The space economy has boomed for the last few years. Interest has been reinvigorated in the final frontier, spurred on by geopolitical competition as well as private companies such as SpaceX. Analysts expect the sector to hit over $1 trillion (with a T) in annual spending by 2030, which would make it one of the largest industries worldwide.
An issue arises for individual stock investors, though: How do you bet on the growth of the space economy? SpaceX is large but private, and public sector investments flow through to national laboratories and NASA. A lot of space economy stocks have been proven to be no more than a bunch of hot air, destroying tons of shareholder value in recent years.
So what can investors do to invest in the space economy? Enter Rocket Lab (RKLB 3.29%). The space flight start-up might be the second coming of SpaceX and is executing an ambitious roadmap to become one of the backbones of the space economy. Should you buy shares with the stock trading under $5?
Rocket Lab: The next SpaceX?
Rocket Lab -- along with SpaceX -- is one of the two private companies that consistently launches commercial loads into space (mainly satellites). Its niche is currently in small payloads with its Electron Rocket, which can take 300 kg to low Earth orbit. It has performed 43 launches to date across the company's three different launch pads and is considered the only small reusable launch vehicle in service. SpaceX's vehicles currently target larger payloads.
But Rocket Lab's ambitions don't end there. It not only wants to help customers launch things into orbit, but also help them complete their missions once they get there. These products include the Photon Spacecraft, software, and solar energy systems. Management wants Rocket Lab to develop into an end-to-end solution for space missions, hopefully providing a superior value proposition than the competition.
The company has grown quickly, with revenue hitting $237 million over the past 12 months ending in Q3 2023. This is up from less than $100 million a few years back. With a backlog of $582 million growing 9% quarter over quarter, it looks like revenue is set to continue growing for this disruptive start-up.
Everything hinges on the Neutron
One problem with Rocket Lab, perhaps unsurprisingly, is the fact that it is highly unprofitable. It has a gross margin of just 16% and an operating margin of negative 70%. Free-cash-flow burn is just under $50 million a quarter. Rocket Lab did have close to $300 million in cash at the end of last quarter and just raised $355 million in convertible senior notes, but eventually, the company needs to generate a profit.
A big portion of these losses comes from its investments in its next rocket, aptly called the Neutron. With a payload of 13,000 kg -- or over 40 times the size of the Electron -- a fully operational Neutron rocket could help lead to a step change in revenue generation for Rocket Lab's launch business as well as its space systems segment. Payloads correlate with launch costs, so just a few Neutron launches each year could mean hundreds of millions in revenue for Rocket Lab.
For reference, SpaceX is aiming for $15 billion in revenue this year. Rocket Lab is just a sliver of this at less than $250 million in annual revenue, which shows the financial opportunity of getting the Neutron regularly launched with commercial customers. Management is aiming for the first Neutron test flight sometime in 2024.
RKLB Free Cash Flow (Quarterly) data by YCharts
Is the stock a buy right now?
With the stock under $5, Rocket Lab trades at a market capitalization of just $2.3 billion. It is hard to value an unprofitable company, but if Rocket Lab is able to get the Neutron rocket operational, it will set itself on a path to generating billions of dollars in revenue each year.
With only one pure-play competitor (SpaceX) in an industry set to spend $1 trillion a year, there is an incredible amount of upside for Rocket Lab stock. Despite its lack of profitability, I think that makes Rocket Lab stock a buy at these prices for risk-tolerant investors.
Any reader looking to buy Rocket Lab should make it a small position. This is a stock with a lot of upside, but also a lot of risk. If the company is successful, a small position will turn into a big one over time. But if the company fails and the stock goes to zero, a small position won't wreck your portfolio.
