$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.