rocket laboratory(NASDAQ: RKLB) investors continue to win. The space flight company is up around 500% in the last 12 months, which is more than double the profitability of NVIDIA in that same period of time. It’s been an incredible run 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.
Here’s why investors are very bullish on SpaceX competitor Rocket Lab, and why the stock is up about 500% in the last year.
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SpaceX has a dominant position in private commercial rocket launches. In fact, just a few years ago, the company led by Elon Musk was practically the only Western company capable of reliably launching rockets into orbit. What happened a few years ago? Rocket Lab began competing for contracts.
To enter the market, Rocket Lab focused on rocket launches with much smaller payloads (i.e., mass on board) compared to SpaceX’s Falcon 9 rocket. This led it to produce the Electron rocket, which can carry small, experimental payloads into orbit. Electron will be the third most launched rocket globally in 2024, which is an impressive feat and shows how much Rocket Lab is making progress in catching up with SpaceX.
Just a few days ago, Rocket Lab demonstrated its true potential with its rocket launch services, carrying out two missions (on separate launch pads) in less than 24 hours. Investors have been excited about these missions, showing that Rocket Lab has the ability to significantly increase its launch cadence in the coming years. The demand is also there. Rocket Lab has a growing order book worth more than $1 billion and thousands of satellites waiting to be deployed by commercial customers.
More launches mean more revenue and, ultimately, profit generation. 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 increase its release frequency, investors are betting this growth will continue for years to come as well.
Rocket Lab has bigger ambitions than just the Electron rocket. Through internal investments and acquisitions, the company has developed capabilities to build payloads (satellites, solar cells and space capsules) for its commercial customers. Space systems revenue has grown at a rapid pace in recent years and now accounts for the majority of Rocket Lab’s overall revenue.
The key is the steering wheel that is built with all of these capabilities. Rocket Lab is one of the few places a customer can go to get a reliable launch into orbit, making it much easier for the company to sell these customers on its space systems capabilities. The government also believes it’s a promising business, as Rocket Lab recently signed a $24 million incentive deal as part of the new CHIPS Act to build semiconductors for space systems.
In the long term, investors should keep an eye on two developments from Rocket Lab to further its vertical integration ambitions. The first is the larger Neutron rocket, which will increase its payload per launch and help compete directly with SpaceX. The company already has a customer signed up for the launch of Neutron, which is expected to debut in 2025.
Secondly, the company plans to build its own satellite constellation and sell software/services from orbit, which could help increase the company’s earnings potential.
RKLB PS Ratio Data by YCharts
There’s a lot to like about Rocket Lab’s business, and I applaud the shareholders who bought the stock more than a year ago. You are enjoying fantastic profits right now. However, that doesn’t make the stock a buy today.
With a market capitalization exceeding $12 billion, Rocket Lab trades at a price-to-sales (P/S) ratio of 34, more than 10 times the market average. Yes, Rocket Lab has great growth potential, but it is a low-margin, capital-intensive business that doesn’t deserve to trade at more than 30 times sales.
To illustrate this point, let’s make some forward-looking estimates for Rocket Lab. In 10 years, if the company achieves all of its ambitions with minimal setbacks (an optimistic scenario), you could see the company’s revenue growing from its current annual figure of 364 million dollars to 5 billion dollars. With a gross profit margin of 26%, it’s reasonable to assume that Rocket Lab can achieve net income margins of 10% once it grows, or $500 million in profits on $5 billion in revenue.
Consider that $500 million in earnings versus the current market cap of $12.34 billion is a price-to-earnings (P/E) ratio of 25. That’s not much lower than average. S&P 500 The current P/E ratio, and that would be Rocket Lab’s earnings power in 10 years under the most optimistic assumptions.
Stay away from Rocket Lab stock right now. The stock price is getting out of control.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.
Up 500% in the Past Year: Why Investors Are Falling for This SpaceX Hypergrowth Competitor originally posted by The Motley Fool
