Intuitive Machines Wins New Moon Landing Contract; Stock Dilution A Huge Risk

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In May, I covered Intuitive Machines (NASDAQ:LUNR) with a strong buy rating as I believe, for those who want to have exposure to lunar exploration, the company provides the most compelling investment case. However, what should be kept in mind is the significant dilution risk as well as the fact that the moon missions, IM-1 through IM-3, have been in a loss position. So, these missions are not generating any profits for the company, and as long as operating cash flow and capital expenditures remain elevated, the dilution of shareholders remains the prime risk. In this report, I will be discussing the most recent results for Intuitive Machines and discuss its valuation.
Intuitive Machines Revenues Soar On OMES III Task Orders
The Aerospace Forum
Looking at the revenues bridge from Q2 2023 to Q2 2024, we see that the lunar missions actually did not provide any growth and decreased. The IM-1 mission has been concluded, so naturally there are no revenues associated with that mission anymore. However, for the upcoming two missions, the revenues were $4.7 million and $8.3 million lower compared to last year. The negative revenue pressures were driven by unfavourable adjustments on task order modifications, which are driving down revenues. Revenues are often recognized as a percentage of cost completion. So, if the cost estimate on a contract goes up, the revenues have to be adjusted for that.
The biggest revenue driver was the OMES III contract, which is worth up to $719 million over a 5-year period. With $39.1 million recognized in a single quarter, it would suggest that we already see OMES III fully ramped 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 revenues were driven by the IM missions.
Total cost of revenues increased by 154% or $34.6 million to $57.1 million. The IM-1 mission has been completed, so there were no associated costs providing a $4 million tailwind on costs. On the IM-2 mission, cost of revenues increased by $0.7 million to $8.2 million while IM-3 mission costs decreased by $4.7 million due to lower activity. The OMES III cost of revenues were $37.1 million. What I think investors should keep an eye on is the gross margins on OMES. For the quarter those stood at 5.1% up from 4.3% in the prior quarter.
Total gross margins were -25% in Q2 2023 and widened to -38% in Q2 2024 on the back of unfavourable catch-up adjustments and operating margins moved from -73% to -68%. So, we see a bit of improvement on favorable fixed cost absorption, but the reality is that neither the lunar missions nor the OMES III task order execution are putting Intuitive Machines in a profitable position. In fact, the losses on the lunar missions continue to mount.
Intuitive Machines Wins New Payload Mission
Intuitive Machines
While the lunar missions to the moon are currently loss making, I still like what Intuitive Machines is doing. Earlier this year, it won a $30 million contract as the prime contractor for Lunar Terrain Vehicle Services. The contract consists of two phases. In Phase One, the LTVS feasibility is assessed and the cargo class lander is developed while Phase Two is the actual mission calling 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 once again demonstrates how big the opportunities in commercialization of lunar exploration are, even more so for a company that currently has a market cap of less than $668 million.
The most recent contract win is the contract for IM-4 worth $116.9 million to deliver six payloads to the Moon’s South Pole, with the mission expected to be carried out in 2027. The contract is a testimony to NASA’s confidence in the ability of Intuitive Machines to carry out the lunar missions and also cement its position as a lunar payload services provider.
The Investment Case For Intuitive Machines Remains Risky
Intuitive Machines is working on setting up a product portfolio, which 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 relaying services. However, there also remains a significant risk to the business. Since cash flow is negative, the company needs to improve its profitability on the programs it works on, and until cash flow turns positive, we will likely see shareholders being diluted. Year-to-date the number of shares outstanding nearly doubled, driven by the exercise of warrants, Class C and Preferred Class A conversion to Class A stock, and stock issues in relation to loan conversion.
During the first half of the year, the company had a free cash flow burn of $41.5 million, had $31.6 million in cash and cash equivalents, and had net proceeds from stock issuance of $77.1 million. That means that virtually all of the cash pile and free cash flow burn are covered by shareholder dilution. I believe that shareholders should be extremely mindful about that. If we model the cash burn at $20 million to $25 million per quarter for the next two years, at least there would be a cash requirement of $160 million to $200 million. That would indicate that at current prices there would be between 30 million and 40 million shares issued, which I would consider to be the best-case scenario. With 55.1 million basic shares outstanding we would be looking at a dilution of 42% and that is under the assumption that the share prices remain constant, which is unlikely to happen. So, I would say it is a given that shareholder dilution will happen. With that in mind, I believe investors should also prudently deploy their cash.
I maintain a buy rating for the name but think that the best way to be invested in Intuitive Machines is to spread stock purchases and ramp up stock purchases to limit the risk of your investment being diluted.
Conclusion: Intuitive Machines Stock Is A Speculative Buy
My view on Intuitive Machines remains unchanged. The contract award for a new lunar mission is nice to have, but we need to see significant improvements in the financial execution. As long as the missions remain loss making, the chances of dilution remain significant, and dilution is actually certain. With that in mind, for those that want to have a speculative position, I believe the most prudent way to be invested in Intuitive Machines is through a ramp-up in share purchases rather than deploying a big sum of cash at once. This shields investors somewhat from the sky-high dilution risk. I continue to believe that for the long-term this is a strong buying opportunity that unlocks a unique opportunity to capitalize on lunar habitation and exploration with a $100+ billion addressable market.