- Spire Global, a low cost vertically integrated earth observation business, is slated to merge with NavSight Holdings, a listed SPAC.
- Unlike other purely speculative space SPAC deals, Spire is a real business with its own intellectual property, high end customer base and sustained revenue growth.
- Perhaps because of this very grounded nature, and certainly in part due to the current tech sell-off, the stock remains under the radar.
- We think Spire is a compelling long-term Buy - it's our top pick among the current crop of space companies coming to market.
- Looking for more investing ideas like this one? Get them exclusively at The Fundamentals. Learn More »
DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by, any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
Deflation Reaches Space
The single most important factor linking our cloud and space sector focus here at Cestrian Capital Research, Inc is deflation. We spelled out our thesis on the topic a while back in this note about the Deflator-In-Chief, Amazon (AMZN). In essence - the technology industry has one singular and brutal focus and that is to destroy all prior incarnations of itself through cost reduction. And if you want just one simple investment thesis for tech, one that has held true for thirty years or more and which we suspect will continue to hold true, it is, invest on the right side of that deflationary tsunami. Which is to say, behind the wave, not in front of it. High cost vendors in tech can stay afloat a lot longer than anyone expects, but in the end, they are swept away like so much other dead wood. So, in networking? Long Ethernet, short Token Ring. Telecom? Long Twilio (TWLO), short AT&T (T). Databases? Long MongoDB (MDB), short Oracle (ORCL). And so on. In tech, the future almost always wins, you just have to hold on when it gets scary for awhile.
From an investing perspective, space is a subset of the technology market. This was our thesis back in 2017 when we started publishing our work on space stocks and it remains the case. And what works in tech, works in space. Find the lowest cost vendor in town, operating in a suitably large and important segment, and as long as their product is good enough to keep customers just about happy, that vendor is likely to offer you compelling long run investment gains.
With that in mind we have had our eye on Spire Global, a low-cost earth observation business, for some time. We interviewed the founder-CEO in 2019 - you can read that here. And we were delighted to see the company announce its planned merger with the listed SPAC, NavSight Holdings (NSH), a deal. We bought the stock (NSH) and the associated warrant (NSH.W) right away in our staff personal accounts, part of the New Space Race portfolio we operate in our Marketplace subscription service.
The Spire investor presentation is well worth reading. It's suitably salesy in a Wall St kind of way, the CEO at Spire being fluent in moneyspeak. But it is also a compelling story in our view. This is a real business serving real customers with low cost data services delivered by low cost nanosatellites that are built in house.
The reason we are at Buy on NSH is simple.
1) We love the idea of low cost disruptive space tech. That smells like winning spirit to us.
2) The company has solid revenue traction & its operating metrics are broadly sensible for a young business. Invest in capex, R&D, sales & marketing for as long as doing so pushes up the revenue line. Young companies are valued based on revenue growth rate as we know - and investors will forgive big spending as long as that growth rate holds up.
3) The company understands instinctively how to position the stock to appeal to investors. Yes we know we might be being sucked in. But that's kind of the point. We are more miserable and cynical than most. When a vertically integrated hardware and data services business tells us it's a cloud software business - which is the Jedi mind trick that Spire is attempting to play here - we take a look at the economics and say, no you aren't. But then we live cloud software and have done for two decades. There's a good chance that the "it's a software business" message works with public market investors. Neurolinguistic programming at work, ladies and gentlemen. Don't bet against it. Just look at Palo Alto Networks (PANW), which as we noted recently, is Definitely Not A Hardware Company. Er, even though they sell great big blue boxes for big chunks of money. Software company. Repeat after us. PANW Is Not A Hardware Business. Well, that works at PANW and we think it will work at NSH too.
3) Validation of a kind has already been assigned by having Bessemer as a private investor. Venture capital funds famously get things wrong all the time - they play a probability game across multiple investments in order to secure a huge outsize win every now and then - but Bessemer is a grade-A-star, gold-plated investor and has been for many many decades. And they have multiple other space sector investments. So whilst we would never outsource our investment judgment - we do take some comfort from their involvement.
Here's the numbers - they're taken from that investor presentation.
Source: Spire Global / NavSight Holdings Investor Presentation, Cestrian Analysis
We don't have working capital data so we can't show you unlevered pre-tax cashflow. We use EBITDA-Capex as a proxy. If customers mainly pay upfront, then UFCF will be >= EBITDA-Capex; if they pay in arrears, then UFCF < EBITDA-Capex. We don't know. (If Spire wants to boost its claim to be a cloud software business, they could articulate it by showing an upfront-paid subscription model with a rising deferred revenue & remaining performance obligation balance over time. We will have to wait for later SEC filings to see if that is the case now or in the future. A revenue model of that nature would do wonders for the stock price in our view).
As you will recall, SPAC deals work by merging the listed bag-of-dollars SPAC with the underlying operating company; the latter then becomes a public company by way of this 'reverse merger' (the target is more substantial than the acquiror).
Here's how it works in this example:
1 - NSH SPAC acquires Spire Global
After all the pieces are thrown up into the air and land again, this is what the capitalization looks like:
2 - Merged entity the moment before trading commences
(The above numbers come straight from that investor presentation and we have a couple questions we'll iron out with the company in due course - e.g. if the existing $88m credit facility is indeed converted into stock is that included in the 163.7m share o/s, or if not, why isn't it the post deal net debt... that kind of boring stuff. Doesn't change the story but to salve our own internal neuroses we want to check we understand it correctly).
So to be clear - if you own one share of NSH today, you own one share of that 14% in the table above; if you own all NSH shares today, you would own 14% of the merged group right before trading commenced.
Then you have potential dilution from:
- Employee stock comp plan - see below - 8m shares
- 13m currently unvested Spire stock options - that 13m is a post-transaction pro forma number
- 11.5m warrants held by SPAC stockholders - the ones you can buy as NSH.W
- 6.6m warrants held by the SPAC sponsor
So that's a total of 39.1m dilutive new shares that are likely to come into being at some point - about 24% of currently issued shares. Think of this as basically a 24% incentive pool - that's generous but not totally out of line for an early stage growth equity deal which is basically what these SPAC deals are - growth equity with a tradable ticker.
This is so what:
- Real live company growing quickly without burning too much cash every year
- Valuation metrics and economics aren't in fact too much out of line with a young cloud software business - here there's more capex, in a s/w co there would be more opex, it's all green stuff in the end, which is why we focus on cashflow not earnings.
- SPAC started trading in the middle of a miserable equities market where it has been Officially Decided That Growth Stocks Are Over For Ever ... until today when it was Officially Decided That Growth Is So Hot Right Now ... so no real run-up in the stock price yet.
Now look at a couple of small print items in the investor presentation. We'll save your eyes.
One, the lenders to Spire may convert their debt to equity at $10/share. We assume that $10 to be viewed as an advantageous price.
Two, the comp plan. We don't cover Tesla (TSLA) but we posted long ago that once Elon Musk agreed his "I can get to be the richest guy in the world as long as the stock price hits $X" comp plan with the TSLA board, we said, well, that's the price that TSLA stock is going to reach then. Which it did. And now he is. Executive compensation plans drive action in companies, since folks who run companies tend not to do it for charitable purposes. The Spire comp plan has 2m shares being awarded at share price thresholds of $13, $16, $19 and $22. So that's those 8m shares we mentioned above up for grabs if the company's stock reaches those levels. And we think there is a very good chance the stock can hit those levels, simply because that's where the payday is for Spire management. If you had their jobs, why would you not get up early for work every day and be gunning for those 8m shares?
As you may know from our commentary on stock based comp in cloud software companies (see for instanceour note on Salesforce (CRM) in this regard, here), we think the market understands the dilution game here. Dilution is fine if the net impact is the stock goes up. So we're at ease with the structure. If the company rocks and rolls, the stock will be issued, stockholders diluted, money made anyway. Company in the doldrums, no dilution, whoopee, shareholders own a bigger % of an underperforming company. Yay. Not.
We remain at Buy. A speculative kind of Buy because this is no Microsoft you're buying here. It could all go horribly wrong. But our best guess is that it won't. So a Buy nonetheless.
Cestrian Capital Research, Inc - 9 March 2021.
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This article was written by
Analyst’s Disclosure: I am/we are long NSH, TSLA, TWLO, PANW.
Business relationship disclosure: See disclaimer text at the top of this article.
Cestrian Capital Research, Inc staff personal account(s) have long holdings in NSH (stock) and NSH.W (warrants), TSLA, TWLO and PANW.
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