Planet Labs Stock Plunged Following Its Recent Earnings Call. Should Investors Buy the Dip?

Space stocks have been a hot topic, and Planet Labs (NYSE: PL) is one company in the industry that has surged 474% over the past year. The stock reached $51 per share in late May but has since declined by 40%, including a 26% one-day drop the day after its June 4 earnings announcement.

Here's what has been driving Planet Labs' stock lower and whether investors should buy the dip in the space stock.

Planet Labs' growing defense business

Planet Labs operates a constellation of satellites that take images of planet Earth multiple times a day. It provides this imagery, along with spatial analytics and software, to government and enterprise customers daily, enabling them to monitor environmental changes, support defense operations, or optimize crop yields.

Over time, Planet Labs has evolved from an open-data start-up to a key contractor for defense and intelligence agencies, opening itself up to more lucrative government contracts. Its revenue has grown thanks to deals with government agencies such as the National Geospatial-Intelligence Agency, NASA, and NOAA. Earlier this year, the company was selected as a prime contractor under the $151 billion SHIELD IDIQ contract by the Missile Defense Agency.

Image source: Getty Images.

A net loss and equity offering weighed on the space stock

In Planet Labs' first quarter, the company generated stellar earnings, with record revenue of $94.2 million, up 42% year over year, driven by strong demand from international defense and intelligence customers. However, it also posted a net loss of $138.9 million, largely due to a non-cash revaluation loss of $106.5 million on warrant liabilities. In the quarter, warrant holders exercised their remaining warrants, generating $107.8 million in cash for Planet Labs, dragging down its earnings.

PL Revenue (TTM) data by YCharts

In addition, the company announced a $1.5 billion at-the-market (ATM) equity offering program, which triggered the 26% sell-off following its earnings announcement due to investor fears of dilution. Planet Labs had a market capitalization of $15 billion just before the announcement, implying up to a 10% dilution if the proceeds are fully utilized.

Should you buy the dip on Planet Labs?

Planet Labs is capitalizing on the stock's huge run-up over the past year and will use the funds to expand its satellite constellation, which could help it secure additional defense contracts. The proceeds could also help fund long-term technology investments in space, including space-based data centers, with which it is working closely with Alphabet.

The space company's growing constellation of satellites should help it secure more deals as well as a steady stream of revenue through long-term agreements. Its backlog continues to grow at a staggering rate, increasing 72% from last year to $906 million. With that in mind, Planet Labs is pre-profit and expanding rapidly, leaving the stock vulnerable to volatility -- making it best suited for growth-focused investors willing to hold it through these fluctuations over the long term.

Courtney Carlsen has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Planet Labs PBC. The Motley Fool has a disclosure policy.