The concept of space as a new, accessible frontier is steadily shifting from Hollywood script to reality. Governments and enterprises are launching thousands of satellites into orbit, and the U.S. created the Space Force a few years ago. It's only the beginning.
According to estimates by Morgan Stanley, the space industry will grow to over $1 trillion by 2040. However, it's still early for investors because there aren't many dedicated space-focused companies in which to invest. Rocket Lab USA (RKLB -1.24%) could be one of them.
Here is why this risky space stock packs millionaire-making potential.
Establishing itself in the new frontier
Rocket Lab is an end-to-end space company. It sells launch services, designs and builds spacecraft, and offers software and services for missions. Rocket Lab has launched 190 satellites into orbit on its Electron small-load launch system. It's also developed Neutron, designed to take heavier loads to orbit.
Importantly, Rocket Lab isn't an "idea" or some company with promises but no sales. The business is approaching $300 million in annual revenue, and analysts believe that it will cross $1 billion by 2027.
RKLB Revenue (TTM) data by YCharts
Establishing itself in this upstart industry is the most crucial thing Rocket Lab can do for its long-term investment prospects. Despite space being a relatively new frontier, it's already competitive. Privately held SpaceX is the most formidable threat; it packs an alleged $200 billion valuation, many times larger than Rocket Lab's $2.5 billion market cap.
Rocket Lab and SpaceX use reusable rockets and aim to make as much of the launch system reusable as possible to achieve best-in-class costs. Rocket Lab's success in reusable launch systems could determine how much market share it can eventually win. Rocket Lab may never displace SpaceX as an industry leader, but space isn't necessarily a winner-take-all market, and Rocket Lab continues to win business. The company just signed a record deal with Synspective for 10 Electron launches.
Financially stable, though balance sheet risks are real
Balance sheet risk is often the biggest problem when investing in small, promising companies like Rocket Lab. Launching rockets into space is a bold, challenging, and expensive endeavor, so Rocket Lab is not some asset-light business with quick profits. That said, Rocket Lab appears on solid footing right now.
The company has a healthy revenue outlook for the following year. Management noted a $1 billion backlog as of the first quarter of 2024 and expects to realize 42% of it (over $400 million) as revenue over the next 12 months. The company's operating cash burn improved significantly from $42.2 million in the fourth quarter of 2023 to just $2.6 million in Q1 2024. The total cash burn was worse because of purchases of property and equipment, but it shows that day-to-day operations are nearly at breakeven.
RKLB Cash and Short Term Investments (Quarterly) data by YCharts
It's not a stretch to see the business generating free cash flow in the coming quarters as revenue rises.
At the same time, there is short-term risk because the company carries less than $100 million in net cash on its balance sheet. There is $492 million in cash versus $407 million in debt. That's not a huge deal as the business progresses toward turning a profit, but a significant setback at the company could quickly create a sticky situation.
This financial risk helps explain why shares are trading so far off their former high.
Multibagger potential is there for portfolio-changing returns
When discussing a company like Rocket Lab, it's hard to point to specific numbers to value the stock. Simply put, figuring out the company's earnings years into the future is a wildly moving target. Investors are likely better off looking for trends inside the business. For example, you can see that Rocket Lab has a path to turning a profit, perhaps in the next couple of years.
You can see the enormous opportunity ahead of Rocket Lab. The space economy can still feel futuristic, but it's coming and likely will be massive. There are many opportunities for a business like Rocket Lab to make money, from launches to maintaining assets in orbit. Then, you see that Rocket Lab is worth just $2.5 billion despite the potential to do billions of dollars in revenue later this decade.
Don't get it twisted; Rocket Lab remains risky until it's on firm financial footing and carves out a clear place in the space industry. However, those patient enough to buy while it's small and store the stock for later this decade could eventually see life-changing investment returns if all goes well.
