Why Rocket Lab Stock Skyrocketed Last Week
Key Points
Rocket Lab announced a deal to acquire satellite operator Iridium for $8 billion earlier in the week.
The acquisition consists of 50-50 split between cash and Rocket Lab shares and would potentially close in 2027.
The deal looks promising, but Rocket Lab continues to trade at a perilously high 82 times sales.
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Shares of burgeoning space systems and rocket launch specialist Rocket Lab (NASDAQ: RKLB) rose 24% last week as the market welcomed the company's latest acquisition announcement.
On Monday, Rocket Lab announced that it was acquiring satellite operator Iridium Communications (NASDAQ: IRDM) for roughly $8 billion, in a deal consisting of a 50-50 mix of cash and RKLB stock. The market is optimistic that the acquisition -- expected not to close until the middle of 2027 -- will reinforce Rocket Lab's growth beyond being a launch provider.
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Chief Executive Officer and founder Peter Beck calls the deal a "shortcut" for Rocket Lab's ambitions with its space applications. Bringing Iridium's satellite prowess on board, the company gains access to spectrum, 66 in-orbit satellites (and 14 spares), and a recurring customer base of 2.55 million subscribers. While Rocket Lab will have to lean on new debt and shareholder dilution via new shares to fund the deal, Iridium could help the combined company vastly improve its cash flows.
Over the trailing 12 months, Rocket Lab burned $161 million in cash from operations, whereas Iridium generated $411 million. Provided the deal goes through, this would provide an ample stream of cash flow for Rocket Lab to continue scaling its business. Furthermore, while the deal isn't "cheap" with Iridium's $8 billion price tag, which values it at 26 times free cash flow, I like that Rocket Lab used its loftily valued stock for half of the funding. Currently trading at 82 times sales -- compared to Iridium's 6, for comparison -- now is as good a time as any to offer new shares.
That said, as much as I like the deal, Rocket Lab's lofty valuation should serve as a reminder for interested investors not to go "all-in" at today's prices. I believe in Peter Beck's shortcut thesis and believe the vertical integration from the acquisition could pay dividends further down the road. Still, I'm not in a rush to add to my shares at today's stretched valuation -- especially after this week's rise.
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Josh Kohn-Lindquist has positions in Rocket Lab. The Motley Fool has positions in and recommends Rocket Lab. The Motley Fool has a disclosure policy.
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