Investors are rocking for Rocket Lab (RKLB 7.60%).
Shares of the U.S.-New Zealand maker of small rockets and even smaller satellites rocketed 30% higher in a single day earlier this week after President Donald Trump ignited investor interest in space stocks by his ambition to put American astronauts on Mars.
Stirring words, to be sure. But investors need to be dispassionate about these kinds of things. While space dreams are inspiring, unless you plan to be an astronaut yourself, your best chance of participating in things like this comes from being able to invest in the companies that will make them happen. And when you consider investing in Rocket Lab in particular, the first question you must ask yourself is:
Where will Rocket Lab stock be in one year? Is this stock going up or down?
NASDAQ: RKLB
Key Data Points
The good...
Let's start with the good news. Rocket Lab has a lot to be proud of already: 16 successful rocket launches in 2024 for starters and a 60% growth rate in launch cadence. Rocket Lab investors also have a lot to look forward to in 2025.
Already, the company has more than 20 separate launches scheduled to take place in 2025, 25% more missions than it conducted in 2024. These include a mix of suborbital hypersonic experiments for Leidos and others, deployments of satellite constellations for customers like Kineis, Synspective, and BlackSky, and of course the highly anticipated first test flight of the Neutron reusable rocket. And 20 is the minimum Rocket Lab is planning. New launches are getting added to the manifest all the time.
Case in point: Just Wednesday, Rocket Lab announced it will launch eight satellites for German wildfire-monitoring company OroraTech this year. And that mission isn't even on the manifest yet.
The biggest event of the year, though, is certainly the Neutron launch. Whereas Rocket Lab charges only $8.4 million per launch using its small Electron rocket, Neutron launches are expected to cost $50 million and up, helping to grow Rocket Lab's annual revenue dramatically -- and profitably.
Caution: Engineers at work (on a Rocket Lab Neutron rocket fairing). Image source: Rocket Lab.
The better...
Which is not to say that Rocket Lab's growth hasn't already been pretty dramatic. From $48 million in revenue in 2019 to $364 million recorded over the last 12 months, Rocket Lab's annual sales are up more than 650% over the last five years.
Growth has been fastest in Rocket Lab's red-hot space-systems business (satellites, satellite parts, and services), which accounts for 73% of annual revenue today, according to data from S&P Global Market Intelligence. When Neutron arrives with its big $50 million price tag, however, I expect the business to even out somewhat and move toward a 50-50 balance between space systems and launch services.
Regardless of where the growth comes from, both sides of Rocket Lab today currently earn roughly 26% gross profit margins. The good news is that Rocket Lab is working to improve these margins. A recent report by Payload Space, for example, suggests launch services could surge past 40% gross margins as the company hits a cadence of two launches per month. (That might even happen this year.) Looking even further out, Payload notes Rocket Lab hopes to hit a 25% operating profit margin.
And the ugly
As promising as the outlook appears for where Rocket Lab's business will be a year from now, Rocket Lab stock looks very expensive to me today.
Priced at $14.8 billion after this week's run-up, analysts on Wall Street don't expect Rocket Lab to show profits for 2024, or even for 2025. This suggests that investors should be prepared for volatility in the stock as it remains a "show me" story until finally turning profitable in 2026 (one hopes).
Fact is, you probably have to look out several years before analyst estimates start showing Rocket Lab generating enough profit to make the stock resemble any kind of a bargain. In 2030, for example, projections call for Rocket Lab to generate positive free cash flow of more than $700 million, which at today's share price would imply a price-to-free cash flow ratio of about 20.
If Rocket Lab hits that mark, I could consider calling the stock a buy five years from now. But at today's prices, it's not a buy, and I expect the stock price to be lower in one year.
