Building rockets is hard. Building rockets and reliably launching them into space is even more difficult. Only one private company has managed to do this on a large scale, SpaceX, with its enormous rockets and reusable landing pads. That’s until Rocket Lab (NASDAQ:RKLB) joins the party. Hot on the heels of SpaceX, Rocket Lab has built a thriving niche in the space economy and is now the second private spaceflight company to launch payloads into orbit consistently and reliably.

Unlike SpaceX, Rocket Lab is a publicly traded company that anyone with a brokerage account can invest in. The company reports its third-quarter results on November 12, and investors will be looking for greater revenue growth, product developments and improved profitability overall. its operations. Should you buy the stock before the publication of third quarter results?

Embracing the future of spaceflight

Rocket Lab is taking advantage of the booming space economy, which analysts estimate will account for more than $1 trillion in annual spending over the next 10 years. Creating value in the space supply chain starts with launching rockets into space. Rocket Lab is the second private company alongside SpaceX to reliably launch rockets into orbit for commercial customers, starting with its small Electron rocket.

The company generates direct revenue through launch contracts. More importantly, it leads to contracts that add up to the launch itself, including building space systems, capsules and satellites for customers. These clients include the US government and private companies such as Synspective. Given minimal competition in small rocket launches, Rocket Lab has accumulated a significant backlog for its launch and space systems segments, totaling more than $1 billion last quarter.

Ultimately, Rocket Lab wishes to add a third pillar to its activity: space data and software services. Like SpaceX and its Starlink satellite internet service, Rocket Lab plans to offer high-margin software services through its space infrastructure. This is perhaps where the true profit potential of the company’s business model lies because, frankly, it is very unprofitable today.

Neutron progress and margin expansion

The company has never generated a profit or positive free cash flow, so it’s no surprise that some investors are turning away from Rocket Lab stock. Over the past 12 months, it spent $149 million on free cash flow. With only about $500 million in cash on the balance sheet, the company must become profitable within the next three years or turn to the capital markets to raise more funds. Either way, it’s a concern for shareholders.

This does not mean, however, that its current rocket launches with the Electron are not profitable. Much of Rocket Labs’ spending comes from initial investments to fill its huge backlog of customer orders as well as the development of the large Neutron rocket. The Neutron will be a much larger rocket than the Electron, meaning it will generate much more revenue for each payload it launches into orbit. Last quarter alone, Rocket Lab spent about $40 million on research and development, or 38% of its revenue. As the company expands its operations, these expenses as a percentage of revenue are expected to decrease.

RKLB Earnings (TTM) data by Y Charts

Should you buy the shares?

Investors considering adding Rocket Lab to their portfolio should ask themselves a simple question: How tolerant am I to risk? Because Rocket Lab’s stock carries a lot of risk. This also presents great upside potential.

At the current market cap of $5.3 billion, the stock trades at more than 10 times its trailing 12-month sales of $327 million, and its profits are nonexistent. There’s a good chance that Rocket Lab won’t be profitable for the next three to five years or more. This would put some pressure on the stock.

The advantage comes from its massive, growing billion-dollar backlog as well as the clear development pipeline it has presented to investors. It wants to continue developing its rocket launch capabilities with the Neutron, strengthen its space hardware division and eventually launch data services to sell to customers. With $1 trillion earmarked to be spent annually in the space economy, Rocket Lab has a chance to eventually generate billions in annual revenue with a huge competitive advantage (that advantage being one of the only companies capable of launching rockets into orbit safely).

If you’re comfortable buying a stock that has a lot of downsides, you might want to buy shares ahead of its next earnings report. Otherwise, it’s best to keep this one out of your wallet.

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Brett Schaefer has no position in any of the stocks mentioned. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.