The space exploration industry has garnered a lot of attention in recent years. The exciting progress of SpaceX, which was founded by Tesla CEO Elon Musk, has helped bring commercial space applications to the mainstream.

One company making noticeable strides is Rocket Lab USA (RKLB -3.37%). The company markets itself as an end-to-end space business -- specializing in launch services, satellite manufacturing, and software used on spacecraft.

At just $5.45 per share, the stock is hovering around all-time lows. Is this a grim sign, or is it possible that the stock is about to take flight?

Let's dig into what may have caused Rocket Lab's sell-off and why the future still looks bright.

Like fellow commercial space businesses Virgin Galactic and Astra Space, Rocket Lab went public through a special purpose acquisition company (SPAC). SPAC mergers had a fleeting moment in the spotlight a couple of years ago as entrepreneurs such as Chamath Palihapitiya and many others looked to democratize access to high-profile start-ups. While the intentions were good, the reality is that many companies that hit the public exchanges through SPACs were still pretty risky. As a result, many SPAC stocks experienced pronounced trading activity with share prices whipsawing all over the place. Unfortunately, many investors were left holding the bag.

Shortly after going public, Rocket Lab stock essentially doubled -- reaching a high of $20.72 per share. Although its cratering share price may not appear alluring, investors should understand some important details.

The space industry requires a significant level of capital investment. Whether it's building rocket ships and satellites or developing software, sending things into orbit is a costly endeavor.

RKLB Capital Expenditures (Quarterly) data by YCharts

The chart above illustrates Rocket Lab's research and development (R&D) and capital expenditures trends over the last several quarters. Unsurprisingly, the rising costs have taken a toll on the company's liquidity.

Given Rocket Lab is not yet generating positive free cash flow, the company's burn rate could extinguish its cash position. These concerns have likely led to a sell-off in the stock as investors realized that each new space business isn't necessarily the next SpaceX or Blue Origin.

Image source: Getty Images.

The dynamics outlined above make it clear that Rocket Lab not only needs to identify new sources of business but needs to do so quickly. According to a recent regulatory filing, on Dec. 21 the company entered into an agreement with an unnamed U.S. government contractor "to design, manufacture, deliver, and operate 18 space vehicles."

Under the contract, Rocket Lab will earn a base amount of $489 million and have the opportunity to collect $26 million of additional incentive pay. While the prospects of a $515 million inflow are encouraging, there are some stipulations investors should be aware of.

First off, the $515 million represents potential future revenue for Rocket Lab. As the graphs above illustrate, consistent profitability is difficult in the space industry. And per the terms and conditions of the deal, these space vehicles won't be delivered until 2027, and full operations aren't expected until 2030.

The long-term nature of Rocket Lab's new contract could be seen as a blessing and a curse. While it adds validation to the company's mission and the quality of its business, it doesn't necessarily solve the liquidity concerns. If anything, the payments from this government deal should extend the company's runway a bit, but it'll still be an uphill battle to long-term profitability.

With that said, Ark Invest CEO Cathie Wood has been scooping up shares of Rocket Lab. Since the company's announcement of its new deal on Dec. 21, Wood has increased her position in Rocket Lab by about 380,000 shares. This could be seen as a positive. However, keep in mind that Rocket Lab is still a relatively small position for her -- ranking 70th among her total holdings.

Investors interested in the space industry may want to consider a position in Rocket Lab. But keep in mind that the stock will likely experience pronounced volatility as it continues to build out its operations. To me, the government contract is a positive sign, and I think more deals will follow. The biggest questions that remain are when new business might enter the pipeline and how quickly the company can recognize those opportunities to strengthen its financial position.

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500 Million Reasons to Buy This Cathie Wood SpaceX Competitor in 2024 - The Motley Fool