BlackSky Stock is a Risky Play on Geospatial Intelligence
Space: The final frontier … probably because it’s the last place you want to invest your money right now. Special purpose acquisition companies (SPACs) have bred faster than tribbles over the last couple of years, absorbing every tech company with a pipe dream and a pipeline that promised billions in projected revenues. These blank check companies especially targeted high-risk industries like NewSpace, where rockets regularly explode unintentionally and Virgin Galactic (SPCE) remains a pre-revenue company after nearly 20 years in business.
It’s little wonder that we had such a hard time finding a space company to fill the slot in our Nanalyze Disruptive Tech Portfolio. We finally settled on the leader in geospatial intelligence after watching the stock drop like a rock. We’re not scared by short-term volatility, but the mess of paperwork that passes for the company’s financial filings does leave us with some outstanding questions. A number of readers have pointed us toward Seattle-based BlackSky (BKSY), which also uses satellite imagery for AI-powered analytics and business intelligence. A first pass on BlackSky before it completed its SPAC merger left us unimpressed, particularly because the stock was too richly priced at the time.
Since then, the company has lost more than -75% of its value. We love a good bargain, and now that we finally have BlackSky’s first official SEC quarterly report, we can take a closer look to see if there’s a compelling reason to pick it up.
What Does BlackSky Do?
One point that we continue to hammer home is that you need to understand what a company does before you invest in it. BlackSky is one of a growing number of geospatial intelligence companies that leverage satellites and other sources to provide imagery and data analytics for a wide range of industries, from agriculture to insurance. The company recently doubled its small satellite constellation to 12 in less than 30 days, claiming the highest revisit rate in the world, with a peak of 15 hourly visits per day over certain locations. Originally, BlackSky had promised to put a 20-satellite constellation in orbit, but there’s no word on any additional launches in the near term, though there are plans to launch a third generation of satellites with better resolution, including shortwave infrared technology to enable imaging in nighttime, low-light, and all-weather conditions.
But BlackSky is not a satellite manufacturer – at least not directly. Instead, it buys its satellites from LeoStella, a joint venture between BlackSky and Thales Alenia Space, a French-Italian aerospace company that builds satellites and components for space stations, among other space-related products. In fact, BlackSky is really positioning itself as a software-as-a–service (SaaS) company with its Spectra AI platform, which serves as a tasking and analytics engine that fuses data from the company’s satellites and third-party sources to provide data, insights, and analytics for its customers. Services include object detection and site monitoring at locations like ports, airports, and construction sites, among other places.
In addition to its imagery and data analytics businesses, BlackSky provides engineering and systems integration services for launch vehicle, satellite and payload systems.
Where Does BlackSky Get Its Revenues?
Now let’s talk about what the company’s revenues look like in those three business segments, with total revenues of nearly $8 million in Q3-2021 and about $22.6 million for the first nine months of last year:
Unlike other geospatial intelligence companies we’ve looked at, BlackSky does not operate as a Software-as-a–Service (SaaS) platform should. Firstly, they say a majority of customer contracts may be terminated by the customer at any time for convenience. Proper SaaS companies use fixed-term contracts measured in years which result in a steady stream of predictable recurring revenues.
On the plus side, revenue from imagery products more than quadrupled – and that was before it doubled its satellite constellation in Q4 – and overall revenue is up 53% compared to last year over the past nine months. While that sounds good, it’s not what BlackSky originally promised. In the February 2021 investor deck, it estimated revenues of $46 million, which was later updated to $40 million. Now, BlackSky is revising its 2021 revenue forecast from $40 million to a range of $30 to $34 million, primarily driven by the timing of new contract start dates and – wait for it – supply chain impacts due to the COVID-19 pandemic.
Revenue is not the only thing the merger overpromised. The original SPAC deal with Osprey Technology Acquisition Corp. was supposed to net BlackSky $445 million after about $53 million in transaction fees and other costs. But that’s not what happened. Instead, after the dust settled, the company’s gross proceeds came to about $291 million.
After nearly $46 million in fees – about 16% of gross proceeds – and other bits and bobs, the end result is that as of September 2021, BlackSky had $197 million in cash on the books. (Contrast that fee structure to the 3.5 – 7% you’ll see for a traditional initial public offering (IPO).)
Customer Concentration Concerns
One investor that is committed to BlackSky is Palantir (PLTR), an enterprise AI analytics company founded by venture capitalist and iconoclast Peter Thiel. Palantir is somewhat infamous for its cozy relationship with the U.S. government, which provides a significant chunk of the company’s revenues. Last September, Palantir bought $8 million in BlackSky stock for about a 10% discount at the time. (They’ve also invested in several other dozen SPACs, so take it for what it’s worth.) The interest from Palantir possibly reflects the fact that about 83% of the space company’s revenues are derived from the U.S. government and various federal agencies. That’s a big red flag for us due to the nature of doing business with the federal government.
In addition, more than 40% of the $22.6 million in revenue comes from customers who account for at least 10% of total revenues, but we’re not told if that’s one customer or four or somewhere in between. (In fiscal 2020, they had five customers that each accounted for more than 10% of their total revenues and in the aggregate, accounted for 74% of their total net revenues.) Regardless, BlackSky’s customer base is way too heavily tilted toward U.S. government contracts, and this represents a major risk because all the leverage is on the other side of the negotiating table.
On the upside, BlackSky’s simple valuation ratio (market cap/annualized revenues) had dropped from 67 last September to 10 as of today. Anything over 40 we consider to be too excessive for a high-growth tech company. In other words, BlackSky stock is now trading at a bargain price compared to just five months ago. Just be careful about trying to catch a falling knife. If the broader market continues to sell off, that tide will lower all ships.
Our market cap cut-off is $1 billion, and companies that fall below that number enter “the death zone.” That’s where BlackSky sits today. They’re a very small company that now needs to show investors they can deliver on all the grand promises in their SPAC deck. They’re not structured like a typical SaaS company, and the U.S. government has them by the cojones. Aside from finally enlarging its satellite constellation, we didn’t find much new information in BlackSky’s financial filings to dissuade us from our original hypothesis that this is not a category leader we would invest in at any price.
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