Why We’re Avoiding Maxar Technologies Stock

There’s an entire contingent of twats on Twitter who think the way to be a successful investor is to find one stock they like and then cram it down everyone’s throats as if they’re selling Amway products. If you criticize their sacred cow in the slightest way, they become unhinged. A better way to use Twitter is for everyone to share level-headed criticisms with one another and – as a last recourse – agree to disagree. Today, we’re going to talk about a stock that some believe is the best way to invest in the geospatial intelligence thesis – Maxar Technologies Inc (MAXR).

Maxar provides 90% of the foundational geospatial intelligence used by the United States Government for national security and keeping troops safe on the ground.

Maxar

About Maxar Technologies Stock

Click for company website

Just over two years ago, we wrote about Maxar Technologies: A Risky NewSpace Stock, noting that their high margins in imaging would be a good place for the company to focus. Today, Maxar appears totally different as they’ve now divested their MDA division and are focused on two primary segments – “Earth Intelligence” and “Space Infrastructure” which make up 60% and 40% of total revenues respectively (for first three quarters of 2021). They’ve also made progress paying down debt, something that we were concerned about several years ago.

For Maxar Technologies, the internal uncertainty around the GeoComm segment represents operational risk, the $3.144 billion in debt represents credit risk (though they’ve taken steps to hedge this risk with interest rate swaps), the heavy reliance on government contracts represents political risk, and the list of risks goes on. 

While some risks such as debt load are decreasing, others remain. Maxar’s Earth Intelligence segment receives 65% of its revenues from “U.S. federal government and agencies” though that number is down from the year prior by 12.5%.

Maxar SEC filings showing their Earth Intelligence segment receives 65% of its revenues from "U.S. federal government and agencies"
Credit: Maxar SEC filings

Governments have long been consumers of geospatial data which has led to technological advancements which lead to more commercial use cases. The bull thesis would show Maxar successfully expanding their commercial Earth Intelligence segment which is denoted by yellow highlight in the above chart. That metric reflects the transition from a company that rises and falls based on contract awards from fickle government entities to a proper software-as-aservice (SaaS) business.

The United States Government Risk

Having the U.S. government as a majority customer is a huge risk because they have most of the leverage at the negotiating table. SpaceNews published an excellent article on the relationship between Maxar and the U.S. Government. NRO is the agency that primarily consumes commercial imagery for the federal government, and they’ve recently decided to make some changes.

The NRO pays Maxar $300 million a year for access to the former Digital Globe’s WorldView-1, WorldView-2, WorldView-3 and GeoEye-1 satellites, as well as the company’s image archive.

Credit: SpaceNews

That agency has now decided to move away from Maxar as a single-source provider of imagery and open that contract up to other providers such as Planet (PL) and BlackSky (BKSY). It sucks when your biggest customer just decides to give business to your competitors and you can’t do anything about it. But will they increase spend so that Maxar gets the same amount of money? The article cites someone who spends his life on this stuff while we just leverage his findings – Chris Quilty, of the market research firm Quilty Analytics:

It remains to be seen, however, if the NRO will increase imagery spending beyond $300 million a year in order to fund additional vendors, Quilty said. “I fully suspect that all three companies will be awarded contracts, and I guess the question is what the aggregate value of that contract will look like.”

There is a chance that the NRO will increase its imagery budget and Maxar will continue to get $300 million “because they’re the only ones that have the advanced high-resolution imaging capability,” Quilty said.

Credit: SpaceNews

This is a good segue into the topic of valuing high resolution.

The Value of High Resolution

Remember the Twitter automatons we mentioned at the beginning of this piece? Some were blown away when Maxar presented their firm to the analysts at Morgan Stanley as “the leader in geospatial intelligence.” It’s not the first time that’s ever happened lads, and it needs to be taken with a grain of salt.

Maxar’s high-resolution satellites have a better resolution than anyone else – 30 cm or about one foot – and they can even get that down to six inches (15 cm) using machine learning algorithms. Check out the below satellite image which shows just how fine the detail can get at a six-inch resolution.

Satellite image from Maxar which shows just how fine the detail can get at a six-inch resolution.
Credit: Maxar

Their new $600 million constellation of WorldView Legion satellites will improve their capabilities even further, but the launch has been delayed until next year. Resolution is a timely topic we were just looking at in our recent piece on Nearmap which produces aerial imagery at a resolution of 2.2-inch to 3-inch resolution images. Maxar argues that it’s all about resolution, but we question just how many additional use cases that opens up. Will it displace aerial imagery, or is there some gap that they’re filling with blue ocean use cases?

Likely it’s the U.S. government that’s pushing for better resolution and better technology as they always have. Maxar launching a new constellation may just be the company keeping up with the demands of their biggest client. It’s also worth noting that Maxar supplies Planet Labs with satellites, and the latter now has 21 satellites with 20-inch (50 cm) resolution. Just how much value does that eight-inch resolution advantage unlock?

Should You Buy Maxar Technologies Stock?

How long is a piece of string? Everyone will have their own viewpoint – some stronger than others – about the future prospects of Maxar. Whether Maxar is the leader in geospatial intelligence or Planet just depends on the criteria. Overall revenues would put Maxar as the leader while total daily data collected puts Planet in the lead. Steve Jurvetson, partner at DFJ and previous Board Member of Planet, SpaceX, and Tesla thinks that Planet is going to dominate based on the volume of data they’re collecting.

With a deep nod to Planet Labs, Steve noted that the company manages 3 million images every day and images 10x as much as every other commercial and public sources combined.

Credit: SatNews

Once collected, that data is then mined for insights by AI algorithms. That data is then stored providing a comprehensive historical dataset that no other competitor can match, at least when it comes to breadth.

Let’s pretend Maxar is the leader for the sake of this piece. Our concerns surround their overreliance on the U.S. government, and the uncertainty of future government contract amounts which creates external risks and increases volatility. If Maxar receives less from the government, that will probably make their stock price fall while simultaneously reducing risk by minimizing their reliance on the U.S. government. Here’s to hoping for bad news.

Then there’s Maxar’s debt load which sits at around $2 billion, down from $3.144 billion. Some of that debt was retired through the sale of their MDA subsidiary to a private equity firm for $765 million, and they issued shares this year to settle $300 million of notes due in 2023 ($500 million remains for the 2023 notes). Debt holders have covenants based on Maxar’s EBITDA, so let’s hope nothing unexpected happens to affect that. Should they manage through their debt problem, and decrease reliance on the U.S. government, we’d be keen to take another look.

Lastly, it’s worth mentioning that Planet Labs (PL) took a massive dump today falling (calls broker) more than -20% after an earnings report that seemed fairly normal aside from “the suspension of a large government contract due to the government takeover by an unsanctioned regime” and a single satellite having some thruster problems. We’ve made some comments to Nanalyze Premium annual subscribers about that, and we also sent an email to Planet’s IR team because they don’t appear to have filed a proper 10-Q to coincide with their earnings report. That didn’t stop Wall Street analysts from pulling plenty of arbitrary price targets out of their asses though. Like every other space stock out there, proceed with caution.

Conclusion

Space as an investment thesis is so risky that even the leaders – however you define them – suffer from red flags such as customer concentration risk, or excessive volatility due to manipulation (Spire, cough, cough). Out of all the space SPACs we’ve looked at, only Rocket Lab (overvalued) and Planet (dumping like a turd) seem compelling – if you can look past that whole SPAC thing.

When a space company brings to the table too many red flags, we have to pass, whether they’re the leader or not. If Planet is to be believed, and there’s a $100 billion TAM waiting to be captured, then there’s plenty of room for more than one leader.

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