Rocket Lab Stock Offers Pure-Play on Rockets
Companies that go public without revenues significantly underperform the market. At least, that’s what University of Florida professor Jay R. Ritter thinks as his research shows that a company with no revenues will underperform the market by nearly 30% over the first three years of trading (hat tip to StrictlyVC.) Then, there are special purpose acquisition companies (SPACs).
What makes the SPAC vehicle unique isn’t that it gives retail investors the short end of the stick. It’s that SPACs include something that the traditional IPO process doesn’t allow – outlandish forward-looking financial projections. SPAC investor decks spend very little time talking about the sorts of things risk-averse investors care about in favor of painting grandiose picture of hockey-stick revenues and lots of delicious fictional EBITDA numbers for all the Robinhood wankers to salivate over.
Today, we’re going to look at a proposed SPAC that has revenues – an amazing feat for a SPAC these days – and some very meaningful traction. A New Zealand rocket company called Rocket Lab plans to back their assets up into a SPAC called Vector Acquisition Corporation (VACQ).
About Rocket Lab
The first time we came across Rocket Lab was in a 2015 piece titled “Rocket Lab: Carbon Fiber Rockets Powered by 3D Printing.” At that time they were using 3D printing to produce all the primary components of their rocket engines which use high-performance lithium polymer batteries to drive their turbo-pumps. Back then, they were already booking launches, stating “some launches as far out as 2019 are already fully booked.” Three years later, we revisited the company’s progress – Rocket Lab Launches Into NewSpace Leadership Role – an aptly titled piece that talked about the company’s goal for monthly launches by 2019 and weekly by 2020. With 16 launches under their belt, they’re not quite there in terms of launch volume, but have already delivered 97 satellites into orbit.
Conspicuously absent from the above list is Elon Musk’s SpaceX, a space company that doesn’t do small rockets, but averaged one large rocket launch every two weeks in 2020 with over 100 successful launches under their belt. Another big difference between SpaceX and Rocket Lab is rocket reusability. That’s something we were able to tease out from the below slide (our annotations in blue):
A typical S-1 filing would contain the granular information we need to assess this investment opportunity, but not in SPAC-land, where actual revenues are mentioned only because they support the hockey stock growth that’s being peddled. Sixth slide from the end is where you’ll find Rocket Lab’s revenues in what can only be described as a visually stunning investor deck.
They managed to get off to a good start, but it looks like The Rona will get the best of them in 2021.
Rocket Lab’s Opportunity
Rocket Lab is just one of two private companies delivering regular and reliable access to orbit, the other being you-know-who. So, saying they’re “the second most frequently launched U.S. rocket” is kind of taking the piss. Still, they’re in front of the pack, and have managed to accomplish a lot in a short period of time. After spending a few months vetting New Zealand’s technology capabilities, we’re not surprised to see this small island nation is winning a lot of first-place medals.
The total addressable market for launching stuff into space is growing rapidly to reach $1.4 trillion by 2030, but you already knew that. You’ve read the same numbers for every other space SPAC that’s debuted – names like Momentus and Astra Space – neither of which (in our opinion) merit being placed alongside Rocket Lab. Being able to do so much in so little time is a testament to Rocket Lab’s ability to address other space applications outside of just sending small satellites into space.
To coincide with the news of their SPAC debut, Rocket Lab announced plans to start reusing their rockets, and part of that bodacious plan involves the creation of an advanced 8-ton payload class launch vehicle called the Neutron rocket. (The small-launch rocket they’re using today is called the Electron rocket.) There’s a whole lot more forward-looking content we could throw your way, but very little will be useful in making a buy decision.
To Buy or Not to Buy
Rocket Lab shares are suddenly worth nearly +40% more because – as everyone knows – a couple of articles on political commentary site TechCrunch automatically ups your valuation by +20% per article. We always find these preliminary pops odd, considering the deal isn’t expected to close until the second quarter of 2021. Here’s the pop from around ten bucks a share to around 14 bucks a share:
So no, we’re not going to pay a +40% premium for shares in a company that’s planning to merge with another company. End of story. But what premium should prospective buyers consider that’s “reasonable?”
We’ve been having a lot of conversations with our premium subscribers lately on this topic. What’s a fair premium to pay for SPACs? After all, we’re just retail investors, and we can’t expect to access deals at the same price institutional investors do.
Let’s assume for a second that every single SPAC deal that happens is fairly priced at $10 a share. Paying a premium of +11.54% as we did with Desktop Metal isn’t horribly bad, at least when you compare that to the +500% premium QuantumScape investors paid and continue to pay. Just remember, when those same institutions that bought those shares at $10 a pop decide to sell them, things can go south in a hurry.
Which is a good segue into why we’re suddenly seeing so many space SPACs.
For yesterday’s article on Axiom: From Space Tourism to Commercial Space Station, we consulted with our resident Romanian MBA – Nana Bonga – to accurately predict that Space SPACs are going to be a thing now. Hours later, two space SPACs were announced, the reason for which seems obvious. ARK Invest has announced their intentions of launching a space ETF, and there aren’t enough pure-play space stocks for that to happen – unless you’re a Morgan Stanley NewSpace analyst in which case there are tons of interesting names like GoDaddy and Facebook. Sure, there are 5 Billion-Dollar Satellite Operator Stocks, but it’s just not enough to launch a proper NewSpace ETF of the caliber ARK promises.
IPOs take a while to come to market, and ARK Invest needs to make hay while the sun shines. Wouldn’t take much more than a tin foil cap to start connecting the dotted lines here. When an Ark analyst suggests a meeting on Twitter and a company’s stock price moves +600%, it’s clear that ARK can do a lot to propel a company’s valuations. While that’s not necessarily a good thing, it’s still a good enough reason to try and front run the ARK space ETF with a SPAC debut. Surprisingly, ARK hasn’t shied away from the price premium charged by SPACs. Could this all be a secret conspiracy by ARK to get the most exciting space startups on stock exchanges as quick as possible? (Takes foil hat off.) Probably not, but what about the $74 billion elephant in the room?
ARK Invest’s Cathie Wood has Elon Musk’s ear, so one wonders if there’s a plan afoot for SpaceX to have an IPO that would coincide with the launch of ARK’s new space ETF. That’s probably where we start putting on the tin foil hat again, so we’ll just leave this alone now and move on to start working on the next SPAC that was announced the same day as Rocket Labs – a space startup called Spire Global – that happens to be launching satellites on Rocket Lab rockets. Stay tuned.
Market hype is at an all-time high, driven forward by a hoard of newbie investors who have no idea what pain feels like. All this talk of diamond hands will quickly go out the window as their paper wealth evaporates before their eyes. It’s at this time that quality stocks return to their rightful owners, as J.P. Morgan once said.
You don’t need to wait for the market meltdown to buy good stocks. The problem is, SPACs don’t give us enough information to distinguish the good from the bad. We’re on the sidelines until Rocket Labs files some proper documents with the SEC that better define the risks we’re taking by going long this space stock.
The SPAC merger is expected to close in the second quarter of 2021 after which time shares will trade under the ticker RKLB.
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