Update on Investment Idea #1

I sold half of my position in Spire

Spire has had an excellent run over the last 18 months, gaining more than 300% since my initial pitch. Conventional wisdom says to let your winners run, but this week, I cut my stake in half.

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.