PL is overvalued; do not buy until price drops ~50% to ~$8 (fair value est. $5.50).

Planet Labs' stock has fallen by about 50% over the past six months . The company has turned positive cash flow and has nearly $1 billion on its balance sheet .

Does this make Planet Labs a buying opportunity at this low point? I want to answer this question in this video , explain why the stock price has fallen so low , share my estimate of the fair value of Planet Labs, and answer whether I think this is an undervalued space stock that investors can buy now in October.

Planet Labs is experiencing increased demand, and the management team is investing in capital expenditures to meet this demand. Since the beginning of the year, the company has generated approximately $68 million in cash flow from operations, and even after increasing capital expenditures, it still generates $21 million in free cash flow.

The management team also took the opportunity to raise capital or cash by selling shares, and now have about $865 million in cash and short- term investments on the balance sheet .

They were not in a desperate situation, but they took advantage of the opportunity in the second quarter by raising about $120 million from stock sales at an average selling price of $32.

Now, if we look at the stock price today, it is much lower than that. It is trading at $17.50. Therefore, the management team was prudent in raising that capital during a time when there was a frenzy surrounding space company stocks.

Remember when Elon Musk’s SpaceX entered the market? There was a general frenzy about space companies, and Planet Labs capitalized on that euphoria and enthusiasm.

Planet Labs shares were trading at around $20 in February and had risen to over $50 a share by June. Some of that is due to organic improvements in its performance and fundamentals, but I contend that much of it was due to the space stock frenzy that occurred while SpaceX was entering the market and going public .

The shares of many space companies rose during that time, and you can see that since then the stock of "Planet Labs" has collapsed, falling even below the price it was at before that space stock frenzy .

But demand for its products continues to rise, and as of the end of the second quarter, its remaining performance obligations amounted to $753 million . That was an increase of approximately 9% .

Much of this is due to the fact that the company executed many of the contracts it already had, and in fact, executed those contracts earlier than expected. Therefore, the second quarter performed better than expected because there was a contract that they did not expect to complete in the second quarter.

They thought the work would be finished in the third quarter, but they managed to complete it earlier and achieved those revenues in the second quarter.

Remember that residual performance obligations are contracts that the company signs with a client and are not recognized as revenue and profit until the company has fulfilled what was agreed upon in that contract.

Therefore, our obligations eventually turn into revenue depending on when that contract is executed. This is exactly what happened with Planet Labs in the second quarter. It executed a contract earlier than expected.

The management stated: "By executing the contracts we already have, we can record over 400 million in revenue over the next four quarters, not counting any new business." So, demand is growing and I estimate that it will continue to do so.

Wall Street analysts agree with this assessment. According to Wall Street analysts who follow Planet Labs, they estimate the company's revenue will grow by 47% in the current fiscal year ending in January 2027.

Then, another 30% growth is expected in the fiscal year ending in January 2028, followed by 28% growth in the fiscal year ending in January 2029.

There is certainly strong growth expected for Planet Labs, and it is likely to continue even beyond the next three years. This is likely to be a company that will grow for at least the next decade, or perhaps even longer, in my estimation.

If you look at the company's trajectory, it has gone through phases where revenue growth accelerated , then slowed down, then accelerated again, and it is now going through a phase where revenue is accelerating again.

Much of the demand for the company's products comes from countries seeking to secure their territories, and its satellite imagery certainly helps in that. They are also getting better at delivering clearer images in faster timeframes, and this of course increases the value of their services.

They are also integrating artificial intelligence into their services to add more intelligence rather than simply providing their customers with images. They leverage their internal teams with artificial intelligence to deliver more than just images to their clients; they also provide analysis alongside the images, and this adds even more value.

This allows them to generate premium revenues with higher profit margins .

Speaking of margins, they have also been improving for Planet Labs over the past few years. Their cash flow has turned from operations to positive , and that's a big turning point for a company like Planet Labs.

Having positive cash flow means you don't need to turn to investors to ask for more money. You can do this opportunistically, as they did in the second quarter when there was a frenzy over space sector stocks.

They said, "Hey, let's join this party." We could have sold some shares and obtained some liquidity from investors who were very enthusiastic about space stocks because of SpaceX's IPO, but they didn't need to do that.

Their cash flows were already positive, and I believe that's how it will continue in the future. They almost certainly—and we'll take a look at the balance sheet —have sufficient capital on the balance sheet , and they are generating cash flows from operating activities.

This reduces the risks somewhat because this work is already risky, so this is one layer of risk that has been removed.

If you want to look at the margins more comprehensively, the operating profit margin also improves from -125 % to -25%. The balance sheet shows they have $867 million in cash and short-term investments, and since the company has generated positive cash flows and even positive free cash flows in the last quarter or since the beginning of the year, it is a healthy balance sheet .

There is no need to worry about this aspect. And if another wave of frenzy occurs , they can take advantage of it and sell more shares to obtain greater liquidity to invest in rapidly growing opportunities.

So, up to this point, I am a big fan of Planet Labs. It's a business that appeals to me, and I'd like to own shares in it. But where I start to hesitate is in the evaluation. The stock is trading at a forward price-to- sales multiple of 11, even after this drop in the stock price.

You can see that at one point during the year, during that surge, it was trading at nearly three times its current valuation, with a price- to-sales ratio exceeding 30. It has now come back down to earth .

This is what I warn all my viewers about almost all the time . I've been through many of these waves of madness in the market. We can look back to the meme stock frenzy of 2020 and 2021, and the electric car stock frenzy during the same years, and I warned investors about all those waves.

I warned against buying at those high levels, as it seemed like a terrible risk for the reward at the time , and it turned out to be very sound decisions. Many of those "meme" stocks have fallen significantly from what they were in 2020 and 2021.

Electric vehicle stocks have been performing very poorly since 2020 and 2021. I warned investors about all that rubbish, and looking at the time, many investors have saved a lot of money, including myself.

There are also quantum computing stocks, the quantum computing stock frenzy a few years ago when those stocks rose by more than thousands of percentage points. Once again , she warned investors against getting carried away by this obsession.

Therefore, this should be another opportunity for me to warn investors that when hysteria prevails, and herd behavior emerges where everyone follows each other and buys the same stock because of the great excitement surrounding it, I instinctively avoid this situation at first glance.

When I do more research, I set higher standards for those types of stocks before I even consider getting in, because the situation is often grossly overvalued, and a major crash is likely to follow such an overvaluation .

I have seen this time and time again over the past decade, and through my studies and long-term history. So, once again , this is one of those cases where there was a great euphoria followed by a crash, and now the stock is trading at a forward-to- sales price-to-earnings ratio of 11, which is almost the same level it was at earlier this year, before the frenzy began.

I also like to look at the valuation using the discounted cash flow model. This model takes into account future cash flows. I estimate the amount of cash flow the company will generate from today to the very distant future, and then I discount those cash flows to their value today, because money in the future is worth less to me than the money in my pocket today.

Because of the time value of money, and also because of the risks, isn't that right? Even the most trustworthy people will not always pay you the money they owe , especially companies.

It is estimated that they will generate this cash flow, but nothing is certain. Therefore, I must discount it based on the time value of money, risk factors, etc., and sum these concerns into a weighted average cost of capital, which is the discount rate I apply.

Taking all of that into account, I calculated a fair value of $5.50 for Planet Labs. The current market price is $17.50.

So, it's a really exciting company, on the right track, and I'm confident it will continue to grow strongly over the next three, five, and ten years. I would like to own this stock, but not at these prices.

I would like to see a drop of at least 50% from here, where the share price reaches about $8, before I start seriously considering buying this stock. I will not buy this stock, all other things being equal, at any level close to these levels.