Many space-oriented companies went public by merging with special purpose acquisition companies (SPACs) in 2021. That process was simpler and faster than filing a traditional IPO, but it also allowed companies to set ambitious long-term projections, which attracted a lot of speculative investors.
Unfortunately, most space-oriented SPACs went bankrupt, attracted regulatory crackdowns, pivoted toward other industries, or went private again. But a few of those tiny businesses survived the washout and continued to grow.
One of those survivors is Rocket Lab USA(NASDAQ: RKLB), a developer of reusable orbital rockets. It's still a speculative stock, but I think it could easily turn a modest $500 investment into a few thousand dollars over the next few years.
Image source: Getty Images.
What does Rocket Lab USA do?
Rocket Lab's main product is the partially reusable Electron orbital rocket, which can carry smaller payloads of about 300 kilograms into space. It's already been successfully launched 53 times over the past seven years, and its customers include NASA, the U.S. Space Force, the Swedish National Space Agency, Capella Space, and BlackSky.
By comparison, SpaceX's Falcon 9 can carry up to 13 metric tons to space. But a single Electron launch only costs about $7.5 million, compared to a $67 million price for each Falcon 9 launch. That price difference makes the Electron a more flexible option for companies that only want to send lighter cargo into space. Spreading out large payloads across multiple Electron rockets can also hedge against the failure of a single large rocket.
Rocket Lab's next rocket, Neutron, is expected to surpass the Falcon 9, with a maximum capacity of 15 metric tons, when it arrives in 2025.
How rapidly is Rocket Lab USA growing?
Rocket Lab USA ramped up its annual launches over the past three years, but its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins deteriorated as its net losses widened.
Metric | 2021 | 2022 | 2023 |
|---|---|---|---|
Electron launches | 6 | 9 | 10 |
Revenue | $62 million | $211 million | $245 million |
Adjusted EBITDA | ($44 million) | ($39 million) | ($91 million) |
Adjusted EBITDA margin | (70%) | (18%) | (37%) |
Net loss | ($117 million) | ($136 million) | ($183 million) |
Data source: Rocket Lab USA.
But in the first half of 2024, its revenue surged 70% year over year to $199 million as it launched five more Electron rockets and signed 17 new launch contracts. Its adjusted EBITDA margin improved to -22% during that period, and it narrowed its net loss year over year from $92 million to $86 million as it expanded its higher-margin space systems division to reduce its dependence on its lower-margin launch services division.
For the full year, analysts expect Rocket Lab's revenue to surge 74% to $425 million, with an adjusted EBITDA margin of -23%. From 2024 to 2026, they expect its revenue to increase at a compound annual growth rate (CAGR) of 45% to $887 million as its adjusted EBITDA margin turns positive by the final year.
Based on those estimates -- which we should take with a grain of salt -- Rocket Lab's stock looks reasonably valued at 8 times next year's sales. With a manageable debt-to-equity ratio of 1.6 and $497 million in cash, cash equivalents, and marketable securities on its balance sheet at the end of the second quarter, the company still has plenty of breathing room to ramp up its production before it needs to raise more cash or take on more debt.
What are the longer-term catalysts for Rocket Lab?
Rocket Lab's successful Electron launches have been attracting a lot of attention. This August, it shipped two research satellites for NASA's next Mars mission. In early October, NASA awarded Rocket Lab with an additional study contract for that mission to retrieve rock samples from Mars to Earth for the first time.
In September, it secured a new contract to deploy an entire constellation of 25 satellites for Kinéis, a global Internet of Things (IoT) connectivity provider, through five separate Electron launches. Those first launches will commence by the end of 2024.
Those new contracts could drive Rocket Lab's evolution into a major competitor for SpaceX and give it a lot more staying power than its other SPAC-backed space exploration peers. If you're looking to invest a small amount into a speculative SPAC-driven space stock, I believe Rocket Lab USA checks all the right boxes.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.
