If I Could Only Buy 1 Space Stock for the Next Decade, It Wouldn't Be SpaceX or Rocket Lab

Investors in space stocks are all over Space Exploration Technologies and Rocket Lab. The problem is, these two space giants look wildly overvalued today, with price-to-sales (P/S) ratios in the stratosphere. If an investor is looking to buy these stocks for the next decade, the valuation math says they are likely to be disappointed.

But what if you want exposure to the space economy? Before taking a bet on the high-flying yet free-cash-flow-negative SpaceX and Rocket Lab, I would buy this smaller space stock instead: Planet Labs (NYSE: PL). It doesn't come without risks, but it could make a winning long-term bet for investors looking to buy the dip today. Here's why.

Advanced satellite imaging services

Planet Labs was born out of the idea of monitoring the Earth from space to help improve life on Earth. It has a constellation of satellites that constantly take photos from orbit to support environmental monitoring, military and defense operations, or any use case you can imagine.

The camera technology is regularly updated as new satellites are launched into orbit, and it supports different use cases, such as broad daily scans over wide areas or zoomed-in tracking of specific areas. Using automation can help organizations sift through data, letting them know when something has changed or is irregular and needs checking.

This is highly valuable for commercial organizations, environmental researchers, and defense applications. Using Planet Labs' growing image database, the company can train artificial intelligence (AI) models to provide insights into the climate, commercial activity, and other areas of focus, which is why it has signed major contracts with governments around the world.

Image source: Getty Images.

Fast growth and huge market opportunity

Governments are the primary market opportunity for Planet Labs, with large, recurring contracts for imaging services. Germany has signed a deal worth hundreds of millions, and the company has various contracts through different United States agencies, such as the National Reconnaissance program and NASA.

This growing number of contracts is why Planet Labs is posting solid revenue growth. Sales were up 58% year over year to $116 million last quarter, with a backlog now at $815 million.

Plus, since Planet Labs can resell the same imaging services with little incremental cost, it has strong margins and is well on its way to profitability. Its gross margin was 57% last quarter, with positive free cash flow year to date. As the platform scales, look for the company to start seeing operating leverage through the income statement, generating solid free cash flow and operating earnings.

PL PS Ratio data by YCharts

Cheaper valuation, but still with risk

SpaceX and Rocket Lab are two promising space-based businesses, but trade at expensive multiples to trailing sales. SpaceX has a P/S ratio of 96, and Rocket Lab has a P/S ratio of 55. These are two of the highest P/S ratios in the world for large-cap stocks, meaning it will be difficult for the businesses to grow into their current valuations.

Planet Labs is not dirt cheap, but it does have a cheaper valuation than either of these space giants, with a P/S ratio of 14.6. It is growing quickly, has better gross margins since it is not actually launching rockets into orbit, and is generating positive free cash flow. SpaceX and Rocket Lab are both burning cash.

With a market cap of $6 billion, Planet Labs could be undervalued over the next 10 years if it can keep up this growth trajectory. In this fiscal year, it expects revenue of upward of $441 million. Over time, this could grow to $1 billion or more with a nice operating margin of 20% or higher at greater maturity, given its strong gross margins. This makes Planet Labs an interesting growth stock to buy for exposure to the space economy, and a much better opportunity than either SpaceX or Rocket Lab at current prices.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Planet Labs PBC and Rocket Lab. The Motley Fool has a disclosure policy.