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What happened

Satellite maker Terran Orbital (NYSE: LLAP) is raising money by selling additional shares, meaning existing shareholders will own less of the company than they did previously. Those shares are under pressure as a result, sending Terran Orbital stock down as much as 19% at 1:01 p.m. ET on Tuesday.

So what

Terran Orbital is one of a new generation of space stocks that have come to market in recent years. The company offers an end-to-end satellite package for defense and commercial customers, combining design, manufacture, mission operations, and in-orbit support.

The company is early in its life cycle and needs cash to support its plans. Late Monday, Terran said it had sold 23.2 million shares at $1.40 each, raising $32.5 million. It said the cash will be used for general corporate purposes.

Each share of common stock was sold with a warrant to purchase another share for $1.50 at any time in the next five years.

The offering represents 13.5% of shares outstanding, meaning that each existing share is now worth less because it represents a smaller slice of the overall ownership pie. The warrants, if exercised, would dilute existing shareholders further.

Now what

It isn’t uncommon for secondary offerings to cause the existing shares to fall. If a growth-focused company can use the extra funds to build out its vision and the business becomes a success, that’s a small near-term price for existing shareholders to pay. But not every company is able to get to the finish line.

For Terran Orbital, a lot of its success is tied to a manufacturing contract it has with another space start-up, Rivada. The deal at full value will be for as much as $2.4 billion and represents most of Terran’s pipeline. But Rivada is also in the process of securing the cash it needs, and in this market environment, that’s no easy task.

Investors would be wise to ignore the near-term dilution that comes from this offering and focus on the long-term prognosis for the business. Until there is more clarity about the health of the order book, it will be hard for Terran Orbital to gain altitude.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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