Rocket Lab's No. 1 Most Important Number (for Investors)

When it comes to space investing, there's no company more popular than SpaceX. For investors, though, the problem is that SpaceX is a private company and so -- aside from possibly owning a small portion of it vicariously through Alphabet stock -- there's no direct way to invest in SpaceX.

But are you even sure you would want to invest in SpaceX? In addition to being difficult to buy, the Securities and Exchange Commission (SEC) doesn't require private companies like SpaceX to disclose their financials. So even if you were able to buy SpaceX stock, you wouldn't know much about what you were getting -- no clear idea of how much revenue SpaceX takes in, in a year, and certainly no idea about how profitable that revenue is for SpaceX.

But that's not a problem with SpaceX's little brother in space, Rocket Lab USA (RKLB 0.27%). Investors know precisely how profitable Rocket Lab is -- and they have a pretty good idea how profitable it wants to become.

Rocket Lab today

If you haven't heard of Rocket Lab, get ready to.

Valued at $1.9 billion, or less than 1% the projected market capitalization of SpaceX, Rocket Lab is already the second-most-frequent launcher of rockets in the U.S. Since starting operations five years ago, Rocket Lab has launched 30 rockets and put 150 satellites in orbit for its customers, which range from private industry to NASA to the U.S. Department of Defense. Probably its best-known mission to date was the Capstone mission launched in June, which sent a NASA satellite into orbit around the moon.      

Following a path blazed by SpaceX, Rocket Lab is also developing reusable rocketry, demonstrating the successful parachute-and-helicopter recovery of an Electron first stage, and making progress on development of a larger Neutron rocket that will land on retrojets like a SpaceX Falcon 9. Unlike all other small rocket makers, Rocket Lab has already demonstrated that its Electron rocket can max out its rated "payload" capacity to orbit (320 kilograms).

Rocket Lab by the numbers

All of which is great to know as background. What investors really want to know about Rocket Lab, though, are its numbers. What kind of revenue is Rocket Lab making? How close is it to profitability? How big, and how valuable, could Rocket Lab stock become?

Rocket Lab estimates the current value of the space industry -- including rockets, satellites, and space services -- at more than $380 billion, and predicts this value will triple to $1 trillion by 2030.

Granted, Rocket Lab presently controls only a sliver of this market, with trailing revenue of about $130 million. But as it accelerates its launch rate and expands into new markets such as satellite manufacturing and space services, not only will the entire space pie grow, but Rocket Lab's slice of the pie will likely grow as well.

In its Investor Day presentation last month, Rocket Lab noted that its contract backlog has grown 37% over the past year, to nearly $400 million, and the company now has more than a dozen future missions on its launch manifest. The company recently won a five-year NASA contract for Venture-Class Acquisition of Dedicated and Rideshare (VADR) missions worth up to $300 million. Separately, Rocket Lab's Space Systems division has been hired to build 17 satellite "buses" for Globalstar -- for $143 million.  

These two contracts alone are worth three years of Rocket Lab's current total annual revenue.

Rocket Lab's most important number

Of course, revenue is only part of the picture. For Rocket Lab stock to become a great investment it also needs to earn profits on that revenue -- and that's the tricky part. At present, cost of goods sold (COGS) consumes 91% of the revenue Rocket Lab brings in. Add selling, general, and administrative (SG&A) costs (44% of revenue) and research and development (R&D) costs (34%), and Rocket Lab is currently operating in the red, with a deeply negative profit margin.  

The good news is that as Rocket Lab gains scale and masters reusability, COGS could fall by half, to 45% to 50% of revenue. SG&A costs, too, are coming down, toward a targeted 10% to 12% of revenue. And R&D costs are working their way down to a range of 15% to 18%. Ultimately, Rocket Lab therefore expects an operating profit margin of somewhere between 20% and 30%. Its midpoint goal -- what I consider its most important number -- is a 24% operating profit margin.  

When might that happen?

Analysts polled by S&P Global Market Intelligence see the company earning its first profit as early as 2025, and entering its target range for operating profitability -- about 21% -- sometime in 2027. So just five years from now, if all goes as planned, Rocket Lab might be earning as much as $0.62 per share in profit, giving the stock a 2027 P/E ratio of about 7.5.

Granted, a lot has to go right for that to happen. But at its current share price of less than $5, I suspect Rocket Lab stock is worth at least a small, speculative investment in case things do proceed as planned.