What a fantastic six months it’s been for Planet Labs. Shares of the company have skyrocketed 76%, hitting $6.83. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now still a good time to buy PL? Or are investors being too optimistic? Find out in our full research report, it’s free.

Why Does Planet Labs Spark Debate?

Pioneering the concept of "agile aerospace" with hundreds of small but powerful satellites, Planet Labs (NYSE: PL) operates the world's largest fleet of Earth observation satellites, capturing daily images of our planet to provide insights on deforestation, agriculture, and climate change.

Two Positive Attributes:

1. Skyrocketing Revenue Shows Strong Momentum

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Planet Labs grew its sales at an incredible 21.3% compounded annual growth rate. Its growth beat the average business services company and shows its offerings resonate with customers.

2. New Investments Bear Fruit as ROIC Jumps

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Planet Labs’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

One Reason to be Careful:

Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Planet Labs posted positive free cash flow this quarter, the broader story hasn’t been so clean. Planet Labs’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 32.3%, meaning it lit $32.27 of cash on fire for every $100 in revenue.

Final Judgment

Planet Labs has huge potential even though it has some open questions, and with the recent surge, the stock trades at $6.83 per share (or a forward price-to-sales ratio of 7.2×). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.

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