If you were grading marketing brochures, Rocket Lab USA (NASDAQ:RKLB) would certainly offer compelling material. Having completed its acquisition for Advanced Solutions, an engineering firm specializing in space exploration-related software and systems, the future for RKLB stock looks quite bright. Just like the much-discussed storyline for electric vehicles, space travel is the future.
As InvestorPlace contributor Will Ashworth observed recently, RKLB stock is “an excellent bet for speculative investors looking to play the space game.” And what a game it is. According to data from Statista.com, the global space economy reached a valuation of $423.8 billion in 2019. This sector encompasses a range of activities such as research, exploration and space utilization.
On paper, it’s perfect for Advanced Solutions, which addresses myriad needs for journey into the final frontier. Morgan Stanley estimates that the global space industry could generate revenue exceeding $1 trillion by 2040. To put that figure into perspective, the space economy would match Indonesia’s terrestrial economy (ranked number 16 in GDP in 2017).
Ashworth noted that over time, Rocket Lab could start eating away at the $100 billion market capitalization of SpaceX. It’s an ambitious goal for prospective buyers of RKLB stock but perhaps not unreasonable should the underlying company succeed in meeting benchmark performance metrics.
Currently, RKLB stock is pricey. During the first six months of this year, Rocket Lab generated $29.5 million in revenue, which to be fair was up 237% from the same comparison in 2020. However, the company doesn’t have any profits, showing an operating loss of $25.4 million. All told, Ashworth wrote that “based on an annual run rate of $59 million and a $6.6 billion market cap, RKLB is trading at 112x revenue.”
So, should you get onboard? It’s complicated.
RKLB Stock Has a Worrying Comparison
Although Rocket Lab seems to be moving in the right direction — at least in context of an innovative technology firm levered to a frontier market — at the end of the day, RKLB stock is a terrestrial investment. In other words, if publicly traded securities move purely on scientific merit and effort, RKLB would probably be a hands-down winner.
But for better or for worse, that’s not how the market works. In any tech play, a constant clash occurs between the labor of love that scientists commit themselves to and fiscal reality. If you don’t believe me, just consider the fascinating story between inventor Nikola Tesla and financier J.P. Morgan — the man, not the bank.
For RKLB stock, the reality is that it came to the public market via a special purpose acquisition company. And SPACs just don’t have the greatest reputation. Just ask our own Stavros Georgiadis, who gave a succinct rundown on these shell companies:
To me, SPACs tend to be overvalued. Momentum in their stock price often leads to an initial price rally that soon corrects fast. This correction leaves lucky investors who caught the uptrend with decent profits, while unlucky investors who bought near the peak see substantial losses.
In many SPACs, this common price trend occurs as soon the merger is publicly announced and euphoria kicks in.
RKLB stock was no exception from a statistical point of view. On Aug. 25, the stock went public. A high of $21.34 was reached in September. Recently, the stock was trading around $12.40 per share.
If you look at Virgin Galactic (NYSE:SPCE), another former SPAC play, it exhibits the same trend: pop on the news, flop on the booze. In other words, SPACs seem unable to hold the liquor of high expectations.
Ride Carefully if You Must
Now, it’s important to realize that SPACs are not a monolith. Some reverse mergers which shell companies initiated have performed very well. Ultimately, you’ve got to perform your due diligence to see if RKLB stock is right for you.
However, if you want my opinion, I think this is speculation you play with pocket change. Frontier markets offer plenty of opportunity but the risks are equally vast if not more so. Judging from how other heavily hyped SPACs have performed, I don’t think we’ve seen the last of Rocket Lab’s decline.
Just on patterns, don’t be surprised to see RKLB stock drop to around the $11 level. If it gets there, though, it might not be a bad idea to throw in some risk-on funds.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.