Is Redwire a Millionaire-Maker Stock?

Elon Musk's space industrial giant, SpaceX, is expected to launch its much-anticipated initial public offering (IPO) this week. But while the stock isn't available yet, that hasn't stopped eager investors from bidding up the valuations of other space-related companies.

Redwire (NYSE: RDW) is a great example, with its share up by a whopping 105% so far this year. Let's dig deeper to find out if this rally is the start of a long-term bull run or just a temporary hype-driven boom.

What is Redwire?

Unlike SpaceX, Redwire is far from a household name. The company got its start just six years ago when the private equity company AE Industrial Partners combined two of its holdings (Adcole Space and Deep Space Systems) into one entity.

Performance has been choppy in the years following the stock's direct listing through a merger with a special purpose acquisition company (SPAC). That said, Redwire has recently started booming amid several important macroeconomic and company-specific tailwinds.

For starters, Redwire is in a good position to capitalize on the growing push toward militarization and next-generation combat capabilities. This megatend arguably started with the Russian invasion of Ukraine in early 2022 and intensified with the ongoing U.S. war with Iran. Redwire serves this market through its defense tech segment, which focuses on delivering autonomous combat drones and various types of navigation and optical hardware to support surveillance and intelligence gathering.

The company was able to quickly ramp up this business through the $925 million acquisition of Edge Autonomy, a UAV specialist with established relationships with the US Department of Defense and allied governments, which already use its Penguin drone for reconnaissance missions.

Space infrastructure represents the other side of Redwire's business. Here, management plans to capitalize on the growing trend of government organizations like NASA outsourcing more of their hardware needs to commercial businesses rather than building everything in-house. The company's imaging and navigation technology was included in NASA's Orion spacecraft for the historic Artemis II mission, a crewed lunar flyby designed to research the moon.

Business is booming

Redwire's financial results look encouraging, with first-quarter revenue rising roughly 58% year over year to $97 million. This growth was mainly driven by the company's defense tech segment, which saw sales more than quadruple to $44.3 million. That said, $44.3 million is a relatively small number in the defense contracting world. And investors should expect this segment to continue growing at an elevated pace due to the highly militarized geopolitical environment.

Image source: Getty Images.

Redwire's bottom-line situation is a little more uncertain. Like many next-generation technology companies, it is struggling to demonstrate a clear pathway to profitability. Research and selling general and administrative expenses are soaring -- likely because of recent acquisitions, which bring in new, highly paid managers, engineers, and specialists. And the heavy outflows caused operating losses to rise almost fourfold to $69.7 million.

When companies are unable to fund their operations with internal cash flow, they must turn to outside sources of capital, such as equity raises.

On June 9, shares dipped sharply by over 15% after management announced plans to issue and sell $500 million in new stock to help fund operations. While equity dilution is often necessary for a company's growth and survival, it increases the number of shares outstanding, which reduces current investors' claims on future earnings.

Is Redwire a millionaire-maker stock?

On the surface, Redwire has all the ingredients for a millionaire-maker stock. It's small (with a market cap of $4.26 billion) and is helping pioneer disruptive technology with major clients such as NASA and the Department of Defense. That said, Redwire's reliance on equity dilution brings risk and volatility. And investors may want to wait until it demonstrates a pathway to profitability before considering a position.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.