Investing in Geospatial Intelligence Stocks
For retail investors, the biggest barrier to entry for investing in any technology thesis is the availability of pure-play stocks. That usually changes when a startup becomes publicly traded. At that time, lots of the industry’s main players will be privately held, so it’s challenging to figure out how threatening the competition is. Then, you have the added challenge of special purpose acquisition companies (SPACs).
With SPACs, there are no S-1 filings, so retail investors are left with an information gap. The glossy cookie-cutter deck that every SPAC vomits out doesn’t cover important things like risks and competition. We’re then left trying to speculate about what the competitive situation looks like and what red flags might exist. That’s where we’re sitting right now with our recent investment in space SPAC Spire Global.
Investing in Spire Global
Nanalyze Premium subscribers already know that we reluctantly opened a position in Spire Global, a company we recently covered in a piece titled Spire Global Stock Offers NanoSatellite Pure Play. The reluctance largely had to do with the market being strangely overheated in the face of a pandemic that has devastated trillions of dollars in value. We’d prefer to avoid any new stock positions until there’s a correction that makes everyone else fearful. We’re also not convinced that SPACs are being fairly valued – even at the price of $10 per share which is what institutional investors pay – because the primary motivation of the firm behind the SPAC is to do a deal before the music stops.
Then, there’s the usual information problem. We just don’t know that much about Spire except that they’re growing revenues every quarter and they appear to have a very attractive Software-as-a–Service (SaaS) model in place. Without comprehensive regulatory filings, we’re unable to compare them to another geospatial intelligence company that recently backed its assets up into a SPAC. BlackSky Holdings is merging with a SPAC called Osprey Technology Acquisition Corp. (SFTW).
Spire Global vs. BlackSky Holdings
Founded in 2013, Seattle’s own BlackSky Holdings raised $50 million in disclosed funding from a single debt financing round in November 2019 with Intelsat as the lead investor. BlackSky used to be a subsidiary of a company called Spaceflight Industries, but the two companies parted ways in 2020. Similar to Spire Global, BlackSky wants to become a leader in geospatial intelligence.
With such limited information, how exactly are we supposed to compare BlackSky Holdings to Spire Global? No, we’re not going to use the comparables slide which compares everyone’s best guesses, we want to use metrics that actually mean something. The only two common values found across both decks would be “satellites in operation” – Spire Global (94) and BlackSky Holdings (5) – and “revenues” which can be seen below.
We don’t know if BlackSky had revenues in 2018 because they don’t tell us. Since so little information is being given to investors, it would be nice if SPACs could include historical revenues by quarter so we can see how timely and consistent they are – just like this chart from Spire Global’s SPAC deck:
Again, we do not have enough information from both companies to perform a meaningful comparison without speculating. For example, it seems like BlackSky is really getting into bed with the U.S. government based on their customer slide. We don’t like to invest in companies that rely too heavily on a single customer, especially when it’s the U.S government which can make or break businesses with a single press release. Then, there’s the share price of the SPAC BlackSky is merging with that presently trades at a +13.6% premium, about twice the premium we paid for our Spire Global shares. Speaking of premiums, the market always assigns them to SaaS business models, so that’s another vote for Spire Global over BlackSky whose SPAC deck says nothing about SaaS metrics.
As of the SPAC filing, BlackSky has five satellites in commercial operation and is scheduled to add an additional nine satellites to its constellation in 2021. Ultimately, they seek to establish a constellation of 30 high-resolution multi-spectral satellites capable of monitoring locations on Earth every 30 minutes, day or night. Another company that is offering high-resolution earth photos day or night is Umbra with their synthetic aperture radar (SAR).
Flying Under the Radar with Umbra
Recently, some pretty big news happened regarding U.S. space policy that governs the ability for satellites to see at higher levels of resolution. A few days ago, the Co-Founder of Umbra Lab, Gabe Dominocielo, dropped us a line to say that the FCC has granted Umbra the first license in U.S history to take satellite images at 15-centimeter (6 inch) resolution. At this resolution, their satellites can detect a soda can from space, a capability that opens the door to loads of new use cases.
A paper from MIT’s Lincoln Laboratory determined that artificial intelligence could correctly classify vehicles by interpreting SAR imagery at 1.0-meter resolution in 45.4% of the cases; at 0.5-meter resolution in 95.4% of the cases and it only gets better from there. Higher resolution makes existing use cases better, and creates entirely new ones, some of which are mind-blowing. Umbra Labs can now spot footprints on the ground to see where human activity is happening. They can tell if a vehicle is running or not, something that could be used to measure activity at construction sites, for example. Power companies can inspect their lines from above, even measuring the amount of power flowing through them, something that can be accomplished by looking at the powerline sag or by estimating ground target vibrations by exploiting the Doppler in the returned signals.
Those few examples are the tip of the iceberg, and the coolest use cases probably haven’t even been thought up yet. Mr. Dominocielo also said something that should strike fear into the hearts of all the drone inspection companies out there.
The status quo is having someone drive out to a site and fly a drone to collect data (on a ship, bridge, survey land), this is expensive, you have to pay for the person’s salary, the truck, the drone, the analysis etc. A single truck roll can cost $50k all in, we can provide the same insights for $100s of dollars.Credit: Gabe Dominocielo, Co-Founder of Umbra Lab
In last year’s piece titled Umbra Lab Makes Space-Based Radar Affordable, we talked about the company’s plans to provide imagery as a B2B service directly to geospatial analytics firms. As long as Umbra can produce the best images, they’ll always be a leader, and that makes for an attractive bolt-on acquisition. And if there’s one person out there who wants to be the leader in everything, it’s Elon Musk.
The SpaceX Elephant in the Room
Elon Musk’s SpaceX, the second most valuable startup in the world with a valuation of $74 billion, is currently working on the world’s most powerful rocket – Falcon Heavy – which can carry 141,000 lbs. of cargo. Contrast that to the Falcon 9 which carries 50,265 lbs. into low earth orbit. If the Falcon 9 can deliver 60 satellites at a time today, then the Falcon Heavy would be able to launch 168 satellites into space in a single mission. What’s keeping SpaceX from launching their own constellation of imagery satellites that should – based on economies of scale – be able to outperform the others on cost? Hardware like what Umbra Lab has developed might be attractive to SpaceX so they can continue to focus on their core competency – launching stuff into space at scale.
The more you learn about Elon Musk, the more fearful you become about placing bets on any company that competes with him or may compete with him in the future. Sure, there’s plenty of total addressable market to go around, but space companies are a risky lot. We’d much rather invest in the companies which are leading the pack. With over 900 satellites in operation, SpaceX aspires to offer everyone Internet across the globe – dirt cheap bandwidth for all – from 12,000 FTC approved satellites (they’ve also requested approval for 30,000 more). After they’ve done that, it’s easy enough to start offering other services from the world’s biggest satellite constellation.
The Geospatial Intelligence Industry
We’ve barely touched on all the players out there capturing satellite imagery and processing it. In addition to the two space SPACs we’ve talked about today, there’s at least one other stock that gives investors exposure to geospatial intelligence – Maxar Technologies: A Risky NewSpace Stock. Since our 2019 piece on Maxar (MAXR), they’ve managed to reduce debt and continue down the path of restructuring the company. (We may look to do an update on Maxar in the coming weeks.) There are also loads of other companies – large defense companies like Airbus or startups like Planet – playing in geospatial intelligence. In order to figure out who the leaders are or will be, we need to step back and take a broader look at the geospatial intelligence industry.
RS Metrics is a geospatial intelligence company we’ve been consulting with to learn how the broader industry is evolving. We spoke with their Chairman and CEO, Maneesh Sagar, for our article on The Global Impact of Cheap Satellites and Launches which talks about how satellite imagery will become a commodity. From that piece:
While there may be no margins left soon in selling the images, there will be fat juicy margins for those who own the dominant platforms when it comes to extracting insights.Credit: Nanalyze and RS Metrics
Where RS Metrics has been adding value lately is in the ESG space where ground truth is difficult to establish.
If satellite imagery is to become a commodity, then the company that’s able to produce the highest resolution photos will always be in a leadership role, at least when it comes to providing something nobody else can. High-resolution images intrinsically are more valuable. Perhaps a company like Umbra Labs provides the highest resolution imagery, then companies like RS Metrics turn those images into insights and disseminate them in seconds. If you’re going to capture alpha from satellite images, that’s one way of doing it. Superior data will enable analytics firms and governments to improve their AI and machine learning workflows.
Geospatial intelligence is a disruptive technology thesis that’s now offering retail investors some options in the form of at least three publicly traded geospatial intelligence stocks – two pure-plays and one with a majority of revenues coming from space imagery. It’s not a stretch to think that once SpaceX has their constellation in place, they’ll start to offer additional services such as space imagery. Having some skin in the game now forces us to more closely monitor a disparate industry where the leaders may start to emerge after the dust settles from all the bankruptcies and corporate actions.
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