The final frontier may just become the next great economic engine for the global economy. Space Exploration Technologies (SPCX -4.20%) is increasing its launch cadence at a rapid clip, with satellites and other orbital technologies taking over the night sky. And yet, with a market cap of $2.3 trillion, SpaceX is trading at a premium, even relative to the space economy's growth potential.
One space stock that may be undervalued is Rocket Lab (RKLB -4.89%). Morgan Stanley has a $105 price target on the stock, which is currently trading at $75. Here's why Rocket Lab has such growth potential, and whether it is a buy right now.
NASDAQ: RKLB
Key Data Points
Expansive launch contracts
SpaceX and Blue Origin may get all the headlines, but Rocket Lab is making a ton of progress as another commercial launch player. It currently has the small Electron rocket, which has won niche contracts for its precision in launch services. Rocket Lab just signed a 20-mission contract with Synspective, its largest contract ever, which will run through 2031.
These long-term deals are why Rocket Lab boasts an order backlog of $2.36 billion, or more than twice its current revenue.
To better compete with SpaceX, Rocket Lab will need to secure deals for its larger Neutron rocket, which is currently undergoing testing. Management has touted tentative deals for the Neutron, which will have a much larger payload capacity than the Electron, but it needs to prove the rocket can reliably reach orbit for customers.
Still, Rocket Lab has one of the best safety track records in the space industry, and is likely to grow even faster once it gets the Neutron regularly making trips to space.
Image source: Getty Images.
Complementary services
Rocket Lab may be undervalued for its launch capabilities, but its real kicker may be the little-discussed push into space services.
These include its recent acquisition of Iridium Communications, which is poised to close soon. Iridium gives Rocket Lab the capability to build its own satellite internet service to compete with SpaceX, and it could be the only competitor with launch and satellite capabilities comparable to SpaceX's.
If Rocket Lab can successfully move into this subsector of the space economy, it has major growth potential from here. Not only can it generate revenue by increasing its launch frequency with the Electron and Neutron, but it can also begin sending its own satellites into orbit. SpaceX generates more than $10 billion in trailing revenue from Starlink alone, while Rocket Lab's consolidated sales were $769 million.
Is Rocket Lab stock a buy?
Compared to SpaceX's $2.2 trillion market cap, Rocket Lab's $43.5 billion market cap looks rather small. However, this does not mean Rocket Lab is automatically a buy; it only means investors are trading it at a large discount to SpaceX at the moment.
With trailing revenue of $769 million, Rocket Lab has a price-to-sales ratio (P/S) near 50, which makes it a very expensive stock compared to the broad market indexes. Plus, it is not profitable at the moment and is burning through cash.
To believe Rocket Lab is a buy at these prices, an investor needs to believe there is a long runway for growth through launches, as well as a successful move into space services such as satellite internet. This is not a stock you buy and hope it goes up next year, but one you buy and hold for more than a decade. Rocket Lab has a strong track record of growth in the space economy, but it will need to maintain this momentum during the next 10 years and beyond to continue delivering gains for shareholders.
