It’s hard not to get excited about the space economy, which is why space launch and satellite specialist Rocket Lab (NASDAQ: RKLB) has been an extraordinary winner in the market. Over the past one-year period, RKLB stock has gained almost 400%, an astounding performance no matter how you look at it. However, the recent severe volatility — ahead of its fourth-quarter earnings report — suggests significant challenges ahead.
To be sure, no one should dismiss the relevance of RKLB stock. According to a report by McKinsey & Company, the global space economy could be worth $1.8 trillion by 2035 (accounting for inflation). With projections like that, it’s hardly surprising that investors have piled into names like Rocket Lab. However, with the company’s sky-high valuation, earlier investors may be looking for an exit plan.
There’s no magic ratio that would automatically trigger a selloff. Nevertheless, the financials may put current stakeholders and prospective buyers of RKLB stock in a precarious situation. Yes, analysts have targeted fiscal 2024 revenue to land at $434.32 million, which would be up almost 78% from last year. And in the current fiscal year, the Street is aiming for $606.22 million, up almost 40% from the aforementioned forecast.
Nevertheless, the price-to-sales ratio has also ballooned. Presently, the multiple stands at 30.43X trailing-12-month (TTM) sales. During the first calendar quarter last year, this metric was only 8.1X. Combined with the fact that Rocket Lab is far from profitable, investors will surely be tempted to trim their exposure.
It’s also worth pointing out that while Rocket Lab has achieved significant milestones with its rocket launches, such missions don’t come for cheap. In recent years, the space company’s operating expenses have marched higher, applying pressure on management.
Yes, the company is brilliant — we can all agree on that. However, it’s also possible that the low-hanging fruit has been plucked. Moving forward, investors want more…and that’s where circumstances can get hairy.
Of course, anyone can have an opinion on RKLB stock. I don’t expect anyone to take one person’s idea on the underlying enterprise as gospel. However, when the big dogs — the institutional investors — move their money away from or against a specific company, that’s something to pay attention to.
One of my go-to sources for the inside baseball is Barchart’s options flow indicator. This screener focuses exclusively on big block transactions likely placed by institutional investors. Put another way, the one or two contracts that a regular retail trader may purchase won’t show up on this screener. It’s the true smart money radar — and it may not bode well for RKLB stock.
I don’t want to paint the picture that options flow is the end-all, be-all. However, on Monday, Barchart’s screener showed that net trade sentiment flashed $868,100 below parity, thus favoring the bears. Further, all throughout last week, this statistic sat in various shades of red.
Again, negative options flow doesn’t guarantee that RKLB stock will fall down from here. However, it’s intelligence that I would personally like to know before making a big decision on the company. Plus, here’s another point: while RKLB’s short interest as a percentage of float is elevated at 11.62%, it’s not horrific. In other words, I wouldn’t expect a robust short squeeze to suddenly materialize.
Finally, the fundamentals seem to cloud RKLB stock amid these pressure points. For example, Rocket Lab may face competition from larger space companies which decide to encroach in its specialty. Also, smaller entities could nibble at niche segments of the launch ecosystem, thereby reducing Rocket’s total addressable market.
Most importantly, in order to keep up with the competition, Rocket would have to spend significant capital. When juxtaposed with the notoriously expensive and unpredictable space sector, RKLB stock potentially faces much uncertainty.
For me, the biggest impediment to jumping onboard RKLB stock at this juncture is the statistical trend: it simply doesn’t favor bullish exposure over the intermediate term.
Using data collected since its public market debut, a position entered in RKLB at the beginning of the week has a 48.09% chance of rising by the end of it. That’s simply the empirical reality. Over the next eight weeks, this baseline probability “improves” to 50%. At best, over a seven-week period, investors may expect long-side odds of 51.98% — hardly exciting stuff.
Under dynamic conditions — when RKLB stock loses between 10% and 20%, as happened last week — RKLB’s long odds do pop to 60% in the second subsequent week. However, in all the other weeks, the likelihood of upside success diminishes below the 50/50 line.
For a nuanced approach for advanced traders, the intrepid may consider the 22/23.50 bull call spread for the options chain expiring March 7. This transaction requires buying the $22 call and simultaneously selling the $23.50 call, with the idea that RKLB may rise slightly above this point by expiration.
However, from the third week onward, the downside argument probably makes more sense. For example, aggressive traders may look at the 22/20 bear put spread for the options chain expiring March 21. This transaction would involve buying the $22 put and selling the $20 put, with the speculation that RKLB could fall to $20 or below roughly one month from now.
