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In May I talked about Intuitive Machines (NASDAQ:LUNR) with a Strong Buy rating, as I believe that for those who want exposure to lunar exploration, the company offers the most attractive investment case. However, what should be kept in mind is The significant dilution risk, as well as the fact that the lunar missions, IM-1 to IM-3, have been in a loss-making position. Therefore, these missions are not generating profits for the company, and as long as operating cash flow and capital expenditures remain elevated, shareholder dilution remains the main risk. In this report, I will analyze Intuitive Machines’ most recent results and discuss its valuation.
Intuitive Machines revenue soars on OMES III work orders
The Aerospace Forum
If we look at the revenue bridge from Q2 2023 to Q2 2024, we see that the moon In reality, the missions did not generate any growth and were declining. The IM-1 mission has now concluded, so naturally there is no longer any revenue associated with that mission. However, for the next two missions, revenue was $4.7 million and $8.3 million lower compared to last year. The negative pressures on revenue were due to unfavorable adjustments to task order modifications, which are reducing revenue. Revenue is often recognized as a percentage of cost completion. Therefore, if the estimated cost of a contract increases, revenue must be adjusted accordingly.
The biggest driver of revenue was the OMES III Contract, which amounts to $719 million over a five-year period. With $39.1 million recognized in a single quarter, this would suggest that we already see OMES III fully incorporated into the revenue profile. So, while Intuitive Machines is seen as a play on lunar exploration, the reality is that virtually none of its Q2 revenue was due to IM missions.
Total cost of revenue increased 154% or $34.6 million to $57.1 million. The IM-1 mission has been completed so there were no associated costs, which was a $4 million boost to costs. On the IM-2 mission, cost of revenue increased $0.7 million to $8.2 million while IM-3 mission costs decreased $4.7 million due to lower activity. OMES III cost of revenue was $37.1 million. What I think investors should keep in mind is the gross margins for OMES. For the quarter, they were at 5.1%, up from 4.3% in the previous quarter.
Total gross margins were -25% in Q2 2023 and increased to -38% in Q2 2024 due to unfavorable recovery adjustments and operating margins went from -73% to -68%. So, we see a small improvement in favorable fixed cost absorption, but the reality is that neither the lunar missions nor the execution of the OMES III task order are putting Intuitive Machines in a profitable position. In fact, losses on lunar missions continue to increase.
Intuitive Machines wins new payload mission
Intuitive machines
While lunar missions to the Moon are currently loss-making, I still like what Intuitive Machines is doing. Earlier this year, won a $30 million contract as prime contractor for Lunar Ground Vehicle Services. The contract consists of two phases. Phase One assesses the feasibility of the LTVS and develops the cargo lander, while Phase Two is the actual mission, which provides for delivery and operational capability of the LTVS to the Moon. The contract has a total value of more than $4 billion for all phases. It demonstrates once again how large the commercialization opportunities are for lunar exploration, even more so for a company that currently has a market capitalization of less than $668 million.
The most recent contract won is the contract worth IM-4 $116.9 million to deliver six payloads to the Moon's South PoleThe mission is expected to take place in 2027. The contract is a testament to NASA’s confidence in Intuitive Machines’ ability to carry out lunar missions and also cements its position as a leading lunar payload services provider.
Investment in intuitive machines remains risky
Intuitive Machines is working on building a product portfolio that would be worth billions of dollars for space and lunar exploration. I believe the company will play a pivotal role in payload delivery services to the Moon, as well as lunar vehicle production and operation, and data relay services. However, there also remains significant risk to the business. With cash flow negative, the company needs to improve its profitability in the programs it is working on, and until cash flow is positive, we are likely to see shareholder dilution. Year-to-date, the number of shares outstanding has nearly doubled, driven by the exercise of warrants, the conversion of Class C and Class A preferred stock to Class A stock, and issuances of stock in connection with the conversion of loans.
For the first half of the year, the company had free cash burn of $41.5 million, had $31.6 million in cash and cash equivalents, and had net proceeds from issuance of shares of $77.1 million. That means that virtually all of the accumulated cash and free cash burn is covered by shareholder dilution. I think shareholders should be extremely aware of that. If we model cash burn at $20 to $25 million per quarter for the next two years, there would at least be a $160 to $200 million cash requirement. That would indicate that at current prices there would be between 30 and 40 million shares issued, which I would consider the best-case scenario. With 55.1 million basic shares outstanding, we would be looking at 42% dilution, and that is under the assumption that share prices remain constant, which is unlikely to happen. Therefore, I would say that it is a given that shareholder dilution will occur. With this in mind, I think investors should also use their cash prudently.
I maintain a buy rating on the name, but I think the best way to invest in Intuitive Machines is to spread out your share purchases and add to them to limit the risk of your investment being diluted.
Conclusion: Intuitive Machines shares are a speculative buy
My view on Intuitive Machines has not changed. It is good that a contract has been awarded for a new lunar mission, but we need to see significant improvements in financial execution. As long as missions continue to generate losses, the potential for dilution will remain significant, and dilution is indeed certain. With this in mind, for those who want to take a speculative position, I believe the most prudent way to invest in Intuitive Machines is through a gradual increase in share purchases rather than investing a large sum of cash all at once. This protects investors to some extent from the very high risk of dilution. I continue to believe that, over the long term, this is a great buying opportunity that opens up a unique opportunity to capitalize on lunar habitability and exploration with a potential market of over $100 billion.