Is It Cake?
Cedric makes cake. Specifically, he makes elaborately imagined and expertly executed edible trompe l'oeil — illusion cakes that look like the things they're made from — a blueberry cake that looks like a blueberry — a raspberry cake that looks like a raspberry. Cedric's cakes look amazing on Instagram. They also taste amazing IRL. He's won a handful of "best pastry chef" awards.
Is it cake is a meme and a Netflix show. On the show, regular bakers take a crack at making cake look like something that isn't cake — a beer stein, a cheeseburger, an iguana. Some attempts fall flat. That's part of the shtick. Most efforts are pretty good — these are professionals after all. Judges pass a verdict on looks first, from a distance, then on taste.
A similar service goes on between investors and companies. Most execs can make their businesses look like cake — er — real businesses. They tell good stories, use the right jargon. But, ultimately, the proof is in the pudding — if a company doesn't make money, eventually investors lose their taste for it.
Fool me once
Lamplighter doesn't have too many companies in the portfolio that don't make money. Investing in these is a bit like trying to judge how good a cake is only by looking at it. It might look good, but how much money a company makes matters a lot. Odds for companies that lose money making great investments are lower than for companies that do make money.
There are exceptions.
A general idea behind investing in money-losing companies is this:
There's some big market or some big problem out there that needs to be solved. Maybe that market doesn't exist yet.
A company spends a lot on innovation to develop a product for this market. This is expensive, so the company loses money.
It takes time and effort to cultivate new customers. This is also expensive. The company loses more money.
After the company's spent a lot of money developing a product and cultivating customers, then, later, maybe, it'll make money. Maybe it'll make a lot of money.
As an investor, the first three steps are fun to think about, but the fourth step is the one you care about most. But, since the company doesn't make any money yet, how can you think about how much it might make when it does turn the corner? How can you tell when it’s ready to come out of the oven?
Half baked
Planet Labs loses money. It lost $29M in its most recent quarter. Investors expect little profit in the future. Investors have lost their taste for it. Its share price has gone in a straight line down since going public.
The company takes snapshots of earth daily from space using its fleet of tiny satellites.
Are investors right or does it have anything going for it?
The market for "data" is having a moment. The beginning of the AI-everything era — the AI-oscene — to turn data into information into knowledge into better decisions or off-beat images is a big deal. It's part of what's led Nvidia to become the world's most valuable company, depending on the day. And each new release of ChatGPT or Claude or other AI model increases the value of it all.
This is all downstream of data. AI — heck, regular intelligence — needs data. The whole idea of Planet was to collect data that no one else could.
Big market? Check.
Planet's created something unique — its album of earth selfies made at 10:00 AM every day for a decade. To put out something comparable, another company would have to travel back in time. And that trove is about to get unique-r with a new fleet of satellites with whizzy new capabilities set to begin launching next month.
Innovation? Check.
Its product is useful to defense and intelligence customers — tracking ships and planes and balloons, it has applications for agriculture — improving crop yields and ID-ing deforestation, it has applications for energy — tagging encroachment on power lines and finding gas leaks.
Governments have been using satellites for a while, but this is something new. For ag companies, insurance companies, energy companies its newer still. They all need handholding to be able to get value from all this information.
Heavy spending cultivating a customer base? Check.
And what about that profitability bit? What about step 4?
Planet still loses money. Even on the more forgiving measure of operating profit, it lost $8M last quarter. A lot of its spending, though, has been for business that's still in the works — it's spent money, but products aren't available yet and customers haven't paid for anything.
As the business has gotten bigger, Planet has turned the dials to lessen this effect. It's starting to show. It's revenue grew by $8M compared to last year, while its operating loss shrank by $11M. The business captured more than all of the value from its additional $8M in revenue.
This is the second report in a row that its delivered such a rosy result. It can't continue forever, but it offers a very strong indication that Planet is turning a corner on profitability — backing up management's promises of making money with substance.
Out of the oven?
So, is Planet cake? Is it good cake? Is it level with Cedric Grolet's entremets?
Not yet.
Approaching profitability is not the destination. The current results are still under-baked. But so are investor expectations for the company’s prospects. Investors, instead, should take three things away from the results to whet their appetites.
Planet is rapidly approaching profitability.
Much of its spending in the past has been to prepare for future growth.
Much of its current spending probably supports a much larger business.
Planet hits the first three beats for a money-losing company to become a good investment. Its going after an expansive market. It’s developed a unique solution and adding to it with more capabilities that aren’t available anywhere else. It’s cultivating high-quality customers who stand to benefit from its solutions.
That fourth beat is in sight. As Planet, its partners and its customers continue to find new and valuable ways to use its platform, it looks set to deliver for shareholders too.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.