The space economy is surrounded by a lot of hype. Companies like SpaceX and Amazon are investing billions of dollars to build businesses beyond planet Earth, with some analysts expecting the industry to hit a size of $1 trillion in 2030.
However, a lot of this hype hasn't materialized into stock returns. For example, the Ark Invest Space Exploration and Innovation ETF is off 33% from its peak, even as the broad market inches closer to all-time highs.
Rocket Lab (RKLB 3.29%) is one of these ambitious space start-ups trying to propel the industry to new heights (pun intended). It is one of the few companies to successfully launch rockets into orbit, passing even long-running start-up Blue Origin. However, investors have soured on the stock, with shares down close to 80% from all-time highs. Does that now make the stock a buy for investors looking to bet on the space economy?
Scaling up operations, but losing money
Rocket Lab was started back in 2006 by entrepreneur and space enthusiast Peter Beck. He calls Rocket Lab an end-to-end space company, a catchy moniker that essentially means he wants it to offer customers products and services for every part of spaceflight. Of course, these include rocket launches, but also satellite services, space modules, solar panels for orbital objects, and in-flight services.
Over the last few years, Rocket Lab has built up its capabilities internally and acquired other space economy companies to fulfill its ambitions. Today, it is operating a small Electron rocket that can take a payload of 300 kg into space. The system has performed 41 successful launches to date and deployed 171 satellites.
Customers pay for the size of the payload, and other services layered on top. It is the only small-launch program in operation today (SpaceX rockets are much larger), giving Rocket Lab a nice little niche to start out in.
But the company is losing a lot of money, with a negative free cash flow of $135 million over the past 12 months on just $236 million in revenue. In order to get into the black, Rocket Lab will need to succeed with its much larger Neutron rocket. It has not flown yet but is planned to be commercially operational over the next few years.
The Neutron rocket has a payload of 13,000 kg. A larger payload means more revenue per flight, which should help Rocket Lab get to positive cash flow. There has been a ton of research and development costs going into the Neutron rocket, along with fixed costs for Rocket Lab's launch facilities. In order to cover these costs, revenue is going to need to be much higher a few years from now.
The second SpaceX?
What should get investors excited about Rocket Lab is how well the leading space economy company SpaceX is doing. The company is not publicly traded but reportedly does $1.5 billion in quarterly sales, which are growing quickly. This shows the potential demand for private space flight services if you can get your rocket programs consistently and reliably launching to orbit.
When Rocket Lab gets its Neutron ecosystem up and running, it will be able to move into larger payloads and offer comprehensive flight packages to more commercial customers. With the company well ahead of any third-place competitor, it has a chance to be the second winner along with SpaceX in this industry. With hundreds of billions of dollars and perhaps trillions of dollars expected to be spent on the space economy in the coming decades, there is a huge market opportunity for Rocket Lab to go after.
There likely won't but just one winner in the space flight sector, meaning eventually SpaceX will cede some market share to these upstarts. Rocket Lab is poised to be one of them.
An important metric for Rocket Lab investors to track is its order backlog. Last quarter, this number hit $582 million, up 9% from the previous quarter. Investors should expect it to climb much higher in the next few years as Rocket Lab increases the breadth of services it can offer customers. If it doesn't, the company will likely struggle to generate a profit.
RKLB Revenue (TTM) data by YCharts
This is a big and risky bet on the future
Even though Rocket Lab is making some great progress, it is still in a sticky spot. It has just $374 million in cash and equivalents on its balance sheet, which will run dry at its current cash burn rate. That means if it doesn't succeed with its Neutron rocket program, it will likely need to raise money from the capital markets with its stock price in the gutter. This would be bad news for investors.
That being said, there is still a chance this company is wildly successful. If you are bullish on Rocket Lab and want to buy some shares, you'll want to make it a small position in your portfolio.
Why? Because there is a chance the company will fail. If it does, a small position won't bring down your entire portfolio. But if it succeeds and puts up huge returns for investors, you'll still reap the rewards. This is a high-risk but high-reward bet that should be treated accordingly.
