DigitalGlobe Still Trying To Find The Right Model

It's been a while since I've written about DigitalGlobe (NYSE:DGI), but in the meantime, a lot of the concerns I had about this satellite imagery and analytics company back in early 2015 have proven to be valid. Namely, DigitalGlobe was too aggressive in stoking expectations for a significant ramp in commercial revenue and arguably a little too cavalier in talking down the threat posed by small-sat competitors.

As old optimism and expectations were washed out, DGI shares slid almost non-stop from the time of my last article to a low early this year of under $12 (a roughly two-thirds fall). Since that time, though, management has gotten a lot better about shifting toward an "under-promise/over-deliver" model with the Street, commercial revenue has improved, and the company has had some notable success expanding its business with friendly foreign governments.

There are still numerous relevant operating threats for DigitalGlobe, and the true ultimate size of the commercial opportunity is a key unknown. That said, management has done a good job of improving margins despite a lower revenue trajectory and mid single-digit FCF growth from 2015 onward can support a fair value close to $30.

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DigitalGlobe Still Trying To Find The Right Model

Seeking Alpha: DigitalGlobe Ready To Reap Cash Flow, But Still Has To Build Its Commercial Efforts

Still deep in the middle of the "show me" part of its story, DigitalGlobe (NYSE:DGI) remains an interesting company but a risky stock. On one hand, no other company can offer the sort of high-quality, high-resolution satellite imagery that DigitalGlobal offers. On the other hand, it's uncertain how many customers really need top-notch image quality and projections of commercial market demand could prove significantly overheated.

I am not as fond of the stock at this level as I was back in August. I do expect the company to see strong improvements in margins and free cash flow over the next few years, but a lot of that is already worked into the share price. For the stock to really work as a long-term holding, there needs to be strong demand in sectors like agriculture, mining, and energy. None of those three are in great shape today, so projections based on current conditions aren't going to look good, but the potential is there to support high single-digit revenue growth over an extended time period.

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DigitalGlobe Ready To Reap Cash Flow, But Still Has To Build Its Commercial Efforts

Seeking Alpha: Can DigitalGlobe Relaunch After A Reset To Expectations?

Overheated expectations for DigitalGlobe's (NYSE:DGI) commercial business came home to roost earlier this year, when weak guidance after fourth quarter earnings sent the shares down 30%. Since then, management has seen a successful satellite launch and the U.S. government agree to allow them to sell higher-resolution images to its customers, as well as announcing a share buyback. Although the commercial opportunity is still a "show me story", DigitalGlobe does have the advantage of offering the best quality images in the market. Revised expectations still offer upside, but the company would probably serve its interests more effectvely by better managing analyst expectations.

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Can DigitalGlobe Relaunch After A Reset To Expectations?

Seeking Alpha: Commercial Becoming More And More Important For DigitalGlobe

Back in September, I thought DigitalGlobe (DGI) was a good name for growth-oriented investors to check out, as I thought synergies from the GeoEye merger and growing commercial use of satellite imagery and data could fuel a long run of above-average growth. Shares have certainly cooperated since that mid-September report, with DigitalGlobe shares up about 18% and trouncing the S&P 500.

Whenever a stock more than doubles the return of the market over a 12-month period, it certainly makes valuation a valid question. I wouldn't say that DigitalGlobe is an inarguable bargain at today's price, but many large potential customers are stepping up their commitment to growing businesses that rely on satellite data. I do worry that sell-side analysts are playing the "the price has reached my target … so it's time to raise the target" momentum game, but a long-term free cash flow outlook still suggests meaningful opportunity.

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Commercial Becoming More And More Important For DigitalGlobe

Seeking Alpha: DigitalGlobe Hopes A Near-Monopoly In Satellite Imaging Pays Off

"Up here in space, I'm looking down on you; My lasers trace everything you do." Judas Priest, "Electric Eye"

The jury is still out as to whether or not DigitalGlobe (DGI) can build a strong business in satellite imaging outside of government defense and intelligence contracts. The integration of the company's merger with GeoEye already appears ahead of schedule, and not unlike the merger that created Sirius XM Radio (SIRI), I expect the combined entity to be stronger and more profitable than either of its constituent parts would be on their own. Even so, getting companies in industries like oil/gas, mining, and agriculture is going to be the factor in whether investors' solid enthusiasm for these shares in 2013 pays off down the road.

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DigitalGlobe Hopes A Near-Monopoly In Satellite Imaging Pays Off