This story was originally published on March 3 2021. Interested in how the company fared after it listed on the stock exchange? Check out our update at the end.
Rocket Lab is promising the sky with its NZ$5.7 billion Nasdaq listing, but potential investors should go in with their feet firmly on the ground.
There’s something crazy exciting and deeply scary about Rocket Lab’s announcement it will soon be listing on the US’s Nasdaq stock market, with a valuation of US$4.1 billion.
Crazy exciting: New Zealand’s very own boy from Southland spawning a company launching rockets into space in competition with Elon Musk’s SpaceX and Richard Branson’s Virgin Galactic – not to mention Nasa and the Russians.
The guy with the mad drive and the frizzy hair whose grandfather lent tools to Burt Munro (of The World’s Fastest Indian fame), who built a rocket-powered bicycle with scraps of titanium scrounged from his first job with Fisher & Paykel, and who quit a job and started Rocket Lab after a trip of a lifetime to Nasa and Lockheed Martin left him feeling they were clogged by bureaucracy. That guy’s company is gonna be worth US$4.1b – and New Zealanders can get a stake in it.
Also crazy exciting: Peter Beck hosting a press conference above Rocket Lab’s production and manufacturing facility in Auckland – real rockets on the floor behind him, American and New Zealand flags flying – and telling reporters the $1b or so in cash from the listing will go towards building a larger rocket with the capability to shoot people into the sky, not just cargo.
And he says Rocket Lab isn’t going to stop there; in the future he’ll be building really big rockets – truly competing with the big boys.
“We are about 30 percent of where we want to be.”
Beck looks incredibly tired, doesn’t smile much, but he’s totally upbeat. He says the company will be cash flow positive in 2024 and making more than US$1b in revenue in 2026. He mentions investment managers BlackRock and Neuberger Berman among the company’s backers.
And he tells us you have to dream big.
“New Zealand has incredible entrepreneurs, engineers and scientists, but we don’t think big enough. Lack of scale in our thoughts and our capital holds back our incredible entrepreneurship.”
He’s ours. He’s doing it. It’s crazy exciting.
The worrying part
But the Rocket Man’s announcement is also deeply scary. And not just because rockets are risky – Peter Beck admits he won’t be queuing up to be on a space tourism flight; he doesn’t even relish flying – spends too much time looking at the wing and worrying about the materials holding it together.
But potential investors also need to keep their feet firmly on the ground. Investing in the stock market is risky. Investing in early-stage, high tech, loss-making companies with valuations of US$4.1b, and in a market potentially coming to the end of a crazy bull run – now that is particularly risky.
There’s very little concrete information available from Rocket Lab so far to help investors decide whether they should buy the stock or not; nothing about its financial performance in 2020, for example. In fact the 2019 results have only just been released.
They show Rocket Lab made a $32,000 loss in 2019, down from a $900,000 profit the year before. Still, revenue doubled from $46 million to $90 million.
There are no details of how Rocket Lab is going to get from this 2019 loss position to what it is forecasting in the listing announcement. That is: “Rocket Lab will generate positive adjusted EBITDA in 2023, positive cash flows in 2024 and more than $1 billion in revenue in 2026.”
Meanwhile, Beck has found it hard in the past to get rockets off the ground. The much-hyped first commercial flight in 2018 was delayed for months because of technical problems and bad weather.
And although he told Newsroom in 2018 he would have one of his payload Electron rockets going into orbit each month by the end of 2018 and one every two weeks in 2019, that didn’t materialise.
Instead there were six launches in 2019, not 26, and seven in 2020.
Despite Rocket Lab tweeting in January it was “excited for our biggest launch year yet”, there’s only been one rocket go up so far this year.
“Scaling launches is incredibly difficult,” Beck says. “The nearest competitor to us took twice as long to get to launch cadence as we did.
“We always want to move faster, but we can’t be twiddling screws on the way up. We are carrying expensive scientific equipment so we aren’t taking any risks.”
Getting the necessary space experts into the country to carry out launches during Covid has also been tricky, he says.
Trouble is, getting rockets into the air is the only way Rocket Lab makes money.
Not an IPO, but a SPAC
For Brad Gordon, a director and investment advisor with Hobson Wealth Partners, the biggest problem with Rocket Lab’s entry onto the Nasdaq is the way the company is going about it. There simply isn’t enough information available to make an informed decision.
The company hasn’t chosen a normal IPO (initial public offering) route, but instead is using something called a SPAC, or special purpose acquisition company.
If you think of an IPO as a company looking for money, a SPAC is kind of the opposite – money looking for a company.
A SPAC is an empty company which lists on the stock exchange, raises money from investors – often large institutions – and then goes looking for a private company to put in its shell.
The other name for a SPAC is a “blank cheque company” – so named because the original investors are basically being asked put their money in with no idea what that money will be used for.
Historically SPACs (or things like them) have tended to become much more popular around financial bubbles, and then disappear when money is tighter. They have also tended to be great for companies – but not always for investors.
In particular, they help companies wanting to list quickly and easily. Because there’s no company in the SPAC when it lists – and therefore very little financial information and other material for the regulator to pore over – going through the listing process for a SPAC is relatively quick and easy.
And when the blank cheque company finally makes its acquisition, that newly-purchased company doesn’t have to provide the wealth of information it would with an IPO.
“With a reverse listing, you aren’t pitching for investors, you are getting them by default and the level of due diligence is completely different – if not nil.”
That’s what makes Brad Gordon nervous. Investors just don’t have the same level of information they get with a normal IPO.
“I’m a bit sceptical of back door listings. Take an IPO like My Food Bag. The company goes round the institutions and pitches and presents their case.
“But with a reverse listing, you aren’t pitching for investors, you are getting them by default and the level of due diligence is completely different – if not nil.”
Ordinary punters who buy into the company after it goes public on the stock market, can get burnt.
“SPACs are red-hot—but they’ve been a lousy deal for investors,” Fortune.com wrote in an article in January.
Red hot indeed.
The number of SPAC IPOs has gone from 12 in 2014 to 248 in 2020, and the amount raised from US$1.8b to $83.3b, according to SPAC Research. Almost as much has already been raised this year.
Gordon points to the SPAC IPO of US electric battery and hydrogen-powered truck company Nikola Corporation.
Nikola listed in June last year, and got massive support from millennial investors trading through the Robinhood app. At one stage its market capitalisation went higher than Ford’s, despite Nikola having no revenue. But the share price got into trouble when the company was accused of making false statements about its technology, regulators said they were investigating and the founder resigned.
Peter Beck says the decision to use a SPAC not a standard IPO allowed Rocket Lab to get to market quickly, which means being able to start building the new “medium-lift” Neutron rocket faster.
He says the merger structure with the SPAC company Vector Acquisition Corporation brings a high-quality investor into the company.
“We are fussy about our investors.”
Gordon said he’ll have a look at Rocket Lab, but he’ll most likely wait until there’s more concrete information available before making a decision to buy.
“It’s very blue sky. Based on the $4.1b valuation the company will have a price-to-earnings ratio of 34 times based on 2024 EBITDA,” Gordon says. “You’d want to see some track record of delivery before paying that.
“Actually you probably wouldn’t find me paying that.”
Excitement in the retail sector
Which doesn’t mean the listing isn’t going to be popular with investors – particularly retail investors. Buying and selling shares is increasingly popular with mum and dad (or often son and daughter) investors because of the ease of online trading platforms and the lack of other options for their money.
Rocket Lab is just the sort of high profile, exciting company that would attract these new investors.
“Personally, I would consider Rocket Lab – and know many Hatch investors will as well,” says Kristen Lunman, co-founder and general manager of online platform Hatch. “They have strong backers (Lockheed Martin, BlackRock), and are a front-runner in this new category of small-launch providers.
“Rocket Lab has an appetite to partner as well as push the envelope of innovation so have the potential to be a world-class player.”
David McEwen, publisher of the McEwen Investment Report is also excited about the potential for a company in the space industry.
“I think it’s one of the next big sectors,” he says, with potential in many areas, including space tourism.
Virgin Galactic has been an exciting company to watch – though high-risk for investors.
McEwen says he’ll probably buy into Rocket Lab when it lists, but it will be a high-risk investment.
“It’s very hard to value them. It’s about how many rockets they will be launching in 10 years. It could be none or it could be thousands. Like most technology businesses, the failure rate is high.
“Still, Rocket Lab has proved itself in the past against high odds. It will be part of the fun to see where it goes.”
Just do your homework, Gordon says.
“There’s a lot of hype around space, particularly in the US. “If it catches on with the right audience there will be a lot of people buying in.”
Does a $4.1b valuation for a company which isn’t even profitable surprise him?
Not really. “It’s the life and times we are in.”
UPDATE: Rocket Lab finally listed on the Nasdaq stock exchange on August 25 (New Zealand time) using a SPAC (existing listed shell company) vehicle. The share price fell from its issue price of $11.57 on the first day, soared briefly above $20 a couple of weeks later and has traded up and down since, rising to $16.28 in mid-November and falling to $11.76 a month later.
“One thing I would say about the RKLB stock price is that the market values the company at US$7.1 billion, which is 41 times sales,” says David McEwen, publisher of the McEwen Investment Report. “It is not expected to make a profit for years to come, so one has to question whether there is a lot of froth in the price which at the very least makes it a highly speculative investment.”