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?

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

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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.

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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.

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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.

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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.

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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

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CROCS —

• Stock price (as of August 15, 2023): $97.80

• Shares outstanding (as of July 20, 2023): 61,644,258

• Market cap: $6.0 billion

• Enterprise value: $7.9 billion

Summary

An investment in Crocs is a multi-year bet on the strength of two casual footwear brands and management’s ability to execute on a global opportunity. For those short on time, the thesis is quite simple:

• Management are capable operators and capital allocators who share ownership and are incentivized to create shareholder value.

• Both brands are durable franchises, with the most promising growth avenues being Asia, sandals, and Hey Dude international.

• The business should maintain industry-leading operating margins north of 25% while consistently converting earnings into cash.

• The business is priced at ~9x earnings or a ~9% free cash flow yield while guiding for double digit growth over the next three years.

1. Management

Some backstory is necessary to understand the quality of leadership.

Crocs was founded in 2002. By 2007, it was a public company with sales of almost $850 million — quite the start for an ugly shoe company. Nevertheless, rapid growth can be difficult to manage. At Crocs, it was severely mismanaged.

Company-operated stores exploded from 94 in 2006 to 619 in 2013 while operating margins collapsed from 27% to 5%. Stores lagged expectations, non-core products diluted the brand, and growth turned counterproductive — it failed to produce profits.

In 2014, Blackstone invested $200 million and overhauled the management team. Andrew Rees (current CEO) joined as President, Michelle Poole (current President) joined to lead product and merchandising, and a host of regional executives with extensive industry experience (something the previous management sorely lacked) entered the fold.

During this period — roughly 2014 to 2018 — the company was transformed. Manufacturing, product, marketing, distribution, digital — everything changed. The company exited non-core business lines and closed underperforming stores. It switched to distribution centers from direct factory shipments. And it closed all company-owned factories in favor of outsourced manufacturing.

On the product side, Crocs returned to its roots — molded footwear — and used the flexibility afforded by injection molding to stay on the leading edge of trends and test adjacent styles. It cut SKU count in half and unified brand messaging globally; previously, marketing efforts differed by region, which negatively impacted the brand’s presence, product sell-through, and supply chain efficiency.

The full transformation story is worthy of its own article (perhaps I’ll tackle that in another post), but the takeaway for the purpose of this write-up is simple: management is directly responsible for the brand’s success since 2014.

It’s also worth highlighting a few things with respect to capital allocation.

First, management has repurchased over $1.6 billion worth of shares at an average price of ~$38, leading to a ~30% decline in shares outstanding since year end 2013. As an opportunistic exercise instead of a rote method of “offsetting dilution,” this has been an extremely value-accretive strategy for shareholders.

Second, management is transparent about capital allocation priorities and have executed on their word. After leveraging up to 3.1x for the Hey Dude acquisition, share repurchases were paused to pay down debt, with a target of under 2.0x leverage by Q2 2023. When the Q2 report came out last month, leverage stood at 1.8x after paying down ~$850 million of debt since the acquisition. And in July, the company resumed share repurchases.

Third, while a frequent subject of criticism, I view the Hey Dude acquisition as an excellent use of capital. It lies directly in management’s sweet spot (brand building) while diversifying the company and expanding its addressable market. The $2.5 billion price tag is often a point of contention, but it represents only 8.4x Hey Dude’s trailing-12-month operating income (and this is during a stretch of elevated investment). In all, I expect the Hey Dude acquisition to be praised in hindsight. (More on this later.)

Management is also invested alongside shareholders. Andrew Rees owns ~1.5% of the company (a market value of ~$100 million and in my estimation, the vast majority of his net worth) with other directors/officers bringing the total to ~2.7% ownership. All managers are required to own shares equal to at least 3x their base salary (5x for Rees). And roughly two thirds of equity compensation is in the form of 3-year PSUs, granted based on achievement of (a) cumulative 3-year revenue and (b) adjusted EBITDA margin targets. The other third is time-based RSUs, which vest based on continued employment.

I won’t belabor my point: the Crocs leadership team is highly capable and are incentivized to create long-term shareholder value. They orchestrated a successful turnaround, returned capital to shareholders appropriately, and set the company up for sustained profitable growth. They are a major asset.

Since reporting Q2 earnings, CFO Anne Mehlman has purchased ~$200,000 of stock; Director Douglas Treff has purchased ~$200,000; and Director Thomas Smach has purchased over $1.2 million of shares. All purchases occurred in the $101-105 range.

2. Brand Durability & Growth

There are plenty of ways to grow the Crocs enterprise. Both Crocs and Hey Dude are (1) distinctive, (2) extensible, and (3) affordable brands operating in a $160+ billion global category, of which the two command less than 5% share combined.

For Crocs, the brand’s polarization is an advantage. Michelle Poole understands this: “You love us or hate us. That’s okay, because that means you’re paying attention to us.” Haters don’t lose Crocs money, but lovers make Crocs quite a bit of money. Really, the fervor leads to one thing: lower customer acquisition costs, which partially explains the rapid improvement in profitability since doubling down on the core brand.

Hey Dude, while not as polarizing, is a similarly distinctive silhouette with avid fans, evident from the average customer owning four pairs. The volume of repeat purchases is a clear sign the brand resonates with customers. Further, Hey Dude’s growth prior to acquisition was achieved on a barebones marketing budget; the prominence of word of mouth also points to the brand’s strength.

The extensibility of both brands is another part of the story. Frequent new colors, new styles, and collaborations with organizations and individuals as varied as Post Malone, Balenciaga, Taco Bell, Salehe Bembury, the Grateful Dead, Bad Bunny, KFC, Justin Bieber, 7-Eleven — the list goes on — ensure the brand remains fresh in the eyes of the consumer and appeals to a variety of interests.

Hey Dude is similarly extensible but has yet to deploy the collaboration playbook to its full extent. Its first collaboration with outdoors brand Mossy Oak launched in Q2 to a positive reception, but it remains (very) early days. I anticipate many more collaborations in the pipeline.

Like Crocs, Hey Dude also launches new color and pattern schemes targeted at specific wearing occasions for holidays, events, etc. The Americana collection, launched for Memorial Day and the 4th of July, was one of the brand’s best-selling collections in Q2.

Affordability is also a central component in the success of both brands. Crocs’ classic clog retails for ~$50, and there is never a shortage of discounts. Even at such an approachable price point (and accounting for discounts), the brand boasts industry-leading gross margins. Hey Dude is similarly inexpensive, retailing in the $50-70 range and also reporting respectable gross margins.

These three attributes — distinctive, extensible, and affordable — underlie my belief in the enduring brand value of both Crocs and Hey Dude.

That said, three specific growth avenues appear particularly worthy of monitoring: (1) Crocs Asia, (2) Crocs sandals, and (3) Hey Dude international.

Asia is a promising land for Crocs as home to two of the three largest footwear markets in the world. For the sake of brevity, we’ll focus on China, where the brand remains significantly underpenetrated. China represents ~20% of global footwear sales and tends to account for a similar proportion of competing brands’ sales. However, it accounts for only ~5% of Crocs sales; this gap is expected to narrow in the coming years.

More importantly, recent evidence suggests the brand resonates with the Chinese consumer with sales growing over 100% for two consecutive quarters. During the mid-year festival, Crocs was the second best-selling casual footwear brand on Tmall and the first on Douyin (Chinese TikTok). This is the fruit of a repeatable brand building playbook executed diligently over the last few years.

Sandals, a highly fragmented $30 billion market, is another promising category and a natural extension of the molded footwear brand (lightweight, affordable, easy to take on/off, and comes in a variety of colors/patterns).

Again, recent results points to the success of the brand’s strategy. Core franchises such as the Classic and Brooklyn continue to grow as collaborations like the Pollex slide (with Salehe Bembury) sell out instantly. Sandals was a $310 million business in 2022; management expects it to reach $400 million this year and over $1 billion in 2026.

Hey Dude may be the most exciting growth engine, provided management’s playbook can replicate its success. Although still relatively unknown, it has incredibly positive brand momentum. Circana, a real-time data provider for the consumer market, noted that Hey Dude was the fastest growing brand in U.S. wholesale in 2022 and moved up from #15 to #8 in casual footwear brand rankings. This is after just one year of Crocs’ ownership.

On the acquisition call, management outlined an expectation for $700-750 million in pro-forma revenue for 2022 and $1 billion by 2024. Actual pro forma revenue in 2022 totaled $986 million. And despite a reduction in 2023 guidance, the brand is still set to reach the $1 billion target a year ahead of schedule.

Notably, the issues behind the slowdown this year are temporary and limited to the wholesale business. The DTC business grew 30% in Q2. On the call, management remained incredibly upbeat about the brand trajectory and emphasized how they continue to make the necessary investments to grow the brand over the long-term.

Specifically, two major initiatives are currently underway — a new ERP system and a new distribution center in Nevada. These should be completed by year end, which will set Hey Dude up for a return to 20%+ growth in 2024.

Hey Dude’s international business is in its infancy and represents a huge area of whitespace. Less than 5% of Hey Dude sales are international compared to ~40% for Crocs. Over time, management plans to match Hey Dude’s distribution to that of Crocs. This year, it began to test the brand internationally and shipped its first orders out of a Netherlands distribution center. This marks the beginning of a multi-year effort to expand into Europe and the Middle East, followed by Asia. Given management’s expertise in building a global brand, this exercise is likely to create significant shareholder value over time.

In all, there are two major aspects to think about when it comes to growth. First, the fad argument against Crocs stands on weak footing. All regions and segments (clogs, sandals, jibbitz) continue to grow at above-market rates. The brand has been around for over 20 years now. And its recent success is the direct result of a conscious strategy diligently implemented over years.

Second, Hey Dude adds another high-growth brand with an opportunity to improve marketing, extend the product, and expand distribution globally. The team has demonstrated success in all three areas previously; I see little reason why they will be unsuccessful this time.

3. Profitability

Crocs is a highly profitable, asset light business with strong cash flows.

Molded products are simpler and less labor intensive to manufacture than traditional footwear. DTC and digital sales also comprise a significant portion of the combined business, resulting in industry-leading gross margins.

Further, a subtle accounting difference understates Crocs’ advantage. While most footwear companies exclude distribution and logistics from cost of sales, Crocs includes it. Calculated on a like-for-like basis, Crocs’ gross margin was 69% in the most recent quarter, compared to 58% reported. (The breakdown of distribution costs included in cost of sales is a new disclosure and unavailable prior to Q1 2023.)

This level of structural profitability grants Crocs an advantage which trickles down to industry-leading operating margins.

Of course, a reasonable investor should question the sustainability of these margins given Crocs’ extraordinary growth in the last three years. The flexibility of its cost structure provides some comfort here. Marketing represents almost 26% of SG&A, up from 8% in 2014; if returns on this spend were to decline, the company would be able to pull some levers to preserve profitability.

Perhaps most importantly, Crocs sees its profits in cash. Free cash flow margins also outpace the industry and have increased from —6% in 2014 to 14% in 2022.

In 2023, free cash flow margins have resumed their upward trend, reaching 19% in the twelve months ended Q2.

Given the continued momentum of the business and management’s proven operational chops, I see little reason to believe the company’s profitability is a fluke. Management has consistently reiterated its expectation for operating margins to remain above 26% over the long-term, and these profits are likely to convert into cash in line with history.

4. Valuation

Crocs is cheap no matter which way you look at it. To gauge a rough estimate of the expectations embedded in the stock price, I used the following assumptions as part of a simplified reverse DCF:

• Starting free cash flow: $500 million

• 5-year growth rate: 4%

• Terminal growth rate: 3%

• Discount rate: 10%

Essentially, the market believes Crocs will grow roughly in line with GDP. That makes little sense to me given the growth opportunities ahead. I expect Crocs to grow at or near double digits for at least the next five years.

Compared to peers, Crocs also trades at a significant discount despite delivering faster growth and higher profits.

There appears to be a severe disconnect between the fundamentals of the business and the stock price. When Andrew Rees was prompted about this disconnect in mid-2022, he responded (lightly edited for clarity):

I think given what we see as the financial performance of the company and the growth prospects we see for the company, even relative to our guidance for this year, we're certainly not getting recognition in the stock price. I think what we need to focus on is just continuing to execute. And that's what we focus the teams on each and every day. Keep executing.

This heads-down mentality is exactly why I am content to sit back, be patient, and wait for the market to understand the results and opportunity at Crocs.

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SPIRE GLOBAL

AUTHOR’S UPDATE: Spire underwent a 1-for-8 split on Aug. 31. The split-adjusted price at the time of this idea is $3.60.

• Stock price (as of June 28, 2023): $0.45

• Shares outstanding (Class A + B, as of May 1, 2023): 158,121,992

• Market cap: $71.2 million

• Enterprise value: $117.6 million

Description: Spire sells subscriptions to data feeds from a constellation of ~100 satellites that track maritime, aviation, and weather data. It also offers a Space Services business — modeled after AWS — that offers simple, rapid, and affordable access to payloads in orbit.

Thesis: Spire is too cheap at 1.2x 2023e revenue. It benefits from (1) a 4-5 year first mover advantage, (2) high barriers to entry, (3) an irreplicable data archive, and (4) an end-to-end (customer to space system design) feedback loop. It expects to reach positive free cash flow in Q1-Q3 2024, at which point the market is likely to reassess the value of the business. A 100%+ return by year-end 2024 is reasonable, but expect outsized volatility along the way.

Brief Background

Spire was founded (as Nanosatisfi) in 2012 by Peter Platzer, Joel Spark, and Jeroen Cappaert, three classmates from the International Space University. Platzer’s thesis, in which he discovered two big ideas, formed the impetus for its founding: (1) satellite performance was increasing at an exponential rate (10x every five years), and (2) the incumbent space industry was largely unaware of the trajectory.

Three principles defined the company’s structure from day one:

1. Collect data only possible to be captured from space.

2. Collect data only possible to be captured by a constellation of satellites (as opposed to a single one or a small number of them).

3. Use a software-defined technology architecture (to upgrade satellites in-orbit).

The company built and launched its first satellite through a Kickstarter campaign in 2013. By 2017, the constellation became operational, at which point the company began to scale its subscription business.

In August 2021, Spire went public via SPAC. It raised net proceeds of ~$237 million at an enterprise value of ~$1.5 billion at closing.

In November 2021, Spire acquired exactEarth — its largest competitor in the maritime segment — for $127 million ($102.5 million cash/$24.5 million stock), or ~5.4x revenue. The acquisition significantly reduced the latency of data and brought a 10-year AIS data archive, as well as a lengthy customer list.

Today, Spire’s priority is reaching positive free cash flow by Q1-Q3 2024.

Durable Revenue Growth…

The first hint as to the company’s ability to sustain revenue growth is the rapid pace of historical growth. Spire went from essentially zero to $100 million of ARR in just over 5 years with a relatively lean direct sales motion.

But while the past points to pent-up demand, it’s not a great indicator of future demand. That said, the outlook remains bright because (1) it collects valuable data, (2) it is the only firm to collect such data at global scale, and (3) it benefits from a customer feedback loop that informs product decisions.

It’s easy to get bogged down in the complexity of Spire’s technology. And while it’s a mistake to ignore the complexity (it’s an important layer to its competitive advantage), we don’t need to dive into the specifics behind the technology to arrive at the crux of the matter:

• Spire is the only company to monitor every ship and airplane in near real-time (over 200x a day, or roughly every seven minutes)

• It collects more of a specific type of weather profile called radio occultation (“RO”) than the rest of the world combined (over 20,000 profiles a day, with potential for 100,000 in 18-24 months)

• It offers a simple, affordable way for customers to access sensors on orbit using proven space infrastructure (an AWS-like service for space)

It plays in big markets with a real competitive advantage. Maritime surveillance is a $20 billion industry growing double-digits. Aviation analytics is a $2+ billion market growing in the same range. And weather forecasting is a $2+ billion market also growing around 10% each year.

Spire’s data improves the efficiency of ports and airlines, uncovers illegal fishing/trade, coordinates global supply chains, and enables more accurate weather prediction. Further, the continuous expansion of its archive supports new use cases such as vessel ETA and predictive maintenance models (enabled through the buzzword of today: AI).

On the Space Services side (an $11 billion market expected to reach $40 billion by 2030), several contracts demonstrate the diversity and longer-term potential.

First, NorthStar signed a contract with Spire to monitor space debris. Three satellites are due to be launched in 2023, with pre-agreed options to scale the constellation to dozens of satellites as needed. The contract has potential (not guaranteed) to reach $200 million over time.

Second, GHGSat signed a contract for three satellites that monitor emissions, with expansion clauses that bring the total potential to $100 million over time (again, not guaranteed).

Third, Sierra Nevada Corporation signed an eight-figure contract for four satellites that detect and geolocate objects based on radiofrequency (“RF”) targeting. The global market for such signal intelligence is worth over $13 billion today.

Finally, Ororatech contracted eight thermal satellites (to be launched in 2024) intended for wildfire monitoring. The contract builds on a previous technology demonstration in operation for ~15 months now. Global wildfires created $69 billion of damage from 2018 to 2022.

In all, Spire estimates over 200,000 customers would benefit from use of its data. Today, its roster totals 755 customers. I won’t belabor my point: a large market exists — it’s up to the company to execute given its significant moat. It has guided to 30-36% revenue growth in 2023, which seems a sustainable forward-looking pace given it grew 46% in 2022 with sales headcount roughly flat during the year.

…Drives Improving Economics…

Spire is a data business at the end of the day. Data businesses have some of the best economic characteristics of any type of business. Why? Because the products are sticky and data acquisition costs are fixed, resulting in high incremental margins and substantial profitability at scale. Further, since customers pay for the data upfront, they see their profits in cash.

So why does Spire lose money today?

Put simply, the company is investing aggressively to capture a large long-term market opportunity. Importantly, these investments are focused on technology and product (R&D is 40% of revenue), rather than customer acquisition (28% of revenue). For a new data business, it’s more important to refine products based on existing customer feedback than acquire new customers — so it’s good to know Spire’s focus is on the right area. And we have evidence of execution, with a net retention rate consistently above 100%.

The numbers are a bit noisy given large income statement investments , so I’ll outline a few things I consider more important to the longer-term thesis:

• Capital efficiency: Spire’s infrastructure (the constellation) is fully formed and shared by all its business segments. Platzer says the constellation now requires only $10-12 million of ongoing capex each year, which translates into incredible capital efficiency at scale. Incremental capital investments in support of Space Services contracts have attractive ROIs.

• Expanding gross margins: Spire’s incremental gross margin over the last four quarters has been north of 90%. Gross margins have jumped from 46% in Q1 2022 to 57% in Q1 2023 as it continues to add customers and upsell existing customers with minimal incremental costs.

• Demonstrated operating leverage: Despite bloated public company costs (G&A at 49% of revenue), the company remains confident it can reach free cash flow profitability within a stated timeline of 9-15 months. Operating expenses have steadily declined as a percent of revenue over the last 18 months and remained flat in absolute dollars year-over-year in Q1 2023 while revenue grew over $6 million.

On the Q4 2021 earnings call, Spire put a stake in the ground for free cash flow profitability in 24 to 30 months. It has continued to progress along the timeline since then, and Platzer recently confirmed they remain on track (lightly edited for clarity):

So we're not just talking about EBITDA profitability, operating margin profitability, but actually producing cash flow from our operations… We feel very good about the balance sheet to support that pathway to profitability on the free cash flow basis… And we are excited when we can announce that we have achieved that milestone in the timeframe of 9 to 15 months.

The necessary condition for success is revenue growth and cost discipline, both of which the company has demonstrated an ability to consistently execute on. It’s logical they can continue to do so.

…With Skilled & Aligned (But Imperfect) Leadership

All three co-founders remain at the company, and Platzer retains a 15% ownership stake, with other directors and management accounting for an additional 5% stake. Bonuses are paid out based on the achievement of (1) ARR, (2) non-GAAP operating loss, and (3) revenue per head metrics. This not only incentivizes growth, but responsible growth given the latter two.

I feel management’s skill speaks for itself in building out an unrivaled technological capability, but their managerial and business-building skills may be a blind spot in my analysis given prevailing negative reviews on Glassdoor (3-star rating; 40% approve of CEO; 40% recommend to a friend).

Negative reviews frequently mention “burn out”, an “always-on” culture, high manager turnover, and a “mean and bullying” attitude from senior management. I haven’t spoken to any employees, so I know nothing concrete, but my instinct is this is an issue that merits attention, but does not destroy the thesis.

On the positive side, many reviews — even negative ones — mention “some of the smartest, most passionate people I've ever worked with” / “Extremely strong engineering teams” / “Working with some of the most talented and passionate individual contributors I have ever met” / “Engineers are of an outstanding level,” and further endorsements of the technology side of the business.

Given the hypergrowth of the last five years (128% ARR CAGR), I’m not surprised many employees feel washed out, but it likely doesn’t help when management adopts a hard-driving stance and ignores feedback.

However, this is nothing new; in a 2015 interview, Platzer commented on the culture of “relentless growth”:

Let’s be very clear: we will not change the bar and expectation in terms of performance. We don’t coddle people. People work very hard because they love what they do. And they constantly grow. Not everyone is up for constant growth.

There is clearly an opportunity for cultural improvement, but I do wonder if it’s just growing pains from a break-neck expansion over the last five years. Platzer seems to copy Bezos in more ways than one, which begs an interesting thought experiment: what would Jeff Bezos’ Glassdoor rating have been in Amazon’s early days? (My guess is not too high.)

Conclusion

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.

Why Does the Opportunity Exist?

First, public markets are skeptical of the viability of commercial space. For decades, space was a slow-moving industry with little commercial appeal. The last decade confirmed this changed, but we still have yet to see confirming evidence of self-sustaining New Space businesses. Public markets (generally speaking) wait to see to believe.

Second, market participants lack an intuitive sense of the addressable market. Who knows how much piracy costs the global economy each year? It’s around $12 billion. Illegal fishing? Around $20 billion. Maritime insurance? $30 billion. What about how many ships are at sea at any point in time? Around 500,000. How many does Maersk (one of the largest shipping companies) own? Just over 700. Spire’s markets are not well known.

Third, Spire is un-investable for most funds. The stock price is <$1, with a market cap of less than $100 million. For funds with no restrictions, they lack liquidity, with shares rarely trading over $1 million of notional volume in a day.

Fourth, Spire went public during the height of the SPAC craze. Over 850 companies went public via SPAC in 2020 and 2021. Many are downright terrible businesses. Spire is not, but it’s lumped in with a tough crowd.

Worthy of Attention

• Suspect balance sheet: Spire has long-term debt of ~$120 million (versus cash of ~$73 million) bearing a floating interest rate of ~13% as of Q1 2023. The loan matures in June 2026.

• Cash burn: Spire continues to burn cash and reported negative $16 million of free cash flow in Q1 2023. At that pace, cash reserves will be depleted in just over four quarters. That said, cash burn is unlikely to continue at that pace. Platzer has continued to note his comfort with current liquidity tiding the company over until it becomes self-sustaining in 2024. With over a decade of lean operations in the rearview mirror, I take him at his word.

• Questionable governance policies: Platzer is married to the COO, Theresa Condor, and they are reimbursed for: (1) two non-business trips to the U.S. each year; (2) housing of up to €5,100 per month; (3) a vehicle for use in Luxembourg; and (4) daycare services when they are both travelling for company purposes. All in, it likely sums to a ballpark $250,000+ in additional compensation — not criminal — but I’m certainly not a fan. That said, I again don’t think it disrupts the fundamental business quality.

• Stock-based compensation: Not unusual for a company in the early stages of growth, I think it makes sense for Spire at such an early stage. Compensating employees in cash or stock is essentially a financing decision, and it makes sense for Spire to focus on removing reliance on external capital markets by favoring equity over cash compensation for early employees. Either way, it’s not prohibitively high at 10-15% of revenue over the last five quarters.

Tags: Spire Global, Investment Ideas