Key Points
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Rocket Lab recently announced plans to acquire Iridium Communications for $8 billion.
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The move will make Rocket Lab vertically integrated and enable it to compete against Starlink.
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Starlink has been a huge part of SpaceX’s business as it accounts for the lion’s share of its revenue.
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Space Exploration Technologies (NASDAQ: SPCX), also known as SpaceX, went public last month. While its overall business is unprofitable, the area doing well is connectivity and the internet, which includes its Starlink subsidiary. It provides satellite internet service.
Competition, however, may be ramping up in that space, particularly with another rocket company, Rocket Lab (NASDAQ: RKLB), announcing a major acquisition. And that could be a big problem for SpaceX stock.
Rocket Lab to buy Iridium Communications
Last month, Rocket Lab announced plans to acquire Iridium Communications in a cash-and-stock transaction worth $8 billion, calling it a “historical deal” for its business. The move will make the company vertically integrated, combining the launch capabilities of Rocket Lab, which is also involved in satellite manufacturing, with the satellite communications network that Iridium possesses. Together, Rocket Lab says it will be a “space powerhouse primed for growth.” The deal is expected to close in the middle of next year.
The strategy is similar to SpaceX’s and could result in greater competition for Starlink, which is the company’s big moneymaker thus far. And it’s not only Rocket Lab that Starlink has to potentially worry about, as there are other companies showing interest in this space as well; tech giant Amazon is also launching Leo in the near future, which is its own satellite internet provider.
Is SpaceX stock in trouble?
SpaceX’s connectivity segment may not attract as much investor interest as artificial intelligence (AI) or space, but that’s the driving force behind the company’s business these days. During the first three months of the year, the connectivity segment accounted for nearly 70% of the top line, which totaled $4.7 billion. It was also the only segment that wasn’t in the red, with an operating profit of just under $1.2 billion.
An influx of competition could pose greater risks for SpaceX down the road, as it could slow Starlink’s growth. If that happens, SpaceX, which is already unprofitable and burning through billions in cash, may require even greater cash infusions to continue investing in its AI and space objectives.
SpaceX is already a risky stock given its inflated valuation, and with more competitors potentially challenging Starlink in the future, it may have even more to prove. Investors are clearly having second thoughts about the space stock as it’s now trading around the levels it was at when it first went public, and it may be due for an even greater decline in the future. This is a stock I’d tread carefully with.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Rocket Lab. The Motley Fool has a disclosure policy.
