LLAP - Terran Orbital: A High-Risk Bet For Investors Willing To Embrace A Bumpy Ride

2023-12-11 04:43:36 ET

Summary

• Terran Orbital Corporation's stock has experienced a significant decline since its IPO but has shown revenue growth with a substantial backlog, indicating potential profitability in the future.
• The global small satellite industry is expected to see strong growth, presenting opportunities for the Company to capitalize on its position in the market.
• While LLAP has seen solid revenue growth, numerous risk factors exist including its growing costs and Rivada's delayed payment.

Investment Thesis

Terran Orbital Corporation ( LLAP ) warrants a hold rating due to multiple mixed variables impacting its share price going into 2024. While the stock has experienced an 89% decline since its IPO, it has demonstrated top line growth that points towards profitability in the next couple of years. Finally, LLAP has potentially bottomed out at just below $1 in share price, indicating an opportunity to buy low at current prices if the company becomes profitable.

Company Overview and Competitors

Terran Orbital is a small satellite company that was founded in 2013 and held its IPO in March 2022 after a SPAC merger. The company provides " end-to-end" satellite solutions for government and military applications meaning that it designs, produces, and provides in-orbit support. For comparison purposes, similarly sized competitors with less than a $1B market capitalization are Redwire Corporation ( RDW ), Astra Space, Inc. ( ASTR ), BlackSky Technology Inc. ( BKSY ), and Planet Labs PBC ( PL ).

Historically, LLAP has seen a dramatic decline in share price with a 3-year return of -89.5%. Terran Orbital has also been volatile with double-digit daily percentage changes in share price becoming a common occurrence. However, other compared small space companies have also had strong declines in share price over the past few years. Key factors impacting these small space companies are high costs, technical expertise required, and regulations associated with space operations. Despite these challenges, the space industry could see $1 trillion in annual revenue by 2040 and greater profitability if launch costs are reduced. Therefore, while high risk, investment in small space companies could also prove to be high reward.

Outlook for Small Satellite Industry

The global small satellite industry is expected to see strong growth over the next decade. With a projected market value of $5.88B in 2030, up from $3.46B in 2023, the small satellite market CAGR is estimated to be 7.9% . Application for satellite constellations exists in communication, navigation, and earth observation. From GPS to Elon Musk's Starlink, a "constellation" of interconnected satellites has multiple lucrative applications for government, civil, and commercial uses.

While there are a number of small space companies, including start-ups, the high barriers to entry position Terran Orbital favorably for this growing market. The space market has high capital requirements, technological expertise, regulatory requirements, and large market uncertainty. Given Terran Orbital's award of multiple contracts and ability to follow through with functional satellites, LLAP is postured to take advantage of the space market size's expected growth.

Order Backlog and Growth

Terran Orbital receives revenue from commercial, U.S. government, and international orders. Majority of its revenue in the last quarter was from the U.S. government ($27.6M or 85.7%). However, Terran Orbital also has international orders ($1.60M or 5%) and commercial customers ($3.03M or 9.4%).

A key metric that the company uses to advertise its growth is backlog, or the estimated dollar value from contracts that have not been completed. In its Q3 earnings release, Terran Orbit announced a $2.6B backlog, up from $170.8M at the end of 2022. In addition to a growing backlog, LLAP has seen solid revenue and working capital growth. In particular, the company saw an 86% YoY revenue growth and 716% YoY working capital growth.

Growth and Profitability Metrics for Terran Orbital and Peer Competitors

Source: Seeking Alpha, 9 Dec 23

Larger corporations have also taken note of Terran Orbital's capacity for growth. Just earlier this year, Lockheed Martin awarded Terran Orbital a contract to build 36 satellite buses to help fulfill a $700 million contract. Although LLAP does not offer a dividend, it has invested in its own growth. Specifically, the company has advanced its vertical integration to overcome supply chain hurdles. Terran Orbital announced in 2022 a new 60,000 square-foot commercial facility to grow its production capability.

Unfortunately, not all contracts have been as starry as the relationship with Lockheed Martin. In February 2023, Terran Orbital closed a $2.4B deal with European space company, Rivada Space Networks. As a result, LLAP stock price shot up 71%. However, last month Terran Orbital had to cut its revenue guidance as Rivada Space Networks failed to meet its payments for the deal. Rivada's $2.4B deal represents a vast majority of LLAP's $2.6B backlog.

Profitability Forecast

If the bright side is the company's top line growth, the downside is its profitability. Terran Orbital currently has a TTM gross profit margin of -2.78%, -104.22% TTM net income margin, and -124.93% TTM return on total capital. However, one must look at the trend to put these metrics into perspective.

Quarterly Improvement in LLAP's Financials (Q4 '22 through Q3 '23)

Source: Seeking Alpha, 9 Dec 23

A key challenge for Terran Orbital has been its costs. In Q3 '23, the company's cost of sales was $34.2M compared to $27.8M in Q3 '22. While determining when the company might achieve profitability is difficult due to numerous factors, one can look at these positive trends to estimate a break-even point. A crude method may be looking at the positive trend of EBITDA over the past several quarters. Plotting the last four quarters, a trend line indicates a positive EBITDA sometime in 2024. Admittedly, there are numerous factors I will cover later that can prevent this trend from continuing.

This prediction matches Terran Orbital's leadership forecast as well. Terran Orbital's CFO stated that the company is " working on a path to reach profitability on both an EBITDA basis and free cash flow basis during 2024". Unfortunately, the quoted CFO has since been replaced. One major impediment to LLAP achieving profitability is its growing debt. This has been seen with its assets versus liabilities which has not seen much improvement over the past year.

Taking an optimistic perspective, the growing liabilities could be viewed as the company's investment in its future. This investment has been seen both in its facilities and equipment. In 2022, the company started construction of a 94,000 square foot manufacturing facility in California. Additionally, LLAP recently released a new line of satellite buses . As a credit to its vision, Time Magazine announced Terran Orbital one of its 100 most influential companies for "impact, innovation, ambition, and success."

Company Outlook and Valuation

LLAP is currently trading at $1.03 at the time of this article. The stock price has seen a recent rebound this past month from a low of $0.62. However, LLAP is starkly down from its all-time high of $10.96 right after its IPO and even its 52-week high of $3.45. Even YTD, LLAP has seen a decline of over 30%.

Compared to other small space companies, LLAP indicates EV/sales and price/sales metrics roughly on par with its peers. Therefore, based on its current financials, LLAP is arguably priced appropriately. However, if the company can achieve profitability in 2024 or 2025, it likely represents a buying opportunity at its current price.

Terran Orbital and Major Competitor Valuation Metrics

Source: Seeking Alpha, 9 Dec 23

Analysts from multiple firms have published buy and strong buy ratings with an average price target of over $5. I consider this overly optimistic. Given the assumption that LLAP will likely be unable to achieve profitability within the next two quarters, I expect the stock to test its 52-week high of $3.45 next year as a best-case scenario. This return would represent a 235% upside. Price returns greater than $5 are unlikely in my opinion until the company becomes profitable. A key risk factor is if the company is unable to continue its favorable trend in revenue. In this scenario, LLAP can certainly drop below $1 again.

Volatility and Risks to Investors

Numerous risk factors impact LLAP's return for investors. The highest current risk is Rivada not fulfilling its obligations, given that its contract constitutes a large portion of Terran Orbital's backlog. In its Q3 release, LLAP removed Rivada's contributions from its revenue forecasts in an ominous sign for this risk factor.

The second greatest risk is the company's ability to control costs. Terran Orbital's long-term debt over total capital is 237% and the company holds total cash of about $38M compared to $195M in total debt. While LLAP's CEO stated they have avenues for achieving more capital, the company has yet to prove its ability to achieve a positive net income margin. If the company is unable to raise capital and its backlog dries up, the company risks insolvency.

The final risk is regarding its large revenue dependency (85.7% of revenues last quarter) on government contracts. Given strategic competition with China, I believe it is unlikely that the U.S. will significantly reduce its investment in space. Therefore, this is the lowest risk factor in my opinion.

If any of these risk factors become a reality, LLAP's volatility will likely bring the stock price back below one dollar. To prevent delisting from the NYSE, the company may conduct a reverse stock split which will have negative repercussions for current investors. Therefore, while future profitability is possible for Terran Orbital, this stock is not for the risk-averse investor.

Concluding Summary

Terran Orbital warrants a hold rating as there are multiple factors working for, and against, returns for the company. Looking forward, there are two likely scenarios. The first is that the company struggles to achieve profitability. This is realized if the company does not continue to grow its backlog and is unable to improve its cost of sales. This will be immediately evident if Rivada continues to be delinquent on its contract payments but worsens if LLAP is unable to acquire new business. This scenario will likely bring LLAP below $1. To maintain its listing on the NYSE, LLAP may conduct a reverse stock split.

The second possible scenario is that the company continues to grow its backlog, controls costs, and achieves profitability in 2024 or 2025. I am inclined to believe in this second scenario as a positive trend has existed for at least three quarters now. Given its current share price, this would be an ideal scenario for new investors who could see a huge return on investment. Regardless of which scenario unfolds, investors in LLAP should hold on for what will likely be a wild ride ahead.

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