enot-poloskun
Spire Global (NYSE:SPIR) operates a constellation of satellites, which collect a range of data, enabling the company to provide insights to customers. This is a relatively new business that is subject to dynamic competitive forces, but a large opportunity has been opened up by technological advances, including AI. Given the size of the opportunity, Spire Global is reasonably priced, but this may reflect investor skepticism regarding the company's long-term competitive positioning.
Market
Spire Global's satellites are capable of:
- Detecting GNSS radio occultation, which is the impact of temperature, pressure and humidity in the Earth's atmosphere on GNSS signals.
- Tracking ships globally by receiving their AIS signals
- Tracking airplanes
This enables the company to provide data and services to a broad range of industries.
Figure 1: Satellite Categories (source: Spire Global)
One area where Spire has seen early adoption is monitoring and predicting the weather, and this is being aided by advances in AI. This is a high value use case as weather impacts 30 trillion USD of GDP and an estimated 10% of that is mitigatable. Improved weather predictions provide significant value in areas like finance, agriculture, aviation and maritime. In the past, physics-based software has been used, but this requires significant compute power and is time consuming. Newer AI models are generating comparable or better results while requiring less compute and processing time. For example, Spire’s AI models are able to run a 10-day global forecast in less than one minute. A supercomputer for weather calculations can cost 80-120 million USD and take hours to run a forecast.
Figure 2: Spire Target Industries (source: Spire Global)
Spire believes that geopolitics and climate change are two secular tailwinds supporting its business. Conflicts in Ukraine and the Middle East, along with rising tension in the South China Sea, have highlighted security challenges facing many parts of the world. Spire's business is also supported by digitization and the growing capabilities of AI, which increase the demand for and value of data.
Figure 3: Spire TAM (source: Spire Global)
In recent years, satellite launch costs have declined from over 18,000 USD per kg to under 3,000 USD per kg. Technological advances have also enabled the size of satellites to be significantly reduced. As a result, it is now far easier for organizations to launch a constellation of satellites. Assuming this trend continues, there is a possibility that competition in services enabled by satellites will be fierce. While this is more of a mid to long-term threat for Spire, the company will need to proactively build a sustainable competitive advantage in the coming years to ensure its future success.
Operating a satellite network is unlikely to provide a competitive advantage long-term, particularly as launch costs decline and the industry matures. Providing data could create a barrier to entry if the company has an advantage in acquisition technology or it is a first mover and historical data retains value. Analytics is more likely to provide a sustainable competitive advantage, particularly if it relies on a large volume of data.
Spire Global
Spire owns and operates one of the world’s largest constellations of listening satellites and provides global data, analytics and space services. Spire was founded in 2012 and now has over 100 satellites in orbit, in excess of 30 ground stations and more than 70 antenna systems.
Spire's satellites consist of 3 cubesats, a deployable solar array and antennas. Spire's satellites do not currently have any propulsion systems to actively maintain orbital altitude, meaning their orbit will naturally decay following deployment. As a result, the planned operational lifetime of each satellite is 2 years following deployment from the launch vehicle.
Spire currently collects AIS, ADSB and radio occultation data for maritime, aviation and weather applications. The company is also expanding its capabilities into areas like detecting GPS jamming and spoofing, capturing greenhouse gas emissions data, space awareness images and data for wildfire tracking and prevention.
Spire continues to work on technology for aviation applications. For example, Spire was awarded a 16 million Euro contract by the European Space Agency to develop an alternative system of tracking aircraft. Current systems rely on self-reported positions, which are derived from global navigation satellite system data. The new system would provide independence and verification.
Spire can aggregate conventional data sources with its own proprietary data, primarily from radio occultation. Radio occultation provides a profile of conditions from the Earth's surface into the upper atmosphere. GNSS signals are refracted by the atmosphere, with the level of refraction dependent on atmospheric conditions (pressure, temperature, water vapor concentration and electron density). Spire Global makes about 10,000 of these measurements each day. In addition to aiding the development of weather models, radio occultation data can also be used to monitor climate change and conduct space and ionospheric research. Identifying conditions in remote locations and deep oceans is also made easier by radio occultation. Spire is also able to measure soil moisture levels and ocean winds and is developing specialized models to predict parameters like hurricanes, floods, ocean waves, fire risk, and solar radiation.
Spire continues to invest in its AI capabilities and is collaborating with NVIDIA in support of this. The collaboration provides Spire with access to GPUs and in return Spire provides NVIDIA with data so that it can train its own models. While any association is likely to be viewed as a positive at the moment, I don't believe Spire's relationship with NVIDIA is meaningful, either in terms of its direct impact on the business or the signal it sends about Spire's prospects. I also question the deal terms for Spire, given that it appears that leading weather AI models can be trained on a handful of GPUs within a few days.
In terms of modelling capabilities, it seems unlikely that Spire will have any sort of sustainable competitive advantage. For example, Google's DeepMind has already developed a model that is capable of accurately predicting the weather, along with extreme weather events. It can predict the path of cyclones with improved accuracy further into the future, identifies atmospheric rivers associated with flood risk, and predicts the onset of extreme temperatures.
Figure 4: Spire Services (source: Spire Global)
While barriers to entry have declined, satellite constellations still require a substantial upfront investment and are operationally complex. As a result, there is an opportunity for companies to offer services which make building, launching and managing satellite constellations easier. Spire has a proven ability to build and operate space infrastructure and is capitalizing on this through its services business. This business offers a range of services, from manufacturing to launch to satellite operations. Space services will provide an additional source of revenue and economies of scale for the rest of Spire's business.
Financial Analysis
Spire generated 25.7 million USD revenue in the first quarter, a 6% YoY increase. While this result was soft, Spire’s first quarter was negatively impacted by solar cycle activity interrupting data acquisition. Follow-on orders from government agencies in the US were also affected by the continuing resolution in the US Federal Government. A third-party propulsion unit on some of Spire’s assets also underperformed design capabilities, resulting in an extended time lapse between launch and full operation, impacting revenue.
Spire’s ARR at the end of Q1 was over 120 million USD, an increase of 15% YoY. The company’s ARR net retention rate was 102%. Remaining performance obligations totaled 196 million USD, with slightly over 40% of this expected to be recognized as revenue in the next 12 months.
Spire expects 29-33 million UD revenue in the second quarter, which would represent approximately 17% YoY growth at the midpoint. For the full year, Spire expects 122-132 million USD revenue, representing 20% YoY growth at the midpoint.
Figure 5: Spire Revenue (source: Created by author using data from Spire Global)
Spire's operating profitability continues to improve as the business scales, with the company likely to close in on GAAP breakeven over the next few years. Some of this is driven by the company's constellation, which is now fully deployed and able to collect data once and sell it many times. Spire expects to achieve positive adjusted EBITDA starting in Q2, followed by positive free cash flow.
Figure 6: Spire Profit Margins (source: Created by author using data from Spire Global)
Spire basically has a fully deployed constellation, with the company now focused on replenishment and upgrading its existing assets. The solar cycle is currently impacting some of Spire's assets, although a lot of these were already fully depreciated. CapEx is currently being dominated by Spire Space services business, with a minority directed towards the company's internal needs.
Figure 7: Spire CapEx (source: Created by author using data from Spire Global)
Conclusion
Spire Global is a company with enormous potential, given the size of the opportunity ahead of it and its early lead in the market. The stock is quite reasonably priced in light of this, which is probably a result of investor distaste for unprofitable and more speculative companies at the moment. It's not hard to see the current share price translating to a single digit earnings multiple in the next 5 years, if the business continues to perform well.
The company is not without risks though. Spire is currently unprofitable and has around 130 million USD debt. The company still has approximately 64 million USD of cash, cash equivalents and short-term marketable securities though, aided by a recent capital raise. Given the ongoing reduction in cash burn, this is probably sufficient for the company to reach breakeven. Spire's free cash flow is currently around negative 15 million USD per quarter, although much of this is driven by capital investments. Cash burn has also been steadily declining, with Spire likely to achieve positive cash flow from operating activities in the next 12-18 months.
The more important concern is probably how declining satellite and launch costs will impact competition. Unless a company has access to proprietary and high value data, data plays like Spire often turn out poorly. Spire has a first mover advantage though, and is building on this by integrating from data acquisition into data analytics. The company is also leveraging its capabilities through its services business, which should provide economies of scale.
Figure 8: Spire EV/S Ratio (source: Seeking Alpha)
