The space business has become a big opportunity for investors, as more private companies crop up to provide services to the government, private individuals, and companies. But upfront costs are high, and it's not always clear what the return on that investment will be, making this a risky space for investors.
If you're willing to take the risk on space stocks, there are some investment opportunities with high potential rewards if plans play out as hoped. Here's a look at why Virgin Galactic (SPCE 3.19%), Rocket Lab (RKLB 3.29%), and Kratos Defense and Security Solutions (KTOS 9.35%) are three space stocks to buy and hold long-term.
1. Virgin Galactic
When Virgin Galactic hit public markets there were plans to take people to space on a nearly daily basis by now. Delays because of safety concerns and upgrades to aircraft pushed back commercial operations, but the company now plans to launch commercial operations in the second quarter of 2023.
The financial impact when commercial operations get going will be dramatic. Tickets are going for $450,000 or more per seat, meaning nearly $2 million in revenue for a flight of just 4 people. And that's just the start.
There's a lot of opportunity to grow as the company expands operations. The Delta Class spaceships will have six seats and be able to fly weekly. A high-speed aircraft that could travel at Mach 3 is also being worked on with the help of Rolls-Royce's engine propulsion expertise, although this project is in the very early stages.
Space has never been closer for the average (wealthy) person, and Virgin Galactic could be a leader in a new next phase of space experiences for the masses.
2. Rocket Lab
One of the exciting developments in the space industry is reusable rockets, and Rocket Lab USA (RKLB 3.29%) is one of the ways investors can get exposure to this business. The company's recent quarterly results showed $63.1 million in revenue, an $8.5 million gross profit, and a loss of $34.6 million. The company clearly isn't profitable, but revenue in the first nine months of the year jumped 360% to $159.2 million, so this is a high-growth company.
Rocket Lab is building on the success it's had in the past year. The company won $14 million of awards to provide motorized lightbands (which help separate space vehicles from launch vehicles) to Lockheed Martin (LMT -0.69%) for a U.S. Department of Defense project, signed a contract with a satellite operator for a mission in January, and is preparing its first mission from U.S. soil.
It's easy to see that Rocket Lab has to improve operational performance and increase revenue to be profitable, but the company is on the right path, and has nearly $500 million of cash to provide a runway to get to profitability.
3. Kratos Defense and Security Solutions
One defense contractor that's moving into space products is Kratos Defense and Security Solutions. The company's space, satellite, and cyber business generated $85.9 million in revenue last quarter, up from $72 million a year ago.
Total revenue was $228.6 million, so space is a much smaller percentage of the business than at Virgin Galactic or Rocket Lab, but that can give some diversification for investors.
What's interesting about the company's recent results is it's having trouble finding enough labor to meet contracts, and cutbacks on some funding projects hurt the bottom line. You can see below that this resulted in a net loss over the past year, which is part of the ups and downs in the defense and space business.
KTOS Revenue (TTM) data by YCharts
Like the other companies mentioned, Kratos should benefit from the tailwinds behind space investment and satellites in particular. Given that it's a defense contractor, this may not be a huge growth business like the others, but it also has a smaller chance of crashing if demand doesn't materialize or rockets don't perform as planned. In that sense, it's the safest of the three.
The final frontier
Space is a new frontier for private companies over the last decade or two, and public market investors are just now getting the opportunity to invest in some of these innovative businesses. But there's a lot of risk given the immaturity of space business models. Investors should keep space stocks as a small percentage of their portfolio and allow those stocks to grow over time. I think there's a lot of potential in space stocks, but there's also risk that can't be ignored.
