Arrival

Arrival (NASDAQ: ARVL) can be easily dismissed as another electric vehicle company. However, what makes this growth stock unique is its approach to producing vehicles. Arrival aims to utilise its in-house technologies to produce rapidly scalable microfactories around the world.

With an estimated cost of $50m, these factories can be set up in a matter of months. Not to mention, they are also 24 times smaller than most other factories. This model allows each factory to achieve unprecedented growth, with an annual gross margin of $100m, producing 10,000 vans a year.

Nonetheless, Arrival now trades at a mere $1.44 after losing 95% of its value from its all-time high. This was the result of an overpriced valuation, delays, and share dilution. That being said, I think the stock is now fairly priced given that its market cap ($920m) is now lower than its total assets ($1.5bn).

After numerous delays, start of production for its vans is set to begin this quarter. This leaves me excited as a long-term investor. Provided that all goes according to plan, I think this growth stock could be a huge winner for years to come.

Astra Space

Astra Space (NASDAQ: ASTR) is a company targeting a niche portion of the space launch market. The firm offers to deliver payloads that are less than 300 kg to low earth orbit (LEO) while charging the most affordable fees.

The company has experienced unprecedented growth in its route to getting to space, as it’s the fastest space launch company to reach orbit. Its cheap method of producing rockets is what sets it apart from the competition. Even with a base launch cost of $2.5m, the Alameda-based firm is twice as cheap as its nearest competitor, Rocket Lab. This has allowed Astra to secure a backlog of over 50 launches with the likes of NASA, Spaceflight, Planet, and many others.

Having said that, Astra has also suffered a monumental drop in its share price of 80% this year. The current bear market hasn’t done growth stocks any favour either. Fears of a potential recession have soured investor sentiment and kept share prices low. Nevertheless, if Astra can manage to somehow deliver on its promises of daily launches by 2025, its current share price is going to be a steal.

Stunted growth?

Given the tremendous amount of potential from these growth stocks, are they a buy? Well, it’s important to note that while these companies have the potential to deliver a monumental return on investment, they can also fail.

I’m definitely intrigued by Arrival’s growth prospects. Even so, its cash position leaves me worried. With just $500m of cash, the unicorn has proposed restructuring its business. On the other hand, Astra has gone quiet since its most recent failed TROPICS launch. With no word from management as to what lies next for the company, I think there’s too much risk involved to buy more shares. As such, I’m holding onto both my Arrival and Astra positions for the time being.

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A tropical storm

After weeks of delays in getting a launch license from the US Federal Aviation Administration, Astra finally got under way on Sunday to launch its payload of satellites into space. However, despite a successful launch, the rocket’s second engine abruptly shut down. This meant that the satellites failed to reach the desired destination. While the reasons for this are still being investigated, NASA did release a statement, and has paused its next two launches with Astra.

Despite a loss of the first two of six satellites, the TROPICS constellation will still meet its science objectives with the four remaining CubeSats distributed in two orbits. With four satellites, TROPICS will still provide improved time-resolved observations of tropical cyclones compared to traditional observing methods… NASA will lend any expertise needed but would expect to pause the launch effort with Astra while an investigation is being conducted to ensure we move forward when ready. 

Source: NASA

Renowned astronomer Scott Manley gave his opinion on why the satellites didn’t reach their destination. He believes that the engine failure led to the rocket’s inability to orient itself toward the designated coordinates. As a result, the rocket overshot its target. Having said that, he isn’t sure what caused the engine to fail either.

‘Cheap’ failure

Amid all the panic, however, I think it’s important to zoom out and assess the economics and business model of Astra. The Alameda-based company offers the cheapest launch price of any of its competitors. At a base launch price of $2.5m, Astra would theoretically need to fail two out of its three launches, before its nearest competitor, Rocket Lab becomes economical. And, Astra transports satellites weighing less than 150kg (Class D), which are much easier to build than other, bigger satellites. This means that for smaller satellites, Astra still remains the straightforward option.

Nevertheless, Astra has plenty on the line. With its share price deep into penny stock territory, Astra needs to prove its worth or risks going under. Another failure would deem its following TROPICS launch redundant, and impact its already tarnished image.

Refuelling is very likely

To make matters worse, Astra isn’t in the best cash position either. With an accelerating cash burn, I am beginning to worry whether the company can survive without having to raise capital. Given its low share price already, dilution isn’t expected to happen. As such, the company is likely to take on debt. This isn’t ideal with interest rates expected to grow over the coming months.

So, is Astra Space stock a buy for me then? While many have been exiting their positions lately, it’s important to remember that the space industry is new and challenging. Elon Musk has even said so himself.

SpaceX, for all its success, had its fair share of failures too. It’s easy to forget in gloomy times that Astra is the fastest company to get its rocket to space, and it’s still this same management team that will be addressing this recent setback. Thus, I’ll be waiting for the results of the investigation before buying more. But for now, I’ll be holding onto Astra Space stock.

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Cheap rockets, cheap valuations

Since Astra IPO’d last year, its share price has taken a beating. It’s down 70%, as is the case with many growth and tech stocks. Nonetheless, given the success of its most recent payload delivery, I believe the company has a bright future ahead of it. Astra’s USP is its ability to manufacture the cheapest rockets on the market, on scale. It also aims to provide weekly launches by 2024 and daily launches by 2025. This is something its competitors are yet to offer.

As the first batch of revenue came in, Astra managed to secure $3.9m for its two launches (One failed, one successful). Although the cost of revenue is almost three times of that, the team expects this to reduce with higher margins as the service scales. Alongside that, it also secured orders for 61 Astra Spacecraft Engines from a number of customers. The company expects the order pipeline to grow given the industry’s high demand for satellites.

Hot Tropics

When CEO Chris Kemp was quizzed about the status of the upcoming Tropics launches on the earnings call, he noted that rockets were on standby and awaiting license confirmation. While he doesn’t expect all six rockets to launch by the end of Q2, he mentioned Astra’s intention to launch all of them before Q3 concludes. If the team from Alameda can pull all these launches off successfully, I think that the share price will start to pick up some momentum.

Could fuel burn out?

A business like this one needs cash to keep going. I was worried when I saw Astra’s cash and equivalents come in at a mere $162m. This is significantly down from $325m in the last quarter as the Nasdaq-listed company burned cash at its fastest rate. With that spend, Astra has completed the expansion of its facility. Additionally, it has installed most of the equipment for high-scale rocket manufacturing.

CFO Kelyn Brannon mentioned on the earnings call that capex and opex should taper off substantially in the coming quarters. However, Q2 is still expected to weigh heavily on the balance sheet. As such, I am wary of the firm’s potential need to raise capital in the near future.

Nevertheless, a balance sheet with no outstanding debt leaves Astra in a healthy position to grow and expand. Another launch from the Department of Defense was also added to the $160m launch backlog, showing that demand for Astra’s services is increasing. With Rocket 4 set to be showcased at next week’s Spacetech Day, these are exciting times for firm and for me as a shareholder. So, with the Astra share price currently at historic lows, I’ll be buying more shares before take off!

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Astra ordinary

Astra has achieved a feat that its competitors haven’t. It’s the fastest space launch company to reach orbit, only taking five years. This wouldn’t have been possible without the leadership and vision of CEO Chris Kemp and his co-founder, Adam London. Prior to being Astra’s co-founder, Kemp was the CTO at NASA while London led initiatives of miniaturising high-performance rocket tech.

This attracted the support and funding of multiple governmental space agencies, which has led to Astra’s obtainment of a Part 450 license from the US Federal Aviation Administration. The license allows for a higher launch frequency and greater regulatory flexibility.

The launch company’s financials are also in tip top condition. Its excellent balance sheet with zero debt and $325m in cash and equivalents leaves the launch company in a healthy position. As such, it can scale its services without having to raise capital for the foreseeable future. This is in part due to its ability to produce the cheapest rockets in the market.

Space to grow

Although Astra’s current rocket only carries up to 150kg to low earth orbit (LEO), Kemp has mentioned his intention to build another rocket. Rocket 4 will be able to carry much heavier payloads beyond LEO with trials expected to commence in Q3. This is to capture customers from the sanctioned Soyuz service that have heavier satellites. Moreover, its partnership with Spaceflight, the leading global launch services provider, should help Astra achieve its goal of daily launches by 2025.

To complement this, Astra has launch contracts with NASA, Space Force, the US Department of Defense, Planet, and Spire Global. With industry tailwinds of an increasing lightweight satellite market, Astra has plenty of momentum on its side, having already secured $160m in total deal value as of Q4 2021.

So, what happens after 2025? Well, Astra is expected to expand its offering beyond launch services, as the CEO disclosed Astra’s goals to offer space products and services. These include electric propulsion systems and constellation services for networks. In fact, Astra recently secured a deal with Leostella to provide multiple engines and propulsion systems for its satellites.

Staying grounded

Despite the potential of this space stock, I think it’s also important to be realistic with my expectations. Delays and setbacks are more not uncommon in such a new industry, with Astra already experiencing a couple. Pair that with a slowing economy, and Astra’s goal of daily launches may suffer hiccups along the way. Nevertheless, I am bullish about the company’s prospects for the future and its ability to outdo its peers. With an average target price of $5, this presents a 50% upside to its current share price. Therefore, I’ll be looking to buy more shares in Astra at a bargain.

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Stock pick #1 – Alphabet

Warren Buffet has always said that the best companies are those that exhibit solid fundamentals, strong earnings power, and the potential for continued growth. Alphabet (NASDAQ: GOOGL) manages to tick all these boxes. With a strong balance sheet, a 29.5% profit margin, and plenty of room for earnings growth with some analysts predicting a 22% upside to its current share price, the Google-parent stock is a no-brainer for me. Furthermore, despite having legal challenges as a big tech company, Alphabet has a history of outperforming the S&P 500. Its upcoming stock split this summer could work wonders for the share price as well. History has shown that stock splits tend to boost share prices as they encourage higher trading volume. Therefore, a solid balance sheet accompanied by strength in the search engine and advertising space makes Alphabet a hybrid defensive-growth stock for my Stocks and Shares ISA.

Stock pick #2 – PayPal

Although the PayPal (NASDAQ:PYPL) share price is 60% off its all-time-high, I think the fintech company still has plenty to offer. Despite a miss on its earnings last quarter, I am excited by PayPal’s revised business model. The platform is targeting more activity per user rather than more users. This is music to my ears because I value quality over quantity. Its partnerships with Amazon, Starbucks, and Doordash to integrate Venmo, an American mobile payment service it owns, will also provide a boost to its revenue. Its previous partnership with eBay generated a sizeable portion of revenue, showing me that PayPal has had some historical success. It could, however, suffer the effects of a high interest rate environment as transaction volume could slow down. Despite its interest income segment earning it revenue, it might not be sufficient to keep investors happy. Yet it’s also hedged against such a potential slowdown. The firm’s interest income segment hedges against rate hikes as it stands to earn revenue from interest too.

Stock pick #3 – Astra Space

Next up on my list is Astra Space (NASDAQ: ASTR). Astra sends small rockets into space to deliver satellites and other payloads for its commercial customers. As a pre-profit company, Astra carries a high level of risk, but with it also comes a high potential upside to its current share price. Since the Alameda-based company launched its first successful payload in March, the share price has shot up 21%. With more launches lined up and monthly launches planned for the rest of 2022, there could be room for the share price to continue growing. Astra also boasts a flawless balance sheet with zero debt, adequate cash levels, and a healthy cash burn. This gives me plenty of confidence to continue buying Astra shares as there is a low probability that the company will need to raise capital in the near future.

No dividends

These are all growth stocks with no official dividends. Nevertheless, the potential upside to the stocks’ share prices offsets the growth of regular dividend-paying stocks, in my opinion. This is why I’ll be buying all three stocks for my portfolio.

The post My top 3 picks for my Stocks and Shares ISA! appeared first on The Motley Fool UK.

Cash is king

With early-stage growth companies like this, I always pay close attention to two financial variables — cash and debt. Fortunately, Astra reported healthy balance sheet numbers. The company finished the year with $325m in cash and equivalents as well as zero debt. Although total cash came in lower than in Q3 2021, I was relieved to see cash burn decrease from $68m to $53m. This eases my nerves as Astra may be able to develop and scale its services without having to significantly dilute its shares to raise capital in the near future.

Bigger rocket share

Aside from cash and debt, I pay an equal amount of attention to total deal value, because it gives an indication of future cash flows. This is the total amount Astra could stand to make from launch contracts. Astra’s deal value didn’t increase exponentially due to the smaller capacity on its Rocket 3 limiting the number of customers it can do business with, but there was still a 33% increase year-on-year to $160m. Nonetheless, with Astra’s latest payload success and cheaper prices than its competitors Rocket Lab and Virgin Orbit, I have confidence that CEO Chris Kemp and his team have got what it takes to grab a bigger market share as Astra continues to scale.

Rocket 4 customers

When Chris Kemp went on CNBC last month, he mentioned that customers from the now-sanctioned Soyuz service could switch to Astra. This sent the Astra share price soaring 31%. However, its Rocket 3 can only support less than half of Soyuz’s customers due to its weight limit. Astra also lost a potential customer in OneWeb that chose to launch its satellites with SpaceX instead. When questioned about this on the earnings call, Kemp mentioned Astra’s ambitions to create Rocket 4, which will be able to accommodate heavier satellites. He also spoke about the introduction of a new launch system that will be more efficient and effective, and will be on display at its upcoming launches later this month.

Making progress

Despite the pros, I remain cautious. Although the company recently launched its first successful payload, there’s always a possibility that the next launch is a failure, hindering progress and profits. The soaring prices of aluminium that Astra uses to build its rockets could dent profit margins too.

Nevertheless, having witnessed Astra overcome many hurdles, I have faith in Kemp and his team. The 33-day period between its last two launches shows it’s getting closer to its target of weekly launches by 2023 as the gap between launches is narrowing. Therefore, with the Astra Space share price currently slumbering, I see it as a bargain and this as a good time to pick up more shares for my portfolio.

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