, and more below). Planet is laying the foundation for scaling these contract values over time. It is learning a new market — who to partner with / how to best position its offering, how to streamline the sales process, and ultimately how to deliver the best solution.

But don’t take it from me. Take it from Will Marshall (in response to a question on slowing sales cycles on the Q2 2024 earnings call):

What I'd just highlight is that we are market making here, and a lot of these governments — we're bringing a new capability to them, and they've never done this before. And we don't understand that process fully. As we understand that, we are adapting, and that's why we're doing some of those changes to our go-to-market approach. So I just want to emphasize that even civil government — some of which have used satellite data before — they're changing the motion here from buying satellites and building satellites, to buying data. And in many cases, it's just a totally unique and new data product, so they haven't done this before. Both we and they are learning through this.

At a high level, the evolution of the satellite data market makes sense. If defense & intelligence agencies were the first (and for a long time only) buyers, other levels of government (civilian, state, and local) represent a logical buyer progression.

This evolution is driven by the new capability introduced by Planet: daily, global monitoring at “good enough” resolution (significantly worse than D&I-focused providers like Maxar and significantly better than public missions like Landsat and Sentinel).

Don’t get me wrong: defense dollars still dominate the market, and will for quite some time, but demand from civil government, specifically for Planet data, is growing at a comparatively higher rate. The pipeline reflects this.

Planet’s data uniquely suits the needs of this group, whether it be scientific research, land use planning / monitoring, permit / regulatory enforcement, or disaster response. The difficulty lies in building an effective, efficient sales motion (remember, Planet’s sales team was essentially built from the ground up over the last 2-3 years). Selling into the government is tricky and takes time, even before accounting for the difficulty of selling data in the first place.

That said, Planet is in a good position to build long-term relationships with these customers, who collectively represent a multi-billion dollar opportunity. It will take longer than many would like it to, but for those with the luxury of time built into our investment strategy, this is exactly what creates the opportunity.

The public market’s reaction to slowing growth is never positive. And while slowing growth is never a good thing when viewed in isolation, the market often forgets the context. In more ways than one, Planet is doing the difficult work today to set it up for success tomorrow: learning, iterating, and embedding its data in a variety of programs that will endure for many years.

Subscribe now

Customer Examples & Comments

1. BKG (German Federal Agency for Cartography & Geodesy)

• Planet’s relationship with BKG began with a trial in 2021. The contract expanded the following year to a country-wide program granting 400 federal-civilian agencies access to the data for crisis response, conservation, and forest / agriculture monitoring.

• Will Marshall: “We see this as an innovative model that has the potential to be repeated in other countries.”

• This contract is notable for a few reasons. It shows the German government quickly recognized the data’s value for a variety of purposes. And there is huge efficiency in such country-wide data purchasing programs; this way, there is one sales process as opposed to many for each individual organization who wants access to the data.

  • Planet’s contract with Wales (#9 below) has a similar structure.

2. ORSAC (Odisha Space Application Center) (via SPARC India)

• The state of Odisha uses Planet’s daily monitoring to regulate fraud in paddy farming subsidy programs. The data verifies self-reported land cultivations, which were previously subject to widespread inflated claims.

• The program covers millions of farmers across 30 districts and led to over INR 1,700 crores (~$206 million) in savings by the exchequer. Those savings are more than Planet’s total revenue last year, implying an opportunity to implement more value-based pricing (as they have hinted at a few times).

• Other satellite systems are ill-suited to the requirements of this program given the scale and cadence of coverage required. This is a common theme across civil government and agriculture, as these use cases require reliable, frequent data across a broad area (and at reasonable cost).

• Subhadarshi Mishra (Managing Director of SPARC): “Successful delivery of a project of this scale requires well-coordinated teamwork. With daily availability of data at high resolution, Planet has made it possible.”

3. NICFI (Norway's International Climate and Forest Initiative)

• The government of Norway funds a global program to monitor tropical deforestation and inform policy development. KSAT runs the program, which began in 2020 and was recently extended through calendar year 2024. Planet and Airbus serve as satellite imagery partners.

• Andrew Zolli (Chief Impact Officer) at the 2022 investor day: “In just two years, the NICFI program that we run with our partners has grown to serve more than 14,000 users in 155 countries, all working together to stop deforestation. Together, that community has made Planet data the gold standard surrounding one of the most important challenges on the planet: monitoring deforestation. And there are network effects here. The more people use this data on that problem, the more it becomes a standard, and the more it becomes a standard, the more people use it, and you get the kinds of data gravity that really allow us to have one common view of what's happening on the earth.”

  • The program remains in relative infancy (four years is not a long time), but it’s not difficult to imagine future deforestation policies being built on top of such a common, reliable data source.

4. Brazilian Federal Police (via SCCON)

• SCCON, a Brazilian distributor of Planet imagery, has built a platform to automate monitoring of illegal road and building development across the entire country. The Brazilian Federal Police use this platform to inform their actions. Since 2020, over 3,300 agents have completed more than 120 operations; at this scale, federal agents are conducting missions based on Planet data roughly every week or so.

• I don’t see this activity grinding to a halt anytime soon, particularly given the results. Since inception, Brazil’s MAIS program (which governs the data acquisition) has collected over $1.9 billion in fines, seized goods, and frozen assets. Over 26,00 users access the data across 270 institutions.

  • Another opportunity for more value-based pricing over time.

5. NASA

• NASA currently purchases Planet data through an $18.5 million blanket purchase agreement (under the Commercial Smallsat Data Acquisition program) that supports research on disaster response, climate, and biodiversity across 32 federal-civilian agencies.

  • The relationship began in 2018; the current contract expanded in 2023 and lasts through the end of 2024.

• One example of how Planet data is used in this agreement is NASA Harvest, a unique program launched in 2017 whose mission is “to enable and advance adoption of satellite Earth observations by public and private organizations to benefit food security, agriculture, and human and environmental resiliency in the US and worldwide.”

  • NASA Harvest used Planet data to conduct a country-wide assessment of grain health across every field in Ukraine to measure the effect of the war on global food supply. It will likely attempt to repeat this exercise worldwide given the time and resources.

  • Inbal Becker-Reshef (Program Director), speaking at 2022 investor day: “Planet has been a partner for Harvest from the very first day. From before we launched Harvest, we recognized the importance of Planet data, but admittedly, I will say that initially, I really thought that we'd be using Planet data primarily for small holder agriculture, for very small fields and for looking at very field-specific activities. I never really thought we'd work at a national scale in a country like Ukraine with such big fields. And instead, Planet data turned out to be absolutely crucial for what we were doing, especially because we were trying to do this in real time in a rapid response manner.”

• From my (outside) view, this contract creates much more value than it costs, and it comes from a sticky budget pool with room to grow. $18.5 million is less than 4% of the CSDA program budget ($476 million) and less than 1% of the broader Earth Science budget (~$2.5 billion). NASA’s total budget is over $25 billion and has been growing steadily.

• Planet provides a daily, global dataset NASA can’t obtain anywhere else. At the 2023 Fall American Geophysical Union (AGU) meeting, the largest geoscientist conference in the world, 41 presentations used Planet’s data through the CSDA program. I don’t see these funds disappearing anytime soon; too many people have vested interests in the data continuing to support their research.

6. UK Rural Payments Agency (via Earth-i)

• Planet’s data supports country-wide agricultural monitoring for the UK Environmental Land Management Scheme (multi-year, 7-figure ACV contract).

• The Environmental Land Management Scheme is the UK counterpart to the EU’s Common Agricultural Program (“CAP”) and a clear demonstration of the opportunity that exists at the intersection of sustainability and regulation (and agriculture for that matter).

• See next section for more on the sustainability angle.

7. Dutch Paying Agency (via NEO)

• Similar to the UK contract, Planet’s data provides country-wide monitoring of the Netherlands to support compliance with the EU’s CAP.

• See next section for more on the sustainability angle.

8. Slovenia National Paying Agency

• Similar to the UK and Netherlands contracts, Planet delivers country-wide area monitoring for CAP compliance. The relationship began in 2020 via Sinergise.

• Since adopting Planet Fusion data (instead of strictly Sentinel), the agency has reduced the number of inconclusive (read: not eligible for payment) fields from 246,000 to 66,000, and the cost of follow-up activities (in person field checks) declined by more than €1 million.

• Lea Remic (Head of Dept. for Geospatial Applications): “With the complexity and small size of the average agriculture in Slovenia, where almost a quarter of the parcels don’t fit Sentinel constraints, the whole program would be under risk due to too many inconclusive parcels, were there not for this additional source: Planet Fusion.”

• See next section for more on the sustainability angle.

9. Welsh Government

• The Welsh government is using Planet’s data to design and implement the Rural Investment Scheme and Sustainable Farming Scheme (replacement for CAP); it also provides access to Welsh universities for research.

  • The contract grew from 5-figures in 2021 to 7-figures in 2022 and expanded again in 2023.

• This contract is unique in that the regulation (commencing in 2025) is being designed alongside Planet’s dataset; in other words, Planet’s capabilities are informing the written rules. This lays the foundation for a sticky, long-term relationship.

• The research angle also deepens Planet’s relationship with the Welsh government. A research program at Aberystwyth University (“Living Wales”), which uses Planet data to model future landscape scenarios and monitor progress against them, is being adopted as the national framework for land monitoring. Programs like these are good for business; they add weight to the data’s credibility and don’t disappear overnight.

10 / 11 / 12 / 13. Natural Resources Canada / Govt. of British Columbia / Northwest Territories Center for Geomatics / Quebec Ministry of Natural Resources and Forests

• Canadian national and provincial organizations use Planet data in similar ways: to inform disaster response and monitor natural ecosystems across the vast Canadian landscape.

• There is a fair amount of debate about the value of imagery over vast unpopulated areas. The Canadian civil government’s use of PlanetScope speaks to the value of such imagery. I see a sizable business opportunity imaging non-critical economic areas at a regular cadence.

14. Philippines Space Agency

• Like NASA, Planet’s data supports disaster impact assessments, environmental monitoring, and scientific research.

• This contract poses an interesting question: why would any space agency not benefit from Planet’s data? I can’t think of a convincing reason.

15. UAE Space Agency

• UAESA is using Planet’s data to build a regional damage atlas for climate change.

• Put simply, this program intends to bring some quantification to the usual pontification at UN COP events. The collaboration launched last year and will be a multi-year effort including access to nearly every Planet product: PlanetScope, SkySat Tasking, Roads & Building Analytics, Soil Moisture Content, Land Surface Temperature, and professional services.

• This type of long-term undertaking requires a long-term relationship. A climate atlas doesn’t come together in a year; it requires an amalgamation of as much data as possible and continuous refinement of the algorithms that extract insights from that data. Once it’s built, the question becomes how to put it to good use. We haven’t reached this stage, so I’ll leave it there for now. The main point is that the UAESA is building this with Planet; its partner isn’t going anywhere.

16. INRA (Bolivian Institute for National Agrarian Reform)

• INRA uses Planet data for country mapping, title enforcement, and public land use monitoring (7-figure, multi-year contract).

• The data allows the nation to map and classify different land areas, organize them by suitability for various uses, and develop land management plans for agriculture, conservation, or urban development. Put simply, it enables more effective use of the country’s land, with proper methods of accountability.

17. Cartographic Agency of Colombia (IGAC)

• IGAC uses Planet data in a similar vein to INRA (7-figure, multi-year contract). Colombia also uses the data to monitor contentious border areas, particularly with Venezuela, and more precisely track illicit farming.

18. U.S. Department of Agriculture

• The Foreign Agriculture Service uses PlanetScope and Planetary Variables to build crop-type maps and overseas planted area estimates. The data is also used in the bi-annual crop report.

• Planet’s data directly assists the USDA in its objective to provide accurate and relevant information on agriculture. It’s unlikely to abandon a partner who can provide a valuable dataset unavailable elsewhere.

19. New Mexico State Land Office

• NMSLO uses Planet data to monitor trespassing and illegal development on over 13 million acres of protected land. This scale of coverage and demand for regular monitoring requires Planet’s solution.

• Historically, NMSLO used outdated imagery and often had to send workers out to remote sites to manage this task. Planet automated this workflow. In its first year, the program identified 53 trespasses worth $2.7 million in back payments; it also converted 53 of those violations into new leases, which generated an additional $800k in revenue.

20. Queensland Dept. of Natural Resources, Mines & Energy (via Geoplex)

• Queensland DNRME uses Planet data to monitor natural resources across 1.8 million acres, encompassing farmland, forestry, and coral reefs. Need I say it again? No other provider can offer reliable, regular captures of such a wide area (at reasonable cost).

• Steve Jacoby (Executive Director, Land & Spatial Information at DNRM): “The access to high quality, daily imagery for use by all government agencies under this arrangement sets a new benchmark that we expect will have far-reaching benefits for the state.”

• Nigel Conolly (Sales Manager at Geoplex): “Now that this technology is in place, other states in Australia are looking at what we’ve accomplished in Queensland with real interest.”

The Sustainability Angle

Sustainability is a compelling angle from which to view the civil government market. Sustainability has powerful economic implications, but the word has become so overused and sensationalized it’s difficult to parse what it really means and where the opportunity lies.

Put simply, sustainability means gradually moving towards carbon-neutrality and preserving natural ecosystems (i.e., preventing deforestation). I think the opportunity is in providing concrete methods of accountability for these goals (i.e., serving as a system of record). Today, we lack the proper means of measurement and enforcement, which is why results have been lackluster despite overwhelming emphasis on the idea.

Planet views itself as a platform capable of bringing accountability to the market at scale. I tend to agree, and I think the opportunity is misunderstood.

Common Agricultural Policy (CAP)

CAP set the stage for Planet’s initial foray into the sustainability market. CAP is a $50+ billion EU program providing subsidies to farmers who follow sustainable agriculture best practices. The program covers more than 10 million farms and over 160 million hectares of land. Reliable coverage of such a large area is Planet’s bread and butter.

Today, Planet’s solutions appear to be used mostly for small fields — in the Netherlands and Slovenia, for example — which account for only 5-10% of the program’s total area. Sentinel remote sensing data lacks the resolution to effectively monitor these fields, which leads to more expensive on-the-spot (in person) checks. Planet Fusion directly addresses Sentinel’s shortcoming by integrating its data into PlanetScope, thereby providing daily, cloud-free monitoring.

I think early adoption by countries with large numbers of smallholder farms will eventually translate to large-scale monitoring of farms of all sizes. This wouldn’t be the first time. NASA Harvest initially thought it would use Planet data for smallholder agriculture, until it recognized the value of country-wide analysis in Ukraine (one of the largest crop producers / exporters in the world). Bayer’s use followed a similar trajectory. What starts with targeted, small scale use extends to large scale (country-wide) use given the advantages of one common field of view, as well as Planet’s ability to easily scale up to the requirements.

Sentinel Hub offers an end-to-end area monitoring solution purpose-built for CAP. Several EU partners (Earth-i and NEO, for example) also offer specific solutions. By working with its current customers, Planet can refine its solution and create a more compelling proposition to the paying agencies charged with monitoring for CAP compliance.

Again, the challenge seems to revolve around selling into these organizations — the offering is clearly valuable. Changing methods of compliance accounting requires significant updates to IT systems, budget allocations, and workflows. It takes time.

I’m optimistic that more paying agencies will bear the burden of shifting their compliance systems as Planet further proves the value of its data to customers.

European Union Deforestation Regulation (EUDR)

CAP is not the only program where Planet’s data is uniquely suited to provide a means of accountability. EUDR is set to take effect on January 1, 2025, and will require all products in or exported from the EU with inputs from seven commodities — soy, beef, palm oil, wood, cocoa, coffee, and rubber — to prove and independently certify a deforestation-free supply chain.

This is a monumental task, and the annual cost of compliance is estimated to be north of $5 billion. Eurostat estimates 1.2 million companies will have to comply with these new requirements. Geospatial data is the only tool with the requisite scale to track global deforestation activity on a frequent basis. In fact, the use of geospatial data for compliance is written into the regulation.

Planet expects to play a meaningful role in these compliance programs, and partners such as LiveEO have already developed solutions tailored to the regulation. In most cases, Planet will not be the one delivering a specific solution, but it will underpin solutions provided by other companies. It will be a form of infrastructure, which tends to be a more stable (and lucrative) position.

If Planet captures just 10% of the estimated compliance cost, it’s a $500 million business. Today, Planet’s revenue from civil government is roughly $60 million. Though this revenue won’t all arrive in the first year, I tend to think it is a very reasonable estimate of the opportunity long-term.

I won’t explore this avenue any further until we have concrete examples of how customers are using the data, but it is a large and compelling opportunity in the relatively near-term. Stay tuned.

The Long Tail

The larger story in sustainability revolves around the development of more regulation like CAP and EUDR. Europe is clearly the first mover with such programs, but other regions and nations could follow, especially now a viable method of ensuring accountability has emerged. Andrew Zolli alluded to this opportunity at last year’s investor day:

I obviously can't predict with certainty, but the likelihood of knock-on effects of those [mandated sustainability requirements] being carried to other markets in the U.S. and other places is not zero.

If you can bear to think five or ten years ahead, I’d argue the probabilities are much higher than non-zero — favorable, even. Sustainability isn’t going anywhere — the question is whether we will start to see concrete directives based on objective data sources. I think yes.

Wrapping Up

The overarching story of how people use Planet’s data in civil government is simple. People use the data to do their jobs more effectively. Whether it’s a paying agency monitoring for regulatory compliance, a local government enforcing permits, a research organization disseminating insights, or a federal-civilian agency mobilizing disaster response units, Planet’s data supports better outcomes.

This is ultimately why the company is seeing more demand in this section of the market. Customers are reacting to a new capability, understanding how to leverage it, and determining how to gain access. In the government, this process takes time (a repetitive point, but an essential one).

The last point I will make is that civil government may prove to be a leading indicator of commercial demand. There are two sides to regulation: the regulator and the regulated. Companies are the ones being regulated, and they will have to buy solutions to demonstrate compliance. We see this in EUDR, which opens the door to CPG companies who have likely never bought satellite data before.

We’ll see — it’s early days — but I’d argue the evidence points to civil government as a leading indicator. In the meantime, I’m content to patiently watch the market develop.

Tags:

Capturing value (sustainably) comes from creating value in the first place. A good data business creates value by producing reliable, useful data at scale. That’s exactly what Planet does for its agriculture customers.

Exploring Ten Major Customers

1. Bayer Crop Science

• Bayer is a long-time partner / customer of Planet and one of the largest ag companies in the world. It uses Planet’s data to monitor seed production and power aspects of Climate FieldView (an app for farmers to manage farm ops) and RangeView (an app for ranchers to track cheatgrass encroachment).

• Jim Kinnett (Global Head of Digital Product Supply) summed up his thoughts at Planet Explore 2023: “Data is critical for us. This relationship is critical for us because it gives us information we typically don’t have.”

  • He further described Bayer’s relationship with Planet as “co-innovating.” That’s a great position to be in, with Bayer spending $2.9 billion on Crop Science R&D in 2022.

  • “We’re using every part of the Planet portfolio of data. To give you an example, we have 700,000 square kilometers of Fusion data, which covers our production fields. So I can tell you what’s going on in those production fields, and I can also make decisions as granular as saying we need to run irrigation on these fields differently.”

    • No other company can provide this data across such a wide area.

  • “At the end of the day, this opened up ideas that we didn’t think to ask before.”

    • Much of the work around Planet involves exploring how its new capability can be best leveraged to improve results in the field. It’s a game of learning and iteration, and it takes time to discover the answers.

• Nalini Polavarapu (Head of Data Science) spoke at Planet’s 2022 investor day: “Satellite imagery, particularly at scale, is a game changer for us.” The key words here are “at scale,” as the primary source of Planet’s differentiation is the size of area it covers each day.

  • “We have a hard time collecting data on commercial farms. Now just imagine the small holder farms. There are many of those, and we don't have enough people to go to these farms and collect all the data, but with imagery, we will be able to. Putting it even further, if you think about what happens in small holder geographies, there is leapfrogging of technology. And this is a technology that leapfrogs. So this is a technology that gets introduced in commercial farms and smallholder farms at the same time.”

    • I recommend thinking through the ramifications of what she is referencing for yourself.

2. Organic Valley

• Organic Valley, the largest organic dairy producer in the U.S. (a farmer co-op with over 1,600 member farms and 460,000+ acres), uses Planet data to measure pasture health across all its farms (to support rotational grazing).

• Last year, the contract expanded 5x after the pilot program.

• Phil Marty runs the program for Organic Valley. Read his Linkedin and this article (written by Andrew Zolli, Planet’s Chief Impact Officer) for more info.

  • One quote from Marty: “We explored doing this with Sentinel-2, but it didn’t have the spatial or temporal resolution that we needed. Planet’s satellites make possible what no other technology could: they allow us to provide this service to every farmer who wants it.”

3. Syngenta

• Syngenta uses Planet’s data in Nema Digital, the first commercial tool for diagnosing damages from plant-parasitic nematodes in soybean crops. The tool is integrated into the Cropwise platform (used by over 40,000 farmers on over 230 million acres).

  • I couldn’t tell you what a nematode is, but they’re big business. Or rather, anti-big business. The parasites cause over $100 billion in crop losses each year (over $5 billion in Brazil alone). Small improvements in parasite protection will unlock billions of dollars of value.

• Planet and Sentinel data complement each other in this solution, which reveals a recurring theme in ag use cases: Planet is just one piece of the puzzle, but an invaluable one given the unique information it provides.

• The pilot program launched in 2022 across 130,000 hectares of soybean farms in Brazil. In 2023, the contract expanded to support new product development and R&D in precision agriculture.

4. BASF Digital Farming

• BASF Digital Farming, a customer since 2019, integrates Planet’s data into the xarvio Field Manager platform.

  • Digital agriculture apps (like Climate FieldView or Cropwise) rely on near real-time data feeds (like Planet) to improve the quality of farmers’ decisions. Over time (maybe a long time), farmers will be able to more directly manage operations across the farm through integrations with machinery. In general, I find such apps a compelling avenue for growth.

• Jeffrey Spencer (Global Head of Technology and Data): “The value PlanetScope imagery adds is not only the frequency for time-series analysis of specific field zones, particularly in cloudy areas, but also the spatial resolution to discriminate crops and reliably measure vegetation health.”

  • “We are excited by the results we’re seeing so far, and at the same time, we expect these results to be seen in other geographies where digital farming technologies haven’t been applied at scale and where we anticipate the greatest contribution to sustainable agriculture and a healthy global population.”

  • Here is some meat on the bones of Nalini’s earlier point about how Planet is a “leapfrogging” technology.

5. AMAGGI

• AMAGGI, a Brazilian ag business with >400,000 hectares of farmland, uses Planet data to create NDVI maps for its Agro precision agriculture solution.

• Ricardo Moreira runs the program on the AMAGGI side. He explains, “In agriculture, there are countless variables. To isolate one from the other, you really have to have a lot of data.”

  • People generally don’t think of agriculture as a data-centric industry, but it is, and it’s becoming even more so. There is never enough data about farms. Planet produces a lot of data on farms today, and it’s likely to produce orders of magnitude more data in the coming years. This bodes well for expansion opportunities with these customers.

• Another quote from Moreira: “In the very near future, we will start automating things. And then Planet imagery will make an even bigger difference because, in addition to identifying a certain problem, it will give you a spatial notion of the routing of these machines. We will have visibility on the management platforms that is a little closer than having an older or outdated map.”

  • This adds to my point of how in the future, data such as Planet’s will more directly inform machine activity on the farm. The agriculture world is moving towards large-scale automation, albeit slowly. Planet is well positioned to benefit from accelerating innovation in this area.

6. Disagro

• Disagro, a Guatemalan ag business and customer since 2018, uses Planet data in AgritecGEO, a precision agriculture app for farmers.

  • AgritecGEO is yet another variant of crop decision tools in a digital / mobile format leveraging satellite data feeds. This is a secular expansion area, and I expect there will be many platforms tailored to farmers in different regions of the world, all of which will need access to as much data as possible.

7. Limestone Valley RC&D (via SkyTec)

Technically a civil government customer, I lumped it in because (a) civil government and agriculture frequently intersect and (b) it demonstrates the trade-offs between satellites and drones for field monitoring.

• SkyTec’s Ranger platform uses Planet data to monitor land use and soil health, and Limestone Valley (a USDA spin-off) uses the platform to monitor fields across 11 counties in Georgia. Again, Planet’s data is uniquely valuable given the size of the area under monitoring.

• Andy Carroll (Co-founder & CEO of SkyTec) on the tradeoffs between satellites and drones: “Ultimately, we found satellite data, for feasibility and scalability, was a whole lot more efficient than trying to get the drones out.”

• Stephan Benketoe (Executive Director of LV RC&D): “We have the capability to collect this data in a way that does not require a field technician to walk every field in the United States. By creating a model that maximizes federal investments, the American people get the best ecosystem services return on their dollar. That’s where this data becomes super powerful.”

• Satellites can collect data across the world with fully automated operations. Drones can’t do that. That doesn’t mean drones don’t have their place — they offer higher fidelity imagery — but satellites offer a unique view of the larger picture. And as such, they will always be a piece of the data puzzle.

8. Taranis

• Taranis integrates Planet data into its crop intelligence platform alongside Sentinel, drones, and other data sources.

• Taranis is in the business of amalgamating data to power field-level AI models. Planet produces a lot of data today, and it will produce a lot more data tomorrow, which again bodes well for expansion of this relationship. Last year, the contract expanded coverage into the southern hemisphere.

• A quote from Ofir Schlam (Co-founder & CEO of Taranis): "As we built a solution to deliver the most timely, actionable insights for ag retailers, co-ops and farmers, Planet was able to provide us unprecedented daily satellite imagery to pair with our leaf-level drone imagery, allowing our customers to quickly identify deviations from expected crop growth and make the right interventions in the right time."

  • This is another example of where different data types (in this case, drones and satellites) are complementary. More data translates into better results, and combining different types of data generally creates a more comprehensive solution.

9. Oryzativa

• Oryzativa uses Planet data to power an irrigation management application that informs directed scouting of rice fields in South America.

• A quote from Joaquin Peraza (CTO): “In the past, farmers needed to walk the entire field looking for irrigation problems, and that took a lot of time. Now that we have Planet, we can go directly into a spot where there is no water or another problem with the irrigation or the crop… The farmer, by solving irrigation problems in 5% of the area, can cover the cost of monitoring the entire area.”

• Planet’s imagery might be lower resolution than D&I-focused providers like Maxar and BlackSky, but it’s more than capable of pinpointing problems for farmers to investigate more closely (especially when combined with other data sources). Further, the fixed cost to acquire all its data, and the ability to resell it across multiple parties, enables a more cost-effective solution.

10. Corteva

• Corteva, a DowDuPont spin-off from 2019 and Planet customer since 2017, uses the data to inform seed production and power the Granular (farming) and LandVisor (ranching) digital apps.

• Planet’s relationship with Corteva resembles that of Bayer. Its data is used across the organization, and Planet plays the role of “co-innovator.” In practice, this means Planet and Corteva work together to discover new solutions (i.e., inform the R&D roadmap) and build core capabilities around the data, which offers a natural expansion opportunity over time.

• I recommend reading the full Planet article on Corteva.

  • Christopher Seifert (VP of Data Science at Granular): “We’re definitely maturing in the view of where Planet data is the best fit for much of what we’re doing. Research and development (R&D) has driven some of that, previous geographic expansion of the offerings has also driven some of that. It took us a while to get moving and really consume a lot of the Planet data and figuring out how to leverage it, and then it took off pretty quickly.”

  • John Davidson (Senior Director of Product at Granular): “You can look at Planet on one side and you can look at what crops you planted or even look at the historical harvest without ever stepping foot in the fields. It’s pretty miraculous just looking at all this data they have and being able to process it really quickly and understand how it all fits together.”

• In 2021, Planet and Corteva signed a three-year contract expansion. At that point, Planet imagery was used in Argentina, Brazil, the EU, Canada, and more. No other data provider can offer this scale of coverage.

Subscribe now

The Big Picture

A rough estimate of Planet’s agriculture revenue lands in the $50 million ballpark (~75% of TTM commercial revenue). Peanuts, in the context of what Planet’s data can do for the industry. Ten years from now, I wouldn’t be shocked if ag revenue is north of $500 million (maybe even $1 billion?).

Why?

Theoretically, every farmer on Earth would benefit from Planet’s data. Practically, there is no reason every farmer on Earth can’t benefit from Planet’s data. The internet enables its distribution to every corner of the world.

Planet is the first company to operate a satellite imaging constellation that images the entire Earth’s surface every day. It is also the first company to build a web-based platform on top of such a proprietary satellite data asset. It has radically changed the availability, reliability, and quality of satellite data used in farming.

Collecting the data, however, is just the first step. Building a market for the data is the real challenge, and selling data is not easy. Ultimately, data augments or automates traditionally manual processes, and it’s difficult to crack workflows which have been done a certain way for years.

In agriculture, farmers have historically walked the field to assess crop health. Planet can now automate much of this process across every field in the world. With this data, the farmer can now target his visits to areas that need attention and adjust treatment more rapidly. The process is smoother, generally requires less fertilizer, and often increases the yield.

The small sample of customers explored here demonstrate how scale is Planet’s primary source of differentiation. Customers use the data to monitor hundreds of thousands of hectares of fields. It isn’t possible to do this reliably with other data sources.

While Planet’s data is just one small piece of the puzzle today, Planet is the only provider who can offer that unique piece. More importantly, that piece is proven to be valuable to farmers across the world. And perhaps most importantly, Planet has a lot of room to offer new types of data, build new products, and further embed its data in customers’ operations.

Agriculture is in the early innings of digitization. Farms want more data of all types. That’s a fact, and one not unique to agriculture. Every industry wants more data because the more data you can get, and the better the quality of that data, the better the results.

In an abstract way, I tend to view the basis of competition as the volume of useful data capable of being reproduced at a frequent cadence. It’s an overly simplistic take, of course, and perhaps even a dangerous one, but I like it for the purpose of evaluating the future of the industry on a decade-plus time horizon.

It stands to reason that those who can produce the most data, can create the most value, and capture the most value over time. Satellites offer a revolutionary method of collecting agriculture data at scale, and Planet is the leading satellite operator today. I like their odds of retaining that position.

Tags:

Owning a business is hard. Owning a business whose quoted value declines every day is harder. Owning a business whose quoted value declines every day and you are powerless to do anything about it is even harder. But that’s an inescapable reality of the game we play as public market investors.

Business values will decline at some point — often to unreasonable levels. Your actions (or more accurately, inaction) during such times are what separate true long-term owners from those in it to make a quick buck.

Any investment thesis in Planet should be based on the duration of revenue growth, not the pace of revenue growth. Sustained growth over long periods of time can only occur if a company possesses a moat. Planet’s moat is a daily scan of the entire Earth, which persists despite lacking execution in recent quarters.

Am I disappointed by Planet reducing its annual outlook for two consecutive quarters? Of course. Have I lost confidence in the long-term opportunity ahead? Far from it.

Personally, I’m only interested in owning companies for the long-term. This means I must have faith in management’s ability to withstand challenges and get things done, even if they take longer than expected. Truly owning a business means facing the inevitable hiccups and price swings with relative equanimity.

So, I will refrain from shouting about the share price and try to assess the business dispassionately, as an owner might. Of course, I’m sure this will prompt many of you to scream, “Bias!”

Correct. My bias will be on full display. But there is no objectivity in the land of investing. Everything we do is a subjective take on the future. There is always a reason to sell — the more valuable question is why should you hold?

Doing nothing is what makes money in this game.

The Financials

Let’s start with the basics. Revenue growth was tepid but met management’s expectations for the quarter. Forward guidance was terrible. Why? Management pointed to a few factors, including (1) elongated government sales cycles, (2) the compounding effect this has given the time it takes for contracts to ramp up, and (3) a slowdown in commercial business due to macro uncertainty.

To be clear, these factors should not have driven a slowdown of the magnitude Planet is currently experiencing — at a certain point, the responsibility simply rests on a lack of execution — but they are logical explanations. The company is prioritizing larger contracts, which skew towards the government. As contract size goes up, sales cycles extend; government contracts also take longer to close than their commercial counterparts.

With that said, Will Marshall makes an important point, and one that is all-too-often forgotten: building a new market requires constant learning and in general, takes time.

What I would just highlight is that we are market-making here… We are bringing in a new capability to them. And they've never done this before. And we don't understand that process fully. As we understand it, we're adapting, and that's why we're doing some of those changes to our go-to-market approach.

I just want to emphasize that even civil government, some of which have used satellite data before, they're changing their motion here from buying satellites and building satellites to buying data. And in many cases, it's just a totally unique and new data product. And so they haven't done this before. So both we and they are learning through this.

So it's more about a few bigger deals taking a bit longer and slipping out of the quarter, and we did have that in Q2 — although I'd point out one of the biggest ones that we had that slipped out of the quarter subsequently closed in the few weeks afterwards. So it's still happening, but we are learning and understanding and then adapting to those processes.

I can respect that explanation. At the end of the day, Maxar has dominated the industry for over two decades. Planet is bringing a fundamentally different offering to market and a new business model attached to that. It’s only natural that governments move slowly to adopt at scale — it’s the nature of the beast. Sure, this hurts in the near-term, but it’s not unexpected — building a new market is hard. But it’s also more profitable in the long run.

Notably, the pipeline continues to grow despite closing times extending. For the first time, Marshall shared that there are 70 qualified deals in the pipeline with seven or eight-figure annual contract values. These should support growth well beyond the next two quarters.

On the cost front, I can understand the complexities and inefficiencies associated with rapidly scaling an organization. We’ve seen this in plenty of other companies recently, and Planet is no exception. The headcount reduction taken during the quarter is a step in the right direction and will force teams to prioritize and execute with less fat (at least, one can hope).

Importantly, Ashley Johnson reiterated the company’s commitment to adjusted (hmm) profitability by Q4 of next year no matter what. Expenses continue to move in the right direction, and Johnson clarified that the RIF lowered run-rate expenses entering FY 2025 by $35 million compared to the start of year plan. That’s a noteworthy chunk of cost taken out; provided they can reaccelerate growth next year, the profitability target can be met.

All that said, it will still require extraordinary execution; operating margins were still —81% in the quarter. I would not be surprised if Planet conducts another round of layoffs in the future to further realign its cost structure, which is unquestionably out of whack with the current growth profile.

In the meantime, they have plenty of cushion with $368 million of cash on the balance sheet and no debt. At the same level of cash depletion as the last twelve months, Planet has enough to last four more years. They are in no danger of having to rely on the kindness of strangers anytime soon.

Pelican & Tanager

The lack of news on Pelican has been a source of consternation among shareholders and analysts alike. I, too, am curious, but Marshall’s comments on its progression actually indicate a strength of Planet’s business model: the ability to flex capex to meet customer demand.

We are pacing the buildout of our next-generation satellite fleets to optimize our resources and support our one-year payback targets for the satellites.

Sell the product before you build it, not after, is great practice for a data business. It may not seem like it today, when revenue growth is sluggish, but returns on capital are what drive a business over the long run. Planet is building Pelican’s book of business before it launches, so it can earn from day one.

The first Pelican tech demo is slated to launch by end of year. It will collect data on the performance of the satellite bus (to be shared by Pelican and Tanager) and test the operational systems underpinning the constellations. If the demonstration is successful, we will start to see deployment next year. I imagine quite a few of those eight-figure pipeline deals are Pelican-related and will start to close next year.

Tanager is awaiting delivery of the spectrometer (the sensor) from NASA JPL and is otherwise ready to launch the first operational satellite next year.

Sinergise

It’s well worth our time to spend a quick moment on the Sinergise acquisition, which I briefly touched on in my last post.

Leveraging Sentinel Hub, Sinergise's self-serve platform, which already serves thousands of users, we will shift towards supporting small deals through a lower touch channel.

This is important. Sales to date have required a more active involvement, limiting the productivity of salespeople. Scaling an organization requires the ability for customers to serve themselves and extract value without salespeople showing them how to do so. Until this is easy, Planet will not hit exit velocity.

They could scarcely hide their excitement about this acquisition, and I expect a lot more details at the Investor Day next month.

(New) Customers

They ran through the usual list of new contracts, from which a major takeaway is the increasing value of Planet’s data for wide-scale regulatory monitoring — an area virtually guaranteed to grow significantly over the next decade.

The UK Rural Payments Agency now joins the Welsh government, the Dutch Paying Agency, Bolivia’s Institute for National Agrarian Reform, and a host of others in using Planet’s capabilities to monitor public lands and/or sustainable farming initiatives. Civil government contracts like these were called out as a major source of pipeline growth.

Importantly, these contracts exemplify use cases best served by the wide-area monitoring capabilities unique to Planet. The dimensions of competition differ from traditional satellite data uses and are an indication of the disruption afoot.

Incoming regulation is also poised to benefit Planet. The new European Union Deforestation Regulation (EUDR) mandates companies linked to the production of seven commodities — cattle, cocoa, coffee, oil palm, rubber, soya, or wood — prove they are “deforestation-free.”

How do they do that? Verifiable data is a good starting point. Planet’s capabilities are perfectly suited for this use, and the company can pursue two angles to profit from this regulation. One, serving the commercial customers who must monitor their own operations. And two, serving the regulators who must verify the companies’ satisfaction of the obligation. The regulation is set to be take effect beginning in December 2024.

Net dollar retention rate is, in my opinion, the most important metric. How well are they executing on the customer feedback loop? This is an essential question, particularly for new data businesses. The metric ticked up quarter-over-quarter, but it’s tough to get a quality read given Planet’s strange reporting mechanism (the metric starts at 100% on January 1 and builds throughout the year).

I’ll be looking for acceleration in the back half of the year, though management did note that elongated sales cycles are not limited to new contracts; they also impact renewals/expansions. Specifically, a large government renewal is expected to stretch into Q1, contributing to a lowered target of 115% for the year compared to 120% earlier. It makes sense, but it doesn’t mean I like it.

AI

AI has been the buzzword for quite some time now — maybe over a year? Planet actually brings something meaningful to the space (no pun intended). Kevin Weil sums up the idea quite cogently:

We believe proprietary data is where the real value is in the AI race. We have 50 petabytes of satellite data to train our own and partners’ AI and machine learning models that can be used for cases like building damage assessment, vessel detection, preventative mitigation of deforestation, and more.

This quarter, Planet moved beyond words to sign its first deal specific to AI exploration:

Planet has a deep proprietary archive of Earth data that grows by terabytes every day, a treasure trove for generative AI models to extract insights and create value. We've seen significant interest in this recently, and I'm pleased to report that last quarter, we signed our first deal in this area, a six-figure, three-month pilot to explore the potential to unleash the value of Planet's daily data with large language models.

It is day one for this aspect of the business — as it remains day one in the application of AI more broadly. Of course, AI continues to be elemental in many of Planet’s existing solutions, including the building damage assessment partnership with Microsoft, used thus far in Ukraine, Turkey, Syria, and most recently the Maui wildfires.

The main takeaway? Look for AI to continue to play an outsized role in unlocking the value of Planet’s data.

The Thousand Foot View

Was the quarter good? No. Was guidance good? No. Is the company’s competitive differentiation intact? Yes. Is the long-term opportunity intact? Absolutely.

Consider also: Planet’s current difficulties may actually strengthen its moat over the long-term. This is not a consumer offering with no switching costs; once Planet’s data is ingrained in these government programs and solutions, it will likely be difficult to pull out.

A few quarters is a very short period of time for a business with a vision like Planet. The calls from the rafters to remove Will Marshall as CEO and/or sell the company are, in a word, insane.

Planet went public to scale the business. It has been public for less than two years and has made substantial progress towards building a market that previously did not exist; these things take time to come to fruition. If you’re not willing to be patient, you’re certainly involved in the wrong company.

Does that mean we must be happy with the results? No. I’m definitely not. My account is bleeding, for sure. But it really doesn’t matter unless you need that money today. And if you need that money today, it definitely should not be invested in the stock market, let alone an unprofitable entity. There is nothing fundamentally wrong with the company, but it is experiencing the difficulties of scaling, as well as the fickleness of public markets.

The present appears bleak today: slow growth, reduced guidance, no profits. But the inherent problem (and opportunity) with investing is looking to the future. You can’t invest in the present.

As Stanley Druckenmiller says, “It doesn't matter what a company's earning, what they have earned — you have to visualize the situation 18 months from now — that's where the price will be." (Forgive me, Planet is earning nothing, but you get my point.)

New regulation is coming down the pipe that virtually demands use of the company’s data. Pelican is set to begin deploying next year. The large government contracts should be signed at some point — likely next year. And they continue to draw a line in the sand for profitability in Q4 of next year.

Where will Planet be in 18 months? My bet is in a much better place.