rewrite this title The Best Space Stock Out There Is… – Nanalyze

The final frontier for investors might be space. The possibilities seem endless. What’s that? You’re asking how we can show an ROI by going to Mars aside from “something, something asteroid mining?” Stop talking nonsense. A return on investment takes second seat to probably one of the most exciting themes for Joe Retail – rockets, satellites, and everything in between. Some call it “NewSpace,” and that’s because the old generation of space companies are going the way of the dodo. So, the first thing we want to do is produce a list of all pure play space stocks with a market cap of at least $100 million. (Anything less than that is likely a failed SPAC.)

A List of Space Stocks

Since AI isn’t good enough to generate a list of pure-play space stocks yet, we’ll need to do this the old-fashioned way – through hard analysis and lots of caffeine. Fortunately, we’ve already done the work. The Nanalyze Disruptive Tech Stock Catalog (available to all Premium annual subscribers) contains a list of 25 space stocks. From that list, we’ll remove all ETFs/funds. Then, we’ll remove companies with a market cap of less than $100 million (Astra Space, Mynaric, Terran Orbital, Momentus, and Sidus Space), three of which represent failed SPACs. Finally, we’ll remove legacy satellite companies, most of which are listed in Europe (Eutelsat, GomSpace, Iridium, OHB, SES, and Viasat). What we’re left with is a list of nine SPACs and one company we chose back in July 2023 as our favorite space stock – MDA.

Since then, MDA has performed quite well returning nearly +300%, about what RKLB returned over the same time frame. (We only mention this because of all the flack we took from RKLB zealots back then who couldn’t believe we suggested some other space company was worth looking at.) But a two-year time frame means very little. The 500-lb South African elephant in the corner, SpaceX, stands to disrupt just about every space company out there with their ubiquitous broadband, 7,578 satellites, and massive rockets that carry all their cargo to space cheaper than anyone else.

To complete our list, we’ll add a recent IPO, Voyager Technologies (VOYG), which is a $2.6 billion company with $138 million in annualized revenues. That’s a simple valuation ratio (SVR) of 18 – right at our cutoff -h so it’s richly priced out of the gates thanks to ongoing hype around the space sector.

Space Hype Persists

When stocks of a feather move together that’s either because something major changed across the entire thesis (less frequent) or a rising hype tide is lifting all boats (more frequent). Because most space companies are busy disrupting, profitability isn’t in focus. Instead, we look to revenues as a proxy for market share being captured. When a company has no revenues, it is extremely difficult to value.

AST Spacemobile and Virgin Galactic

That’s the case with AST Spacemobile (ASTS) which still doesn’t have meaningful revenues despite commanding a $15 billion valuation. All the zealots out there wearing their emoji badges of pride are responsible for pumping this stock to the moon, and one of two things will happen – sure as death or taxes. Either fundamentals will catch up, or the valuation will revert to the mean. And what’s the price-to-sales ratio for a company with no revenues? It’s null, or about as much interest as we have in companies that haven’t proven product-market fit.

ASTS would need revenues of about $555 million per annum to enjoy the same simple valuation ratio as NVIDIA (NVDA). Last year they didn’t even clear $5 million when their SPAC deck promised $1 billion in – not revenues, EBITDA! – for 2024. Talk about a miss. One of the earliest SPACs, Virgin Galactic (SPCE), promised “just” $590 million for 2023 and that came and went. Fool me once, shame on you, and all that.

When either of these firms realize consistent meaningful revenues, we can then get a glimpse into what their gross margins might look like. Until then we have zero interest. So, with ASTS and SPCE off our list, here’s what last year’s gross margins look like for the nine space stocks remaining.

If you don’t have positive gross margins, you don’t have a business. Intuitive Machines (LUNR) wouldn’t make the cut, and neither would Redwire (RDW) which talks about how “larger contracts with lower margins and completion of certain higher margin contracts” led to a decline in gross margins from 24% in 2023 to 15% in 2024. We’re told to expect positive free cash flows this year on 88% revenue growth (at midpoint) so let’s see if they can manage to pull that off. While it’s entirely possible to operate a profitable venture with low gross margins, we like to see these numbers at 50% or higher, which provides some buffer when contracts go south.

Speaking of which, that’s a criticism we had of Rocket Lab (RKLB) which has been scrambling to bolt on the growth they promised in their SPAC deck. This means taking on fixed-price contracts which have been the bane of defense companies which now shun them. Zealots of RKLB are quick to dismiss these concerns as they blindly chant mantras and cheerlead the stock at every chance. That’s why it’s now valued far more richly than most all other space stocks. Here’s the simple valuation ratio (SVR) for our remaining seven names.

Back when RKLB traded at an SVR of six, we said it was finally a good time to pull the trigger on some shares. Now, it’s just far too rich. We don’t invest at a simple valuation ratio of 18 or less (3x our catalog overage of around six) which translates to a share price of $19.31 for Rocket Lab. (We like to use average SVR over the past four quarters as an appropriate target which is around 12 for Rocket Lab or a share price of $12.87.) But let’s put valuation aside for right now and look at the most important metric for any disruptive technology company – revenue growth.

Imaging vs Infrastructure

We’re now starting to see two distinct groupings emerge from our remaining names. We have three space infrastructure companies (Rocket Lab, MDA, and Voyager) and four pure-play space imaging companies (Planet, Spire, Blacksky, and Satellogic).

Four Spatial Imaging Stocks

Starting with the latter, here’s what last year’s revenues look like alongside growth over the year prior.

We always look to invest in leaders which means Planet Labs (PL) would be the preferred name here. In our last check in with the company we noted they’re now diversifying into the satellite services market. It’s conceivable that this entire space will see consolidation so that we start to see more situations like MDA which has a geospatial imaging component to their business (about 17% of revenues). Also dabbling in imaging are Maxar and Airbus. The former was taken private several years ago, while the latter is largely a defense contractor.

What initially attracted us to the spatial imaging thesis was the software-as-a–service (SaaS) business model which commanded high margins. But as we learned over the years, imaging is a commodity offering, and it comes down to how much value a vendor can provide on top of the imagery. So far, this doesn’t seem to be the “$100 billion opportunity” that was advertised on all those glossy SPAC decks. And if the opportunity has already been sufficiently exploited, then we’d expect these firms to eventually merge into larger space infrastructure companies. Speaking of which…

Three Space Infrastructure Firms

All three space infrastructure firms in our list have gross margins roughly in the mid-20s with varying levels of growth seen below.

We haven’t covered Voyager Technologies before, but it’s the smallest in terms of revenues, presently overvalued, and doesn’t appear to be growing very quickly.

That leaves us with Rocket Lab and MDA, two companies we happen to like with wildly different valuations – 28 and 3 respectively. One is pumped incessantly by a legion of fintwats, the other isn’t. Both appear to be executing well, though profitability should continue to be in focus for this capital-intensive industry where bankruptcies aren’t uncommon.

Our last piece on MDA raised concerns over their low cash position and continued cash burn. After realizing $816 million in positive operating cash flows last year, they invested $201 million in the business and used the remaining $615 million in free cash flows to extinguish long-term debt. This year they expect “neutral to positive” cash flows with revenue growth expected to be around 45% at midpoint of guidance. That’s impressive growth, but operating cash flows going from positive to neutral is worth investigating if that’s indeed the result for this coming year.

As for Rocket Lab, all eyes are on their larger rocket, Neutron, which is expected to have one test launch in 2025, three commercial launches in 2026, and five in 2027. The company currently enjoys a 27% gross margin on launches so we’ll see if they can improve that with a larger rocket.

Thoughts on Space Stocks

Space might be the riskiest theme we cover because it’s inherently difficult, complex, and risky. The combined market cap of all space companies discussed today with meaningful revenues is about $24 billion. That’s about 7% the size of SpaceX, a $350 billion private company that’s a dominant leader in NewSpace. When you can launch cheaper than anyone else, your margins will always be better for everything you’re doing in space.

Except for MDA and Voyager, all the companies discussed today went public using SPACs, a mechanism used to offload subpar businesses onto retail investors at absurd valuations (in most cases). We also don’t have much visibility into what’s being accomplished by private companies or even large defense companies that also dabble in space themes (think Maxar or Airbus for geospatial imaging). In other words, just because you can invest in these various stocks doesn’t mean you’re investing in tomorrow’s NewSpace leaders.

We pondered adding RKLB back when it was fairly priced, but felt holding one space name is sufficient. Perhaps the exception would be the Starlink franchise which hints at a trillion-dollar opportunity for connecting everyone in the world to the Internet at prices that undercut traditional land-based bandwidth. Should SpaceX take Starlink public, you can be sure the valuations would be excessive since there’s so much hype around any of Mr. Musk’s brands. Going forward, we’ll continue to watch this short list of space stocks and expect to see further consolidation as companies move towards more holistic space infrastructure offerings.

Conclusion

For investors looking to put some money into these names, set an SVR cutoff that you won’t exceed and wait for entry points. We’ve always been able to acquire any stock we like at a more reasonable valuation by just waiting until our target valuation is met. Don’t let hype make you overpay for some of the riskiest names out there, many of which have quite a low potential for profitability. Keep an eye on what the biggest player out there, SpaceX, is getting up to. Based on today’s analysis, the best space stocks out there right now are probably Rocket Lab, MDA, and Planet.