LLAP - Terran Orbital: Starry Visions Cloudy Finances

2023-08-08 13:17:10 ET

Summary

• Terran Orbital Corporation, showcases impressive strides in contract wins and a growing backlog, but remains ensnared in a web of operational and financial challenges.
• The company's weak balance sheet puts them in a precarious position with a high risk of equity dilution.
• Terran Orbital Corporation's financial journey has been troubling, with climbing revenues but no positive gross.
• We list this stock as a Sell.

Introduction

Terran Orbital Corporation's (LLAP) financial journey over the past few years has been a perplexing one. Despite climbing revenues, the company's inability to post positive gross profits paints a worrisome picture. Terran Orbital Corporation's trajectory in 2023 is a cautionary tale of ambition meeting reality. Despite its lofty goals and promising beginnings, the company appears to be caught in a quagmire of financial distress, market skepticism, and operational challenges. This combination of factors leads up to placing a Sell rating on the stock.

Terran Orbital Corporation, trading under the ticker LLAP, once hailed as a beacon in satellite technology, now finds itself navigating through turbulent skies. Having debuted with fanfare through a SPAC merger and championing AI-integrated satellites, the company's performance in 2023 has been riddled with volatility and uncertainty.

Business Model and Setbacks

Despite its ambitious vision of revolutionizing space with their satellites, the company has struggled to fully capitalize on its potential. The world of satellite technology and applications is cutthroat, and Terran Orbital's endeavors have fallen short of creating the anticipated impact.

Though 2023 saw the company boasting a $2.4 billion deal with Rivada Space Networks , the stock's subsequent behavior painted a different story. Instead of solidifying its position, LLAP's stock value nosedived multiple times post the initial 98.9% surge, suggesting significant market skepticism.

Moreover, while partnerships like those with Safran Electronics & Defense and features in reputed lists like Time's '100 Most Influential Companies' should have buoyed the company, they barely made a dent in offsetting the persistent negative sentiments and distracting from their ongoing challenges.

Soaring Revenues but Dwindling Gross Profits

Terran Orbital Corporation's revenues have shown a commendable upward trajectory, increasing from $6.5M in Dec 2020 to $28.2M by Mar 2023. However, this revenue growth comes with a caveat. The company's cost of revenues consistently outpaced its total revenues, leading to negative gross profits. This anomaly reached its peak in Dec 2022 when, despite raking in $31.9M in revenues, the company posted a gross loss of $10.8M. Such a trend suggests potential inefficiencies in production, procurement, or both.

Despite the rising revenues, the company's operating income also paints a bleak picture. The losses have been increasing at an alarming rate, particularly noticeable from Jun 2022 onwards. With a loss of $33.0M in Jun 2022, the figure further deteriorated to $38.4M by Dec 2022, despite an increase in revenues during this period. The mounting selling, general, and administrative expenses play a significant role in this downward spiral. Such trends raise concerns about the company's operational efficiency and its capacity to manage costs in line with its growth.

Though we anticipate that the magnitude of the Rivada Space Network's contract will eventually lead to economies of scale for LLAP, currently there's little proof that they can produce satellites with a positive Gross Profit, let alone achieve an Operating Income any time soon.

Balance Sheet

Terran Orbital Corporation's balance sheet over recent quarters has increasingly reflected its financial challenges. A significant point of concern is the sharp decline in the company's cash reserves. From an impressive $93.6M in Dec 2022, the reserves plummeted to $57.4M by Mar 2023. With an average operating income loss of $32.5 Million over the last four quarter this cash balance covers less than 2 quarters of operating income losses. This rapid depletion, even in the face of significant deals like the one with Rivada, suggests that LLAP is burning through its capital at an alarming rate.

The balance sheet also reveals a concerning uptick in liabilities. By Mar 2023, total liabilities had swelled to a staggering $292.1M from $226.8M in Dec 2021. The surge in long-term debt, in particular, reveals the company's growing dependency on debt financing. This trajectory, when combined with consistent operating losses, paints a grim picture for the future.

The drop in accounts receivable from its peak in Mar 2022 to Mar 2023 could signal either tighter credit terms or, more concerning, a possible decrease in sales on credit due to dwindling demand or market skepticism.

Valuation

Terran Orbital's ongoing liquidity challenges and cash flow constraints are glaring red flags for potential equity investors and investment banks. In the backdrop of a rising interest rate environment, the cost for Terran Orbital to secure loans for its operations will inevitably escalate. Given the assumed hurdles they face in procuring debt at sustainable rates, it's plausible they might resort to stock issuance as a financial buffer for the upcoming quarters. However, this approach is a double-edged sword. Issuing more stock can lead to a cyclical downturn in share prices, necessitating even more shares to be issued to generate the same capital.

Compounding these concerns is the looming dilution risk for LLAP. A potential dilution of 116 million shares looms large, especially when contrasted against the current float of 145 million. Such significant dilution not only erodes shareholder value but also casts doubts on the company's financial strategy. This pronounced dilution risk further undermines the confidence of equity investors and solidifies the rationale behind the 'Sell' rating for LLAP.

Conclusion

Terran Orbital Corporation, while showcasing impressive strides in contract wins and a growing backlog, remains ensnared in a web of operational and financial challenges. The journey that began with promise, symbolized by ascending revenues, is overshadowed by the company's inability to realize positive gross profits. The balance sheet further amplifies these concerns, with dwindling cash reserves and mounting liabilities pointing to an unsustainable financial trajectory.

While lucrative contracts like the Rivada Space Network deal might hint at potential scalability, the current landscape offers no substantial evidence of LLAP's capability to turn a positive Gross Profit or Operating Income. In addition, the looming specter of dilution - with a staggering potential of 116 million shares - threatens to dilute shareholder value significantly. This, combined with the company possibly needing to resort to stock issuance in a bid to navigate its financial constraints, only magnifies the risk for equity investors.

In light of these compounding challenges, from balance sheet vulnerabilities to operational inefficiencies, and considering the immense dilution risk, it becomes increasingly clear that LLAP presents a precarious proposition for investors. Despite its contract wins and technological vision, the fundamental financial metrics suggest caution. The persistent operational setbacks, coupled with a problematic balance sheet, underscore the rationale for a 'Sell' rating on Terran Orbital Corporation.

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