Rocket Lab USA(NASDAQ: RKLB) is going to Mars. I mean that literally: The company just announced the completion of two spacecraft bound for the planet in the Escapade mission for the National Aeronautics and Space Administration (NASA) and the University of California.
The mission is scheduled for launch in October and will study plasma and electric fields around the planet. Exciting stuff.
For Rocket Lab's business, this mission will hopefully prove its capabilities as a custom spacecraft supplier as it works to become a vertically integrated spaceflight company. With this news and other successful rocket launches with its small Electron rocket this summer, Rocket Lab stock has shot up 30% in the past month as investors get excited about its potential growth.
Here's what this Escapade mission could mean for Rocket Lab, and whether the stock is a buy after jumping 30% in August.
Proving spacecraft capabilities for a key customer
The origins of Rocket Lab are with its small Electron rocket. The nimble vehicle entered a launch market dominated by SpaceX in the one area the latter lacked capabilities: small launch loads. This has allowed Rocket Lab to become the second major player in commercial launches, with the Electron taking off multiple times every quarter.
While this was a great development, Rocket Lab does not necessarily generate significant revenue directly from launch contracts. For example, last quarter, it generated $106 million in total revenue, but only $29.4 million came from launch contracts for the Electron rocket.
The other revenue comes from spacecraft development like the Escapade mission. The company has built and bought capabilities to manufacture spacecraft for commercial and government customers, with more than $720 million in value for its current signed contracts.
Proving its capabilities for NASA in this Mars mission will not only generate revenue for Rocket Lab but also serve as proof and marketing that the company can be a trusted supplier of spacecraft. My hunch is that if the mission is successful, it will see a boost in contract signings in the coming years. This will allow it to invest and further expand its operations.
The next step: bigger launch capabilities
The Escapade mission is being launched on a rocket made by Blue Origin, one of Rocket Lab's direct competitors. Over the long run, Rocket Lab would love to further vertically integrate with this mission.
This is why it is building the Neutron rocket. This second-generation rocket from Rocket Lab will have over 40 times the payload capacity (the mass it can carry into space) compared to the Electron.
More payload capacity will enable Rocket Lab to expand its customer base and compete with the likes of SpaceX for launch contracts. Even better, the more payload capacity on a rocket, the more a customer pays for a launch contract. If the Neutron becomes commercially successful, it could lead to a step change in launch revenue for Rocket Lab.
The Neutron, now in development, will be costly. This is a big reason the company burned over $150 million in free cash flow and $173 million in operating income over the past 12 months. The Neutron is key for Rocket Lab to reach profitability, and its development is something investors should watch closely.
RKLB free cash flow; data by YCharts.
Take a measured approach to this risky stock
At a market cap of just $3 billion, there is a ton of potential with Rocket Lab stock. If we simply look at its competitor SpaceX -- which is roughly valued at $200 billion -- there is plenty of room for Rocket Lab's market capitalization to grow if the business keeps growing.
Another way to look at it is the global space economy, which is expected to be worth over $1 trillion within a decade. With only a few competitors, Rocket Lab has a chance to capture a lot of this spending if it can keep developing worthwhile rockets.
But this does not mean Rocket Lab is guaranteed to succeed. There is a risk that the Neutron has major delays in commercial deployment. The company could face struggles with its spacecraft division if something goes wrong on the Escapade mission. With the space economy, nothing is a certainty. The business can literally blow up in your face if things go wrong.
Considering both of these factors, investors who are bullish on Rocket Lab should make it a small position in their portfolio. That way, if the stock works, it will become a larger position for you. But if it doesn't and things go wrong, it won't make a big dent in your wealth.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.
