The space industry has garnered a lot of attention over the last several years. A good deal of the media coverage surrounding commercial space companies stems from a start-up called SpaceX.
The company was founded by Elon Musk and reportedly has a valuation of $175 billion. Besides launching rockets, SpaceX also operates a satellite operation called Starlink.
SpaceX might be the most mainstream commercial rocket company, but many others are more easily accessible for investors.
One lesser-known space stock that is liked by Cathie Wood, technology investor and CEO of Ark Invest, is Rocket Lab USA (RKLB 3.29%). With the stock trading at rock-bottom valuations, now could be an opportunity to buy the dip and allocate a position in your portfolio toward the budding space industry.
What does Rocket Lab do?
Rocket Lab hit the public exchanges a couple of years ago during the craze for special purpose acquisition companies (SPACs). On its website, the company markets itself as an end-to-end space business. More specifically, it specializes in launch services, satellite manufacturing, and software used on spacecraft.
Rocket Lab works closely with government agencies such as NASA, the Defense Advanced Research Projects Agency (DARPA), and the U.S. Space Force. In the private sector, the company has launched satellites for Canon Electronics and Planet Labs.
While this is exciting progress for smaller players in the space economy, the competitive landscape is actually quite crowded.
Image source: Getty Images.
More competition than you might think
Think about it: Launching a rocket into orbit is a complex task, to say the least. For this reason, there are all sorts of companies that contribute to space operations, even if only at a peripheral level.
Some of the more obvious companies playing an integral role in space exploration are aerospace and defense contractors such as Boeing, Lockheed Martin, L3Harris Technologies, and Northrop Grumman. From equipment, satellite imaging, and mission-critical communications technology, there are loads of companies that provide products and services for spacecraft.
On the launching side of the equation, Rocket Lab competes more directly with Virgin Galactic, Astra Space, SpaceX, and Blue Origin -- the operation funded by Amazon founder Jeff Bezos.
Should you invest in Rocket Lab?
An investment in Rocket Lab is, in some ways, akin to a venture capital (VC) deal, which are known to support emerging companies during the earliest days of operations. In exchange for capital, VC investors acquire an equity stake that, in theory, could earn a multibagger return over the investment horizon.
As of the time of this writing, Rocket Lab stock was trading 50% below its IPO levels. So while it seems like reality is setting in for this once high-flying space innovator, investors with strong conviction around the space industry might see this as an opportunity.
One of the biggest challenges of rocket companies is capital restraints. Unlike SpaceX or Blue Origin, which the funding from large institutional investors and from Musk and Bezos, respectively, companies like Rocket Lab turned to the capital markets for liquidity purposes. The graph below illustrates Rocket Lab's cash and free cash flow over the last year. The dynamic here is that the company's burn rate is eating into its cash position at a noticeable rate.
RKLB cash and equivalents (quarterly) data by YCharts
If SpaceX's valuation as well as the sheer number of players in the rocket launching and satellite imaging realm are any indication, the upside for Rocket Labs could be enormous. But with that said, it's obvious that as the company continues to burn cash, it may have to turn to a secondary offering to raise capital. This action could dilute shareholders. For this reason, it's probably best to limit Rocket Lab to a small allocation in your portfolio and closely monitor its progress.
