Small-rocket maker Rocket Lab (RKLB +4.69%) ended the week up 4% after reporting mixed earnings Tuesday evening. The leading space stock in the category of small-rocket launches reported $54.9 million in first-quarter revenue (better than expected), $0.10 per share in net losses (worse than expected), and guided investors to expect no more than $63 million in Q2 sales (worse than expected).
So, good news -- and bad news, too.
NASDAQ: RKLB
Key Data Points
Rocket Lab by the numbers
On balance, though, investors seemed willing to accentuate the positive in this report -- and no wonder. Rocket Lab's 35% year-over-year increase in revenue was certainly impressive, and the stock's 73% increase in gross profit suggests that Rocket Lab is starting to see benefits from a larger scale of operations as it grows.
The fact that Rocket Lab also held growth in its selling, general, and administrative expenses to less than revenue growth -- up only 23% -- gives further hope for margin improvement, and eventual profitability for the rocket stock. (Analysts polled by S&P Global Market Intelligence see Rocket Lab finally breaking even on its business in 2025, and turning a solid profit in 2026.)
There's just one thing slowing down Rocket Lab's march to profits right now: Neutron.
The price of progress
Neutron rocket, if you recall, is Rocket Lab's response to SpaceX and its uber-successful Falcon 9 reusable rocket. Reusable like Falcon, and boasting a 13-ton payload to Low Earth Orbit (about half of Falcon's capacity), Neutron will be a medium-lift vehicle outclassing all of Rocket Lab's small-rocket competitors, while occupying a potentially lucrative slot in the range of available lift capacities, between small and large rockets like SpaceX's Falcon 9 (or ArianeGroup's Ariane 6, or United Launch Alliance's Vulcan).
Such progress comes at a cost, however.
In the four quarters prior to its Neutron announcement, Rocket Lab averaged about $10.5 million in research and development spending. Since Neutron was first announced in late 2021, there's been a notable increase in R&D spending -- to just under $18 million per quarter, and just under $24 million in the most recent quarter. Indeed, R&D spending in Q1 was up 77% year over year, growing twice as fast as revenue.
Admittedly, Rocket Lab has several irons warming in several fires -- in particular in its fast-growing "space systems" business, which focuses on building satellites and satellite parts rather than the rockets that help get them to orbit. So probably not all of Rocket Lab's increased R&D spending is necessarily going into Neutron. Still, seeing as Neutron is Rocket Lab's highest-profile development project, it's likely that the bulk of the R&D spending is going to Neutron.
So how much is it going to cost Rocket Lab to bring Neutron to market?
With the admission that this is all very back of the envelope, I calculate that since Neutron was announced, Rocket Lab has probably spent a total of about $40 more than its current pace on R&D work. And if we assume that Neutron takes flight sometime in mid-2024, or roughly five quarters from now, then I suspect the company will spend anywhere from an additional $40 million to $65 million more before Neutron is ready.
The upshot for investors
Even assuming the high end of that estimate, though, this implies Rocket Lab may be able to develop its new rocket for only about $100 million or so. That's a sizable chunk of change for a company that only does about $225 million in annual revenue -- and that isn't yet profitable.
Still, if spending $100 million now gives Rocket Lab a rocket that's more than 40 times more powerful than the Electron rockets it currently has, and in a year or so, enables it to carry more small satellites (at one go), opens up new markets among customers that need to launch larger satellites, and turns Rocket Lab into only the second company on Earth (after SpaceX) to possess a reusable space rocket... well, I think it's probably worth the investment.
Long story short, developing Neutron may be delaying the date Rocket Lab turns profitable. But Neutron may also be the thing that increases the company's potential to become even more profitable in the future.
For long-term investors in Rocket Lab stock, I think this is a good thing.
