Surprise Party
Markets don’t' like surprises. Most surprises are bad. At least, that's how it goes for investors. Here's a recent one. Biotech outfit INmune got bad results on their clinical trials. Investors knew it got the results. They didn't know what those results were. INmune sold stock to raise money. Then, it announced the results. Shares tanked. No wonder investors mostly clench their cheeks when companies hint at anything unexpected.
Most good surprises are small ones. The job market added a few thousand more gigs than expected. Company profit margins move from 12% to 13% quicker than investors thought. Small stuff.
Things that aren't surprising do better for investors anyway. Shares that are less sensitive get better returns. Those are usually businesses that enjoy more predictable underlying results. So, investors have really good reasons for not liking surprises.
Tape bomb
Anyway, here's Planet Labs announcing a surprise. Planet last updated investors on its regularly scheduled earnings call at the beginning of June. Reaching back out to investors before July meant something big.
Management knows all this baggage about surprises. It tried making it dripping-obvious to even the densest investor that they would be discussing good news. IR titled the release "Business Momentum Update." Investors love "Momentum." It's an idea they can get behind. It works.
Planet announced that it signed four new large defense contracts in those couple weeks. A EUR240m contract with Germany to support European defense headlined. Other big wins with the US Department of Defense, the US Navy, and NATO filled out the undercard.
Planet plies in the data trade. It provides images from its fleet of satellites to customers to do a variety of things — intelligence, disaster management, monitoring. Its customers are increasingly governments. The "variety" of uses is increasingly for defense — a consequence of heightened defense needs and more and faster value through AI.
Planet's market value jumped 15% from before the announcement to after its investor update.
Is this the right reaction?
Weellll, that 15% increase in price is only $225M, less than the headline value of Planet's contract just with Germany. The US Military and NATO declined to say how much their contracts were worth. One of the other contracts exceeded $100m. The other two were "eight figures" (above $10m, less than $100m). All-in, the contracts will bring in something more than $400m. Management said the contract with Germany would use its existing and planned fleet — it would require any unplanned spending. Planet's profit on incremental revenue is really high — it actually increased gross profit by more than it increased revenue in the past year. The market's response was limp given the size of the contracts and that Planet wouldn't need additional investment to fulfill them.
The after party
Planet shares had already jumped 55% after it reported earnings earlier in the month and before its announcement. Maybe investors already priced-in this bounty. Maybe all the investors who would have bought Planet already jumped in after its earnings. Or, maybe it's just a matter of investors not sharpening their pencils enough and appreciating a good surprise. In any case, if Planet — the investment — turns into a bonanza, this is the type of event you would look back on and say "there were signs."
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.