For the final session before the Christmas holiday, aerospace specialist Rocket Lab (RKLB) represented one of the top winners, gaining nearly 23% against the prior session. Unsurprisingly, RKLB stock also ranked among the top entities in terms of unusual options volume. From available data, it appears that the overwhelming consensus is for shares to continue rising higher. Still, market speculators may want to exercise caution.
To be sure, if you have a patient, long-term approach, RKLB stock appears quite compelling. As Barchart content partner The Motley Fool mentioned, shares skyrocketed thanks to Rocket Lab securing a U.S. government contract worth up to $515 million. As the investment resource pointed out, the startup enterprise represents one of several entities benefiting from the commercialization of space.
Regarding the contract, Rocket Lab stated in a securities filing on Thursday that it entered into an agreement with a government agency to design, manufacture, deliver and operate 18 space vehicles. Further, the assignment will start immediately, with the delivery of said vehicles – which are likely satellites – slated for 2027. Also, the deal includes operational agreements through 2030, with an option for extension through 2033.
Notably, the contract features a base value of $489 million. Incentives and options may raise this figure by $26 million. To put the deal into context, Rocket Lab posted revenue of $211 million in the fiscal year ended December 2022.
Encouraging long-term investors, RKLB stock currently carries a strong buy consensus view among Wall Street analysts. Further, the median price target among the experts stands at $8.47. From Friday’s closing price of $5.44, the forecast calls for a 55.7% lift. As well, on Dec. 22, TD Cowen reiterated its “buy” rating while Stifel Nicolaus initiated coverage, also with a “buy” assessment.
So far, so good, yes? For long-term investors, maybe. For swing traders, there are nuances to consider.
RKLB Stock is Attractive But Lacks ‘Pressure’
At first glance, the speculative position for RKLB stock appears just as compelling as the investment narrative. As stated earlier, Rocket Lab was one of the top highlights in Barchart’s unusual options volume screener. Specifically, total volume reached 89,823 contracts against an open interest reading of 139,145 contracts.
Moreover, the difference between Friday’s volume versus the trailing one-month average metric came out to 953.27%. Call volume hit 80,580 contracts against put volume of 9,243 contracts. This pairing yielded a put/call volume ratio of 0.11, which on paper symbolizes overwhelming bullish support.
Fintel’s options flow screener – which focuses exclusively on big block trades – largely confirms the same. While some of the largest entities did sell call options, for the most part, the alpha dogs bought calls. Some of the largest transactions include the following:
- 6,484 contracts bought of the Jan 19 ’24 7.00 Call ($19,940 in premiums paid)
- 2,744 contracts bought of the Jan 5 ’24 6.00 Call ($30,000 in premiums paid)
- 1,000 contracts bought of the Jan 12 ’24 6.50 Call ($14,985 in premiums paid)
- 2,500 contracts bought of the Dec 29 ’23 5.50 Call ($32,110 in premiums paid)
From a topical view, circumstances appear incredibly auspicious for RKLB stock. However, the problem for swing traders is that few traders appear willing to take the opposite side of the trade. In other words, with so many folks on one side of the trade, the ultimate reward for piling into the obvious transaction could be limited.
For one thing, institutional sold calls against RKLB stock are largely set to expire on Jan. 19 of next year. Further, the exposure arguably isn’t so severe that it would cause panic to the short traders. Second, RKLB’s short interest comes in at only 6.94% of its float. Also, the short interest ratio sits at 1.44 days to cover.
In terms of speculative potential, these stats simply are not remarkable. Therefore, if you’re looking for a short-term profit-scalping opportunity, Rocket Lab’s viability may have passed on Friday.
Even the Long-Term Picture Has Question Marks
Now, I remarked that RKLB stock is a “maybe” in terms of buying shares as a long-term investment. I’m not clamoring for Barchart readers to jump on this idea because of the valuation.
Right now, the market prices shares at 11.1X trailing-12-month (TTM) sales, based on its revenue per share of 49 cents at the end of the third quarter along with Friday’s closing price of $5.44. However, this revenue multiple is several times higher than that of the aerospace and defense sector, which comes in at only 1.95X.
Okay, let’s just magically assume that the aforementioned contract were to come on line immediately; thus, a TTM revenue of $515 million. Assuming the other variables such as shares outstanding are the same, the revenue multiple would clock in at 5.1X. That’s much lower but it still represents a roughly 162% premium to the sector average sales multiple.
To be clear, I’m not taking anything away from Rocket Lab’s impressive achievement. However, after such a stratospheric rise, investors should look under the hood before making a final decision.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
