Last week was a "good news, bad news" kind of week for investors in Rocket Lab (RKLB 3.04%), given a pair of analyst notes.
First German megabank Deutsche Bank raised its price target on the former SPAC investment, now a bona fide space stock, to $15 per share. (Rocket Lab costs barely $6 per share today.) But then, just a few days later, ratings watcher TheFly reported that investment bank Stifel had lowered its price target on Rocket Lab -- also to $15.
It almost seems like a consensus is forming on Wall Street: Rocket Lab stock is worth $15 per share -- 150% more than it can be purchased for today.
Rocket Lab's Q2...and Q3 and Q4
What is it about Rocket Lab that inspired Wall Street banks to make this prediction?
In a word: Earnings -- or rather revenue.
Roughly one week ago, Rocket Lab reported its financial results for the second quarter 2022, and gave new guidance for the third quarter. So far this year, Rocket Lab has launched six missions to orbit successfully. That's as many as it launched in all of 2019 and 2021, and nearly as many as it launched in 2020, so the numbers were going to look good. But even knowing that, Rocket Lab's results were astounding.
Sales for the fiscal second quarter, which included three of the company's six launches, surged 392% in comparison to Q2 2021 (when Rocket Lab launched only one mission) -- to a quarterly record of $55.5 million.
As Rocket Lab keeps up the pace later this year, management is forecasting that Q3 2022 revenue will be even greater -- between $60 million and $63 million. (And if it maintains that pace through Q4, Rocket Lab should hit analyst estimates for this year's revenue: $219 million, according to data from S&P Global Market Intelligence).
Enthusiasm burns hot, but burns out quickly
Encouraged by this prospect, investors immediately bid up Rocket Lab shares, which gained more than 21% on earnings day.
Unfortunately for long-term shareholders, though, investor enthusiasm burned out rather quickly, and Rocket Lab stock has been falling ever since. Indeed, by close of trading on Friday, the stock had given up all its post-earnings gains.
So what explains that delayed reaction to Rocket Lab's earnings?
Well, to begin with, there's the fact that Rocket Lab didn't actually earn anything in the second quarter. In fact, it hasn't actually earned anything, ever -- and analysts don't expect to see its first profit before 2025.
Why not? So far this year, Rocket Lab's sales are up 226% in comparison to the first half of 2021, but its cost of goods sold is up 242% -- which isn't a great way to grow profits. If there's any good news to report on the profits front, it's the fact that operating costs at the company grew "only" 145% -- so if revenue keeps outpacing operating-cost growth, there's at least a chance that Rocket Lab will prove analysts right and figure a way to turn a profit. But it's going to take time.
Make it up on volume
Rocket Lab's problem is simple: Launching small satellites to orbit atop small, expendable rockets simply isn't the most cost-efficient way to move mass into orbit. To earn better profit margins, it's more efficient to cram a lot of satellites into one really big rocket, and toss that up into orbit, delivering lots of payloads all in one go. (And if you can deliver your satellites with a cheap, reusable rocket, that's even better for margins.)
This is the route that Rocket Lab's privately owned rival SpaceX has chosen to go. From a purely economic perspective, it seems to work well for SpaceX, enabling that company to charge as little as one-sixth Rocket Lab's price to put a kilogram of payload into orbit, or to reap greater profit margins by charging more -- or both.
Luckily for Rocket Lab, though, it has a side business producing fatter profit margins than space launches. Rather than launching satellites to space, Rocket Lab's space systems division builds those satellites for its customers. And whereas Rocket Lab's launch division is still working toward profitability, space systems reached gross profitability back in 2020, and now is working to reach operating profitability.
As management noted in the earnings release, in Q2, the space systems business is already twice as big as Rocket Lab's rocket-launching business, generating 66% of company revenue in Q2, and is expected to account for 62% or 63% of revenue in Q3.
If Rocket Lab succeeds in hitting analyst sales targets this year, and turning profitable in 2025, it won't be because Rocket Lab has gotten better at building rockets. It'll be because of its space systems business.