Why Rocket Lab Stock Plummeted This Week

Key Points

• Typically, equity offerings dilute shareholder value over the short term.

• However, since Rocket Lab's stock was previously at an all-time high, it could prove to be a great decision by management.

• Raising cash to help fund its Geost acquisition and Neutron launch ambitions, this relatively minor dilution could prove to be worth it over the long haul.

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Shares of up-and-coming space company Rocket Lab (NASDAQ: RKLB) are down 10% this week as of 2 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.

The culprit for this decline came Monday night, when Rocket Lab announced a new $750 million at-the-market equity offering.

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Due to the shareholder dilution involved from the higher outstanding share count that comes alongside an equity offering, a drop in share price isn't unwarranted. However, it may not be bad for Rocket Lab and its shareholders over the long run.

The argument for shareholder dilution in Rocket Lab's case

First, Rocket Lab is home to a market capitalization of approximately $23 billion. This implies that shareholder value could be diluted by roughly 3% -- making this week's 10% drop slightly overdone.

Second, the company's stock is up sixfold in just the last year. A share offering following an incredible run like this is the perfect time to raise cash.

Image source: Getty Images.

Since Rocket Lab is still in hypergrowth mode, it has consistently burned between $100 million and $200 million in free cash flow (FCF) over the last few years.

This week's share offering, with shares at all-time highs, gives the company the best bang for its buck and provides it with cash to fund expansion plans.

Looking to build out its payload capabilities following its $275 million purchase of Geost and aiming to launch its larger, reusable Neutron rocket by year-end, this influx of cash will go a long way toward the company's ambitions.

However, even after this week's decline, Rocket Lab still trades at a sky-high price-to-sales (P/S) ratio of 48, so interested investors shouldn't rush to go "all-in" right now, despite the stock's promising future.

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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Rocket Lab. The Motley Fool has a disclosure policy.