Rocket Lab(NASDAQ:RKLB) investors just keep winning. The space company is up about 500% in the last twelve months, which is more than double the return of Nvidia in that same time frame. It’s been an incredible run for the stock, led by increasing performance in space launches and satellite production, allowing it to compete with the sector’s dominant player: SpaceX.
This is why investors are very bullish on SpaceX competitor Rocket Lab, and why its shares are up about 500% over the past year.
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SpaceX has a dominant position in private commercial rocket launches. Just a few years ago, the Elon Musk-led company was virtually the only Western company that could reliably launch 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. the mass on board) compared to SpaceX’s workhorse Falcon 9 rocket. This led it to produce the Electron rocket, which can deliver small and experimental payloads into orbit. Electron will be the third most launched rocket in the world by 2024, which is an impressive feat and shows how much progress Rocket Lab is making to overtake SpaceX.
Just a few days ago, Rocket Lab showed its true potential with its rocket launch services, completing two missions (on separate launch pads) in less than 24 hours. Investors have become excited about these missions, demonstrating that Rocket Lab has the opportunity to significantly increase launch frequency in the coming years. The question is also there. Rocket Lab has a growing backlog worth more than $1 billion and thousands of satellites waiting for commercial customers to deploy.
More launches mean more sales and ultimately more profit. Since entering the public markets in 2021, Rocket Lab’s revenue has grown by 551%, making it one of the fastest growing companies in the world. If it can increase launch frequency, investors are betting this growth will continue in the coming years.
Rocket Lab has bigger ambitions than just the Electron rocket. Through internal investments and acquisitions, the company has built capabilities to build the payloads (satellites, solar cells and space pods) for its commercial customers. Space systems revenues have grown rapidly in recent years and now represent the majority of Rocket Lab’s total revenues.
The key is the flywheel that is built with all these possibilities. 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 convince these customers of the capabilities of its space systems. The government thinks it’s a promising company too, with Rocket Lab recently signing a $24 million incentive deal 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 achieve its vertical integration ambitions. The first is the larger Neutron Rocket, which will increase its payload per launch and help it compete directly with SpaceX. The company has already signed up a customer for a Neutron launch, which is expected to debut in 2025.
Second, the company plans to build its own satellite constellation and sell software/services from space, which could help boost the company’s earnings potential.
RKLB PS Ratio data according to YCharts
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’re sitting on some fantastic winnings right now. However, that doesn’t mean the stock is a buy today.
At a market cap of $12 billion, Rocket Lab trades at a price-to-sales ratio (P/S) of 34, more than 10x the market average. Yes, Rocket Lab has a lot of growth potential, but this is a capital-intensive, low-margin company that doesn’t deserve to trade at more than 30x revenue.
To illustrate this point, let’s make some forward-looking estimates for Rocket Lab. Ten years from now, if the company achieves all 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 can achieve a net profit margin of 10% once it scales, or $500 million in profit 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 is not much lower than the average S&P500 P/E ratio today, and that would be Rocket Lab’s earnings power ten years from now under the most optimistic assumptions.
Stay away from Rocket Lab stock for now. The stock price is spiraling out of control.
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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.
Up 500% in the Past Year: Why Investors Are Falling in Love with This Hyper-Growth SpaceX Competitor was originally published by The Motley Fool
