This company has large ambitions, but that doesn’t come without risks.
The bull market is heating up, with the S&P 500 soaring around 35% in the last 12 months on the back of artificial intelligence (AI) winners like Nvidia. One stock that has gone on a monster run is Rocket Lab (RKLB 5.95%). The space flight start-up is up 120% in the last 12 months as the company keeps growing sales and expanding its operations. Rocket Lab — a competitor to SpaceX — is now approaching a market capitalization of $5 billion.
Should you buy the stock today?
A vertically integrated space company
Rocket Lab’s aim is to build a vertically integrated space company. What does this mean? Management wants to provide products and services across all areas of the fast-growing space economy. This includes building and launching rockets, building and operating spacecraft, and selling software/data services to third parties.
Today, Rocket Lab’s main business is launching a small rocket called the Electron and selling spacecraft systems. In the future, it aims to sell software on top of these services. Last quarter, launch revenue from the Electron totaled $29.4 million, while space systems revenue was $76.9 million. Add this together, and Rocket Lab’s revenue is growing 71% year over year.
Its backlog is now over $1 billion. With a growing track record of execution, Rocket Lab has dozens of flights booked for its Electron rocket in the coming years and over 40 spacecraft it will get paid to build. This predictability allows the company to invest heavily for growth. If it can build it, the customers — including the U.S. government and private businesses — are telling Rocket Lab they will show up with dollars ready to spend.
Everything hinges on the Neutron
Revenue at Rocket Lab is up over 400% in the last three years. While impressive, the company is still highly unprofitable. Net income was negative $177 million and free cash flow was negative $149 million over the past 12 months. It is burning a lot of cash, and quickly.
Why? Because of the research and development for its new Neutron rocket. This is its second-generation launch vehicle that will be much larger than the Electron, increasing the payload (weight) by more than tenfold for each flight. Designing, building, and testing a new rocket is costly and comes with zero revenue generation. Not to mention the costs of building the launch facilities and launch pad, too.
Today, Neutron is around a year away from full tests and commercial flights, according to Rocket Lab management. Investors need to watch this development closely. Reaching commercial operations for Neutron will be a huge help for Rocket Lab getting to cash-flow positive. It is a risky endeavor, but one that’s worthwhile.
There is a huge demand for larger rocket flights from satellite operators, and right now the only supplier in town is SpaceX. Rocket Lab has a chance to steal these customers and generate (potentially) hundreds of millions or billions in sales from these launch contracts.
It won’t happen tomorrow, though.
RKLB Net Income (TTM) data by YCharts
Should you buy the stock today?
At a market cap approaching $5 billion, Rocket Lab stock does not look cheap. The stock has a price-to-sales (P/S) ratio of 14.5, which is significantly higher than most other stocks. Gross margins are also not that high, coming in at under 30% last quarter. This means the company will likely translate just a small fraction of its sales to earnings once it scales. It’s not a bad thing, but something investors need to consider when doing valuation work.
If Rocket Lab can get the Neutron rocket operational and keep ramping up its space systems segment, I think the company can grow from just over $300 million in revenue to $1 billion or higher in a few years. Profits should start to show up as well, although I would still expect management to reinvest heavily to keep growing and take advantage of the huge opportunity brewing in the space economy.
Revenue of $1 billion is still not that large compared to a market cap of $5 billion. What this means is that Rocket Lab stock is overextended at current prices. For now, avoid buying this stock for your portfolio following its 120% rip higher in the last 12 months.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.
