Surely, you’ve heard about the CHIPS and Science Act in which the U.S. government is funding domestic semiconductor manufacturers. Maybe you’ve already decided to capitalize on this by investing in Intel (NASDAQ:INTC) or Advanced Micro Devices (NASDAQ:AMD). What about Rocket Lab USA (NASDAQ:RKLB), though? I am bullish on RKLB stock, as it is a rarely discussed CHIPS Act play for 2024.
Rocket Lab USA might sound like a space tourism start-up, but it’s not. Rather, Rocket Lab designs and manufactures satellites to be sent out into space, along with components and related technology for satellites.
Frankly, I’m amazed that there aren’t more publicly listed satellite stocks. Rocket Lab is a true pioneer, and our modern way of life wouldn’t exist without satellites. So, let’s get our telescopes out and take a closer look at the fascinating satellite start-up Rocket Lab.
First, The Bad News about Rocket Lab
Since satellites are a necessary part of modern society, you may be tempted to assume that Rocket Lab stock will immediately launch into outer space. Hold your horses, though, as there’s some unfavorable news that you’ll definitely want to know about.
The fact is that Rocket Lab isn’t a profitable company. You can see this immediately if you check TipRanks’ earnings page for Rocket Lab. The company is only income-negative by a few pennies per share, but it’s still something to be aware of.
On that topic, Goldman Sachs (NYSE:GS) analysts expressed concerns that Rocket Lab’s path to future profitability is uncertain. Furthermore, the Goldman analysts pointed out that Rocket Lab is EBITDA and free cash flow (FCF) negative.
Thus, it’s not surprising that Goldman Sachs analyst Noah Poponak initiated his coverage of RKLB stock with a Hold rating not long ago, citing uncertainty around Rocket Lab’s profitability (or lack thereof). On the other hand, as we’ll discover soon, the analyst community is mostly bullish on Rocket Lab stock.
To be fair and balanced, I feel the need to address Rocket Lab’s financial imperfections. I’d like to see more revenue growth from Rocket Lab, though it’s encouraging that the company has reduced its net debt over the past year.
That’s the bad news about Rocket Lab, and you’ll have to decide whether it’s a deal breaker. Don’t make up your mind yet, though, since Rocket Lab’s top-line and bottom-line results could improve dramatically due to large-scale government funding.
Rocket Lab Will be a Major CHIPS Act Beneficiary
It’s obvious that domestic computer and smartphone chipmakers like Intel and Advanced Micro Devices will benefit from the CHIPS and Science Act. However, many stock traders simply don’t realize that Rocket Lab will also get a financial windfall from the CHIPS Act.
Actually, it shouldn’t be a complete surprise since Rocket Lab already works hand-in-hand with the U.S. government. Specifically, according to TheFly, Rocket Lab recently “completed the second of two Electron launches for NASA’s PREFIRE climate change-focused mission.”
Electron is the name of Rocket Labs’ flagship satellite group. Reportedly, Rocket Lab has sent two Electron satellites into space in order to help NASA collect data about heat loss measurements and other climate-related information. Electron, TheFly reports, is the U.S.’s “second-most frequently launched rocket annually and one of the most frequently launched rockets globally.”
Yet, that’s not Rocket Lab’s only connection to the U.S. government. Apparently, the company signed a non-binding agreement with the Department of Commerce in which Rocket Lab will receive as much as $23.9 million, courtesy of the CHIPS and Science Act. The signed agreement is called a non-binding preliminary memorandum of terms, or PMT.
Now, you might wonder why the government would agree to invest in Rocket Lab, of all companies, through CHIPS Act funding. It’s because, according to TheFly, the proposed investment “would enable Rocket Lab to increase its production of compound semiconductors for spacecraft and satellites.” This would happen as “part of an expansion and modernization” of Rocket Lab’s manufacturing facility in Albuquerque, New Mexico.
This could turn Rocket Lab into a satellite-chipmaking powerhouse. Due to the CHIPS Act funding, Rocket Lab’s compound-semiconductor production capacity could increase by 50% within the next three years.
Not only that, but the the State of New Mexico is “chipping in” (pardon the pun) with financial assistance and incentives to Rocket Lab collectively valued at $25.5 million. Hence, it certainly looks like the federal and state governments want to see Rocket Lab succeed as a satellite semiconductor manufacturer.
Is RKLB Stock a Buy, According to Analysts?
On TipRanks, RKLB comes in as a Strong Buy based on six Buys and two Hold ratings assigned by analysts in the past three months. The average Rocket Lab USA stock price target is $6.78, implying 38.1% upside potential.
Conclusion: Should You Consider RKLB Stock?
Rocket Lab USA shares currently trade for less than $5, but someday, the stock might be much more expensive. It’s hard to know for sure, since Rocket Lab’s financials aren’t perfect at the moment.
That said, it’s undeniable that Rocket Lab will benefit from large-scale federal and state government funding. Besides, Rocket Lab could become a household name someday as the market for satellite and satellite-chip technology might grow exponentially over time. Therefore, I will certainly consider RKLB stock for a small and speculative but exciting portfolio holding.
