There's been a lot of talk about stocks "going to the Moon" in the last few years. But that kind of talk is typically a bunch of hogwash peddled by (and to) people looking to get rich quick in penny stocks, cryptocurrencies, and other risky plays.
However, one company is literally making trips to the Moon: Rocket Lab USA (RKLB -1.08%). The rocket-launching and space-economy company went public via a reverse merger with a special purpose acquisition company (SPAC) in 2021, raising $700 million to fund its ambitions as a vertically integrated rocket launch services provider.
Here's the skinny on Rocket Lab, what it is doing to drive the space economy, and why the stock could be a buy after falling 56% from its SPAC merger price.
A SPAC that (somewhat) met its projections
Rocket Lab has initially focused on small payload launches of 300 kilograms or less. Its Electron rocket system has been reliably launching payloads into orbit for the last few years with minimal operational hiccups. In 2022, the company performed nine launches for customers, and is the only private company outside of SpaceX that is consistently launching rockets for commercial purposes. And since SpaceX doesn't provide small launch services, Rocket Lab currently has a monopoly in the small payload market.
After refining the Electron launch program, Rocket Lab started expanding into the space systems sector (in part via multiple acquisitions) to offer vertically integrated solutions to its customers. Rocket Lab now offers products like radio systems, solar arrays, and software to its space customers. Its unified solutions are helping it win large contracts, including a $143 million deal to build and launch 17 new spacecraft to deploy a network of satellites.
While a lot of the growth in space systems has been inorganic so far, its acquisitions have been highly accretive as Rocket Lab works to build out its launch business. For example, space systems revenue went from virtually zero in 2020 to $23.3 million in 2021 to a whopping $150.3 million in 2022 -- well in excess of its $61 million in launch revenue last year.
Neutron rocket and overall launch frequency
In the near term, Rocket Lab is working to grow its business on two fronts. First, it plans to increase the Electron program's launch frequency to around 30 per year, which will give it more launch revenue, more opportunities to sell space systems products, and higher profit margins. Boosting the launch frequency will allow Rocket Lab to spread its high fixed costs over a larger revenue base, which should lead to margin expansion.
Second, it is investing aggressively in its larger Neutron rocket, which it expects to have operational within the next few years. The Neutron rocket will have 50 times the payload capacity of the Electron, meaning Rocket Lab could earn $50 million to $100 million in revenue per launch compared to under $10 million for every Electron launch. If the Neutron program becomes commercially operational within the next few years, this could lead to a positive step change in Rocket Lab's launch revenue, as well as adding synergies in space systems.
All of this should lead to better operating leverage and profit margins, which have been improving, but which still have a long way to go. In 2022, Rocket Lab's gross margin was 9%, but its operating margin was negative 73%. Once it gets the Neutron program operational and scales up the Electron launch frequency, it expects to hit 52% gross margins and approximately 24% operating margins. If it meets those targets and continues to grow revenue, Rocket Lab stock will likely do very well for shareholders this decade.
Position sizing is vital
There's a lot to be excited about with Rocket Lab. The company is going after a huge addressable market, is one of the only companies in its industry operating with any consistency, and has a market capitalization of just $2 billion.
But don't get too greedy. Rocket Lab still has a ton of risks, the most glaring being that it has never generated a profit and is currently burning through around $150 million in free cash flow a year. If it's unable to get its Neutron rocket commercially operational, Rocket Lab will struggle to achieve positive cash flow, which likely would lead to steep declines in its stock price.
RKLB Free Cash Flow data by YCharts.
That is why it would be prudent for any investor who wants to add Rocket Lab to their portfolio to make it a small position, no more than 1% to 2% of your asset allocation at cost. If the company is successful, shares will likely go up by at least 10 times from current levels and turn your stake into a much larger position. But if the company goes belly up, your portfolio will be fine.
