With the halfway mark of 2024 close at hand, your portfolio has likely generated some abnormally high returns in select areas. Sectors including technology and energy have performed particularly well.
One stock that hasn't fared so well is Rocket Lab USA (RKLB -1.24%). As of June 21, share prices of the space exploration business are down 9% in 2024. Despite the drop (or maybe because of it?), Ark Invest CEO Cathie Wood has been steadily adding to her position in Rocket Lab over the last couple of months through her ARK Space Exploration & Innovation ETF and ARK Autonomous Technology & Robotics ETF. It's possible Wood is using a dollar-cost averaging strategy to lower her cost basis in Rocket Lab, as the stock currently trades near all-time lows.
Let's dive into why this could end up being a lucrative move by Wood and assess if Rocket Lab shares could be headed higher.
Rocket Lab has some momentum, but...
Contrary to what the stock price reflects, Rocket Lab's business had a good start to 2024.
Earlier this month, Rocket Lab successfully launched satellites for a French Internet of Things (IoT) company called Kinéis. The satellite mission was called Electron and represented Rocket Lab's 50th commercial launch. More importantly, the successful deployment gave Rocket Lab bragging rights as the fastest commercial space business to complete 50 launches.
Elsewhere, the company is in line to receive up to $24 million in federal funding under the CHIPS Act to help finance the production of semiconductors that are used in spacecraft.
One would think these milestones should warrant some positive sentiment from investors. Rocket Lab has proven that its services are in demand, and the company has even received some validation from the U.S. government. But the cratering stock price suggests investors were left uninspired.
Image source: Getty Images.
...is the stock headed for liftoff?
The chart below illustrates some important financial metrics to note about Rocket Lab.
RKLB Revenue (Quarterly) data by YCharts
It's important to understand that space exploration is a capital expenditure (capex)-intensive business. But even with these hefty costs, the revenue trend illustrated above suggests that Rocket Lab is capable of meeting its backlog demand and is beginning to achieve a noticeable top-line acceleration.
This is good news, but there is more to unpack. The operating profile also sheds light on Rocket Lab's margin and expense profiles. While gross profit is also improving, operating expenses remain elevated.
Even when adjusting for stock-based compensation, the $67 million in operating expenses pictured above would be normalized to $56 million on a non-generally accepted accounting principles (GAAP) basis. This represents an increase of 40% year over year.
Given this dynamic, it's not surprising to see that Rocket Lab's free cash flow remains negative. Despite some modest improvements in working capital coupled with rising revenue, the company's ability to reach breakeven or positive cash flow remains questionable. For the quarter ended March 31, Rocket Lab reported free cash flow of negative $22 million.
On top of all of this, Rocket Lab reported a slight dip in its backlog at the end of the first quarter. Again, part of the decline in backlog was due to increased revenue recognition -- which is a positive thing on the surface. However, growth investors should want to see a combination of accelerated revenue trends and enough net new bookings activity to bolster its backlog.
Is Rocket Lab stock a good investment right now?
Rocket Lab is in an interesting position. I think investors see the company as doing well, but not well enough to warrant buying the stock. While Wood's purchases represent some institutional support, it's important to acknowledge that she often makes speculative bets among her funds.
So long as Rocket Lab continues operating at a loss, the company's cash position will become increasingly jeopardized. In order to improve its liquidity, Rocket Lab may need to issue additional stock (which would be dilutive for shareholders) or potentially raise debt.
Neither of those options is ideal at Rocket Lab's current stage of development as a company. While the company has some potential, the prudent thing for investors interested in this stock to do would be to continue monitoring Rocket Lab's progress. Right now, the stock's falling price seems warranted and growth investors can find better options elsewhere.
