Shares of up-and-coming space company Rocket Lab (RKLB 2.60%) are down 10% this week as of 2 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
The culprit for this decline came Monday night, when Rocket Lab announced a new $750 million at-the-market equity offering.
Due to the shareholder dilution involved from the higher outstanding share count that comes alongside an equity offering, a drop in share price isn't unwarranted. However, it may not be bad for Rocket Lab and its shareholders over the long run.
NASDAQ: RKLB
Key Data Points
The argument for shareholder dilution in Rocket Lab's case
First, Rocket Lab is home to a market capitalization of approximately $23 billion. This implies that shareholder value could be diluted by roughly 3% -- making this week's 10% drop slightly overdone.
Second, the company's stock is up sixfold in just the last year. A share offering following an incredible run like this is the perfect time to raise cash.
Since Rocket Lab is still in hypergrowth mode, it has consistently burned between $100 million and $200 million in free cash flow (FCF) over the last few years.
This week's share offering, with shares at all-time highs, gives the company the best bang for its buck and provides it with cash to fund expansion plans.
Looking to build out its payload capabilities following its $275 million purchase of Geost and aiming to launch its larger, reusable Neutron rocket by year-end, this influx of cash will go a long way toward the company's ambitions.
However, even after this week's decline, Rocket Lab still trades at a sky-high price-to-sales (P/S) ratio of 48, so interested investors shouldn't rush to go "all-in" right now, despite the stock's promising future.
