Call me crazy, but I think there’s something exciting in the works from Rocket Lab (NASDAQ: RKLB). But the company’s stock price certainly doesn’t seem to indicate as much.

Shares of the end-to-end rocket launch services leader fell about 19% to end this week, spurred by a combination of its weaker-than-expected preliminary results and a new potentially dilutive equity offering.

On Rocket Lab’s “meh” quarter

On the former, Rocket Lab told investors on Wednesday that when it officially announces Q4 results in late February, quarterly revenue will likely arrive in the range of $59 to $61 million — well below consensus estimates for sales closer to $66 million. On the bottom line, Rocket Lab’s net loss should be in the range of $49 million to $52.5 million — though its GAAP gross profit margin will also expand to nearly 26% at the midpoint of that range, far above the 3.5% gross margin it achieved in the same year-ago period.

The culprit for Rocket Lab’s relative underperformance? Rocket Lab postponed a single launch of its Electron rocket that was previously slated to happen before the end of the year. That launch is still slated to happen in the near future, and the delay doesn’t impact Rocket Lab’s long-term growth. But our market hates being told to effectively hurry up and wait.

The purpose of the $300M offering is twofold

In conjunction with its preliminary quarterly release, Rocket Lab also announced a $300 million private debt offering of convertible senior notes. Those notes will mature on Feb. 1, 2029, and come with the option for the noteholders to convert every $1,000 in principal to 195.1029 shares of Rocket Lab common stock. That’s good for a strike price of $5.13 per share, or a roughly 29% premium from Rocket Lab’s closing price on Thursday — but the conversion, if fully exercised, would also dilute existing shareholders by more than 15%.

All told, Rocket Lab should collect net proceeds of around $290 million from the offering (or $343.5 million if the purchasers exercise an option to purchase additional notes.

That raises the question: After ending last quarter (Q3 ‘22) with around $144 million in cash on its balance sheet, did Rocket Lab really need this much additional cash?

The answer: Yes and no.

Given its cash burn over the first three quarters of 2023, Rocket Lab saw its net cash balance declined by around $101 million during the period. So assuming cash burn remains roughly consistent — which might prove a conservative assumption once Rocket Lab introduces its larger upcoming Neutron launch vehicle (commanding a $50 million-per-launch price) later this year — that would leave the company’s coffers nearly empty a little over a year from now. Rocket Lab is making an astute decision, then, to raise capital while it’s still possible to do so from a position of relative strength.

Still, that wouldn’t necessitate a $300 million raise, which leads me to believe that Rocket Lab might have an acquisition (or two, or three) up its sleeve.

Rocket Lab even admitted as much in its press release this week, indicating it “may” use the proceeds for “potential acquisitions and strategic transactions.”

Rocket Lab also has a history of making such moves: When I previously interviewed Rocket Lab CEO Peter Beck and CFO Adam Spice in 2021, Beck mused that the space industry is currently “characterized by a tremendous number of very small operators at some scale.” Spice elaborated that strategic consolidation in the space industry will be crucial for early players like Rocket Lab to gain a first-mover advantage.

Sure enough, Rocket Lab has since closed on no less than four strategic acquisitions, most recently including a winning $16.1 million bid for Virgin Orbit’s main production facility in Long Beach, California — only a few blocks from its own headquarters and factory. Beck called that purchase a “scaling enabler” for the soon-to-launch Neutron program.

• Rocket Lab expects to close on its offering in the next few days, and will release final fourth-quarter 2023 results on Feb. 27 2024. I can’t blame the cash-burning company for raising capital while it can still predictably do so, but don’t be surprised if it unveils yet another strategic acquisition in the near future. All told, my thesis remains intact for Rocket Lab and I view this drop as an opportunity for patient, long-term shareholders to open or add to their positions.

• Palantir is set to release fourth-quarter 2023 results on Monday (Feb. 5, 2024) after the market closes. The AI software platform should deliver its fifth straight quarter of GAAP profitability, with revenue widely expected to climb around 18% year over year led by momentum in the company’s commercial segment. Stay tuned for a recap of Palantir’s results next week.
  

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