Rocket laboratory (NASDAQ:RKLB) Investors keep winning. The spaceflight company is up nearly 500% in the past 12 months, more than doubling its returns. Nvidia In the same time frame. It’s been an impressive performance for the stock, led by its rising performance in space launches and satellite manufacturing, which has helped it compete with the dominant player in the sector: SpaceX.
That’s why investors are so bullish on SpaceX competitor Rocket Lab, and why the stock is up nearly 500% in the past year.
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SpaceX has a dominant position in the field of commercial private rocket launches. In fact, just a few years ago, the company led by Elon Musk was the only Western company capable of reliably launching rockets into orbit. What happened a few years ago? Rocket Lab began competing for contracts.
In order to enter the market, Rocket Lab targeted rocket launches with much smaller payloads (i.e. on-board mass) than SpaceX’s workhorse Falcon 9 rocket. This led to the production of the Electron rocket, which can carry small, experimental payloads to orbit. The Electron will be the world’s third most launched rocket in 2024, an impressive feat that shows how much progress Rocket Lab is making to catch up with SpaceX.
Just a few days ago, Rocket Lab demonstrated its true potential with its rocket launch services, flying two missions (on separate launch pads) in less than 24 hours. Investors have been excited about these missions, showing that Rocket Lab has an opportunity to significantly increase its launch cadence in the coming years. The demand is there too. Rocket Lab has a growing backlog of more than $1 billion and thousands of satellites awaiting deployment from commercial customers.
More launches mean more revenue, and thus profits. Since entering the public markets in 2021, Rocket Lab’s revenue has grown 551%, making it one of the fastest-growing companies in the world. If it can pick up the pace of its launches, investors are betting that this growth will continue over the next few years as well.
Rocket Lab has bigger ambitions than just the Electron rocket. Through internal investments and acquisitions, the company has built capabilities to build payloads (satellites, solar cells, space pods) for its commercial customers. Space Systems revenues have grown at a rapid rate in the past few years and now make up the majority of Rocket Lab’s overall revenue.
The key is the flywheel, which is designed with all these capabilities. Rocket Lab is one of the few places a customer can go to get a reliable launch into orbit, making it easier for the company to up-sell those customers on the capabilities of its space systems. The government thinks this is promising work, too, as Rocket Lab recently signed a $24 million incentive agreement as part of the new CHIPS Act to build semiconductors for space systems.
Longer term, investors should keep an eye on two developments for Rocket Lab to further its vertical integration ambitions. The first is the larger Neutron rocket, which will increase its payload per launch and directly help compete with SpaceX. The company already has a customer signed on for the Neutron launch, which is expected to debut in 2025.
Second, the company plans to build its own satellite constellation and sell software/services from orbit, which could help boost the company’s earnings potential.
There’s a lot to like about Rocket Lab’s business, and I applaud the shareholders who bought the stock over a year ago. You are sitting on some great gains right now. This doesn’t make the stock a buy today, though.
With a market capitalization of $12 billion, Rocket Lab trades on a price-to-sales ratio (F/S) of 34, more than 10 times the market average. Yes, Rocket Lab has a lot of growth potential, but this is a low-margin, capital-intensive company that’s not worth trading at more than 30 times sales.
To illustrate this point, let’s make some forward-looking estimates for Rocket Lab. Within 10 years, if the company achieves all of its ambitions with minimal setbacks (an optimistic scenario), I could see the company’s revenue growing from its current annual figure of $364 million to $5 billion. With a gross profit margin of 26%, it’s reasonable to assume that Rocket Lab could achieve 10% net income margins once it scales, or $500 million in profits on $5 billion in revenue.
Consider that $500 million in profits versus the current market capitalization of $12.34 billion represents a price-to-earnings ratio of 25. This is not much lower than average. Standard & Poor’s 500 Today’s P/E ratio, which would be Rocket Lab’s earnings power in 10 years under the most optimistic assumptions.
Stay away from Rocket Lab stock now. The stock price is out of control.
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Brett Schiffer He has no position in any of the stocks mentioned. The Motley Fool has positions on and recommends Nvidia. The Motley Fool recommends Rocket Lab USA. The Motley Fool has Disclosure policy.
Up 500% in the past year: Why investors are falling in love with hyper-growth competitor SpaceX Originally published by The Motley Fool