Investors have flooded into space stocks over the past year, and with good reason. Space wasn't just the final frontier on Star Trek, it represents a whole new and potentially lucrative market for a wide range of companies.
Morgan Stanley estimates the global space industry could generate upward of $1 trillion in revenue by 2040.
But there are some serious risks that go along with that opportunity. Space tech tends to be volatile, at times literally blowing up on the launching pad. And just like some rocket designs prove to be better than others, some of these companies that investors love today will likely fall well short of expectations in the years to come.
It's too early to say for sure who the ultimate winners and losers will be. But we've seen enough from these companies to at least get an idea about who might have the right stuff.
Here's why three Fool.com contributors believe Rocket Lab USA (NASDAQ:RKLB), Virgin Galactic Holdings (NYSE:SPCE), and Spire Global (NYSE:SPIR) have the potential to defy the law of gravity and remain sky-high.
The least risky of a risky bunch
Lou Whiteman (Rocket Lab USA): Rocket Lab has been public for less than a month, joining the Nasdaq Stock Market on Aug. 25 after completing a merger with a special purpose acquisition company. And during that time it has blown up in a good way, with the shares up more than 50% in only a couple of weeks.
I've expressed a lot of skepticism about the new generation of commercial space start-ups, and given the somewhat questionable total addressable market and the massive number of companies -- and fresh capital -- chasing that opportunity, I am not certain any of the space whiz kids that have gone public in the last few years will be long-term winners. But Rocket Lab has better odds than most.
For one, while the company is new to public markets it has a solid history of putting satellites into orbit. Since May 2017, it has launched 21 missions, putting more than 100 satellites in orbit for customers including the U.S. government and large corporations. It also has a solid book of future business, including deals with NASA.
I worry we are reaching a point where there is too much launch capacity for the number of customers trying to put things in orbit, which could mean pricing issues for all of the companies involved. But RocketLab is focused on smaller low-Earth-orbit satellites, the fastest growing segment of the market.
The company is developing a second, larger launcher that should allow it to serve longer and heavier missions, including U.S. government classified work. RocketLab also has a plan to be a lot more than just a launcher, adding satellites, components, and services toward a goal of becoming an end-to-end supplier in the space business. Armed with the cash from its SPAC merger and a solid plan to reach breakeven, RocketLab should have upward of $500 million in surplus cash to use on acquisitions to try to consolidate a still young and fragmented market.
RocketLab is no bargain, sporting a market capitalization of $7 billion despite only recording $55 million in sales in the last 12 months. And given the uncertain size of the market and the number of competitors there is still a real risk this could blow up in a bad way. Investors should keep stocks like this to a small part of a well-diversified portfolio.
But there is great potential in space, and there will be winners to go along with the eventual losers. RocketLab looks like one of the best candidates out there to reach and sustain orbit.
Delayed gratification will pay off for investors
Rich Duprey (Virgin Galactic): The market has serious doubts about Virgin Galactic, and they're not completely unwarranted. The company that wants to be the space tourism leader has subverted more expectations than Rian Johnson did to Star Wars fans in The Last Jedi, but there's good reason to believe Virgin will eventually accomplish its mission, and not nearly as far into the future as its detractors suggest.
Virgin's decision to delay its Unity 23 flight with the Italian Air Force is a disappointment, yet wholly reasonable after it was notified by a third-party supplier of a potential part defect. As the spaceship company is already under scrutiny for alleged laxity when it comes to safety protocols, most notably because it deviated from its flight plan during Unity 22's July flight, which led to the Federal Aviation Administration grounding Virgin flights until it reviews the mishap, Virgin will likely exhibit an abundance of caution going forward.
That will lead to disappointment from time to time, but should result in a better company overall that can become a trusted name in commercial space flight.
In the meantime Virgin Galactic's stock is left sitting on the launchpad. Shares are down 61% from their record high in February and analysts have lowered their own price targets to the low- to mid-$30s range, which still represents over 40% upside for the coming year at the consensus midpoint.
Commercial space flight is a long-term pursuit, though Elon Musk's SpaceX seems to make it look almost effortless these days. Yet even its launch of the Inspiration4 the other day gave Virgin's stock a small lift because of the tremendous promise it holds.
It's a good bet Virgin will soon be able to put the issues that have confronted the rocketeer behind it and resume its mission to space. There's now an expectation of a mid-October schedule for the Unity 23's flight and Virgin's founder Rich Branson believes his company will herald a new era of space tourism, one which he maintains can begin as early as next year.
While reservations on Virgin flights currently go for $250,000, analysts expect that to double, which ought to be when the company will really take off. Buying in now will require patience, but should be well rewarded in the years to come.
Barely a month after its initial public offering, this space stock is already making acquisitions
Rich Smith (Spire Global): As I type this, space company Spire Global is wrapping up its second straight day of stock price gains. Spire stock rose an impressive 6.3% on Wednesday, but as it turned out, that was just the warm-up act. On Thursday, Spire exploded 16.9% higher -- definitely the "good" kind of an explosion.
What lit the candle on Spire stock this week?
On Tuesday, Spire announced it will be acquiring Toronto-listed exactEarth in a $161.2 million cash-and-stock deal. Spire noted the price values exactEarth at just 9.1 times trailing revenue, which makes it a relative bargain -- because Spire itself costs closer to 46 times revenue.
In exchange for this purchase price, moreover, Spire says it will grow its customer base by over 75%, adding 150 new commercial and government customers, and creating "substantial cross-selling opportunities [for] Spire's data and analytics products." It will also give Spire a minority interest in Internet-of-Things satellite company Myriota. And it will accelerate revenue growth for Spire. Illustrating that last point, exactEarth reported its own earnings on Tuesday, showing 26% year-over-year revenue growth in its space-based maritime data and analytics business -- and nearly triple last year's cash from operations.
In short, this is a move that will grow Spire's business smartly, and at a smart valuation.
As for Spire itself, the company is no slouch in the growth department either. Although data on such a new company is necessarily limited so soon after its IPO, we know that sales at Spire grew 34% in the first half of 2021. The company is not currently profitable, however, and for that reason I have to classify Spire as a speculative stock. Although I own it myself, I'd suggest investors consider this one risky until it has proven itself capable of earning profits from its business -- and suggest not investing any more in it than you can afford to lose.