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Premium Edition, Brought To You For Free (Cestrian Stocks Bulletin #13)

Premium Edition, Brought To You For Free (Cestrian Stocks Bulletin #13)
By Cestrian Capital Research, Inc • Issue #13 • View online
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.

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Idea Of The Week - Spire Global ($NSH)
Our Premium Edition is all about laying out our best investing idea of the week. We aim to make them all good ones, though we cannot guarantee we will succeed in this quest. We also intend these ideas as a basis for your own further work. Nothing we do is investment advice and it shouldn’t be taken as such. All we do in our business is share the work we prepare in pursuit of investing staff personal account monies. We hope that you find it useful.
This week’s best idea is to go long the space business Spire Global, with a long term timeframe in mind. How long? Only you can decide. We think Spire has many many years of growth ahead of it. Allow us to canter through why we think this name can be a long-run winner.
You can think of Spire Global as a data services business with a big capex bill. Not unlike a datacenter business or a Cloudflare ($NET) for instance. Where $NET builds servers and pays telcos to place them at the edge of the public Internet, allowing content to be placed there and, increasingly, web apps to be built and deployed there, Spire builds Earth observation satellites - itsy-bitsy ones operating in the RF band - pays launch providers to loft them into orbit, and then collects vast quantities of data from them and sells that data to its customers.
The company serves a number of end markets, among them weather data, aerospace data, maritime data and others. There are a number of players in Earth observation - some very well established and some new on the block with little revenue to speak of. We’ve written extensively in our other subscription services about Maxar Technologies ($MAXR) which operates right at the high end of Earth observation - high resolution satellites serving a principally government market. MAXR is in our view a great long term pick and the stock’s seemingly persistent volatility means you can often find an opportune moment to buy in. We see Spire as the likely winner in low cost Earth observation services. And that’s not a negative or damning thing to say. Generally speaking in tech - and we see space as just another extension of the tech market - low cost wins. If you plan to invest in a technology category, really invest, as in, be there thick and thin for years, decades - history tells you to pick the low cost leader and hold on for the ride. This theme permeates our work but you might take a look at this note on Amazon we published a while back as one evocation of the thesis.
Spire is also unusual amongst the current crop of space SPACs insofar as it is a real operating company already, with revenues and with a business model that ought to be able to generate positive unlevered pre-tax free cashflow. Here’s the summary information the company filed as part of its SPAC SEC documents.
Spire Global - Summary Financials (Source: Company SEC Filings)
Spire Global - Summary Financials (Source: Company SEC Filings)
$28m revenue last year at a solid 64% gross margin and burning only around $30-35m of cash before paying any lenders or tax authority. (We don’t have information on working capital inflows or outflows, so, assuming a modest outflow, let’s say that the unlevered pre-tax FCF number is a little worse than the EBITDA-Capex number in the SEC documents).
The numbers are small still, but the growth is strong, the financial discipline ditto, and the company’s ambition is big.
Spire is yet to complete the “de-SPAC” process wherein the merger of the operating company target and cash shell holding company completes. (For more on how SPAC deals work you might check our earlier post here). Completion of such mergers is not in any way certain and should not be taken as such. Today the traded securities on offer as regards Spire are solely those of the SPAC shell, NavSight Holdings, Inc (hence the NSH ticker). You can buy common stock (NSH) and/or warrants (NSH.W) in this shell. Likely a result of recent negative SEC focus on the SPAC asset class, both the common and the warrants are trading at beaten-down prices. So the question is, do you feel lucky here?
The bull case is rather simple. Let’s assume that the Spire business continues to grow and that its capital requirements are fed either by internally generated cashflow or by securities issuance at a level not too harmful to the stock price. With a company this early stage, those are grand statements and there can be no certainty that they play out. For what it’s worth, based on our assessment of the company’s financials and our conversations with the management team, we think there is every possibility that this company is the real deal, ie. one which is going places. Demand for Earth data is only going one way in our view, and there are few players that have both the low cost basis and government client basis that Spire has chalked up over the years. Low cost trusted supplier? Sounds like a good combination to us.
If that’s the case, the major question here is, will the SPAC deal complete and will valuations hold up over the long term for growth companies like this? Some SPAC deals will not close, that’s a certainty. It’s very difficult to say ahead of time whether any one specific deal will close. We aren’t aware of any reason why the NavSight/Spire merger won’t complete, and from what we see of those that have failed (eg. Red Ball Acquisition Company / Fenway Sports Group) or delayed (Stable Road Acquisition Company / Momentus Space), there are very specific and forseeable reasons for those. Our best judgment is that the NSH/Spire deal will go ahead, but this is only judgment, no certainty.
But NSH stock is trading as if the deal won’t happen and NSH reverts to a cash shell (it’s below the notional $10 “cash value” per share). So either the market knows something we don’t, or the SEC has spooked volume buyers of SPAC stocks so much that there are simply more sellers than buyers right now.
NSH stock closed last week at $9.90 and the warrants (each of which expire on 1 January 2030 and give you the right to buy one common share at $11.50) at $1.33. The stock pegs the enterprise value of Spire right around the $1.2bn level, which is approximately 44x FY12/20 revenue. That’s a huge multiple of course. We don’t know Spire’s FY12/21 revenue progression, since it is not yet obligated to post quarterly results, but let’s say the company delivers 50% revenue growth this year, for the sake of argument. That would imply FY12/21 revenue of $42m and mean that your $1.2bn enterprise value today represents 28-ish times FY12/21 revenue. That’s a big number, but not that big as a function of its growth. In cloud stocks right now (even after the Doom That Hath Verily Been Visited Upon All Growth Investors in 2021) you’ll pay say 36x FY12/21 guided revenue for NET, and we choose the comp carefully - NET is just as capital intensive as NSH, so we aren’t talking crazy-cash-generative CrowdStrike ($CRWD) here. So in the current zeitgest, Spire’s fundamental valuation multiples are perfectly reasonable, low even.
Your bet here is - does the SPAC deal complete and during your ownership does everyone cheer up and get their growth mojo going again, or do they stay moping around clipping coupons from AT&T or its modern progeny, Google.
Our bet is, it will and they will. So we own both NSH and NSH.W and we have high hopes for our investments therein.
And here concludes our first Premium Edition.
Cestrian Capital Research, Inc - 10 May 2021.
DISCLOSURE: Cestrian Capital Research, Inc staff personal account(s) hold long position(s) in CRWD, MAXR, NET, NSH and NSH.W.
FURTHER DISCLOSURE: This is Issue 13 of Cestrian Stocks Bulletin. Superstitious folks may wish to factor that into any consideration they make of the stocks mentioned herein.
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