rocket lab(NASDAQ: RKLB) Investors just keep winning. The spaceflight company is up about 500% in the past 12 months, more than double the company’s earnings. Nvidia In the same time frame. The stock is doing incredibly well, driven by improved performance in space launches and satellite manufacturing, helping it compete with SpaceX, a dominant player in the space.
That’s why investors are so optimistic about SpaceX competitor Rocket Lab, and why its stock price has risen nearly 500% in the last year.
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SpaceX holds a dominant position in private commercial rocket launches. In fact, until just a few years ago, Elon Musk’s company was virtually the only Western company capable of reliably launching rockets into orbit. What happened a few years ago? Rocket Lab began competing for the contract.
To enter the market, Rocket Lab targeted rocket launches with a much smaller payload (or payload mass) compared to SpaceX’s flagship Falcon 9 rocket. This led to the creation of the Electron rocket, which can carry small experimental payloads into orbit. Electron is on track to become the third most launched rocket in the world in 2024. This is an impressive feat and shows how far Rocket Lab has come to catch up with SpaceX.
Just a few days ago, Rocket Lab showed the true potential of its rocket launch service, executing two missions (on separate launch pads) within 24 hours. Investors are excited about these missions, showing that Rocket Lab has a chance to significantly increase its launch pace over the next few years. There is also demand. 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 ultimately profit generation. Since entering the public markets in 2021, Rocket Lab’s revenue has increased 551%, making it one of the fastest growing companies in the world. If they can increase the frequency of launches, investors are betting that this growth will continue for years to come.
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 commercial customers. Space systems revenue has grown rapidly in recent years and now accounts for the majority of Rocket Lab’s overall revenue.
The key is the flywheel with all these features. Rocket Lab is one of the few places where customers can reliably launch into orbit, making it much easier for the company to upsell its space system capabilities to these customers. . The government also sees this as a promising business, with Rocket Lab recently signing a $24 million incentive deal as part of the new CHIPS Act to make semiconductors for space systems.
Longer term, investors should keep an eye on two trends that will further propel Rocket Lab’s vertical integration ambitions. The first is a larger Neutron rocket, which will increase the payload per launch and help it compete directly with SpaceX. The company already has customers signed up to launch Neutron, 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 increase the company’s profit potential.
There’s a lot to like about Rocket Lab’s business, and we commend the shareholders who bought the stock over a year ago. You are now making great profits. However, that doesn’t mean you can buy the stock today.
Rocket Lab has a market capitalization of $12 billion, with a price-to-sales ratio (P.S.) is 34, more than 10 times the market average. Sure, Rocket Lab has a lot of growth potential, but it’s a capital-intensive, low-margin business that doesn’t deserve to trade at more than 30 times sales.
To illustrate this point, let’s run through some of Rocket Lab’s future predictions. After 10 years, if the company achieves all its goals with minimal obstacles (an optimistic scenario), the company’s revenue will increase from its current annual sales of $364 million to $5 billion. With a gross profit margin of 26%, it’s reasonable to think that Rocket Lab could reach a net profit margin of 10%, or $500 million in profit on $5 billion in revenue, as it scales.
Consider that $500 million in earnings has a price-to-earnings ratio (P/E) of 25 on a current market cap of $12.34 billion. This is not significantly lower than average. S&P500 This is the current P/E ratio, and under the most optimistic assumptions, this is Rocket Lab’s 10-year earnings power.
Stay away from Rocket Lab stock right now. Stock prices are spiraling out of control.
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Brett Shafer has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool recommends Rocket Lab USA. The Motley Fool has Disclosure policy.
