The age of private space flight is upon us. Catalyzed by SpaceX's large reusable rockets, commercial customers are now able to easily and reliably launch stuff (mostly satellites) into space. Analysts estimate the entire space economy to be worth $630 billion in 2023 and expect it to boom to $1.8 trillion by 2035 due to the huge growth in private space offerings, which is a lot of spending for suppliers to go after.
Given this booming demand, there are many companies vying to be the next SpaceX. Enter Rocket Lab (RKLB -4.29%). The upstart is growing strongly and has major ambitions to compete with SpaceX and become a fully integrated space flight company. Shares are on a tear in 2024, up over 100% year to date (YTD). Is Rocket Lab stock a buy, sell, or hold at these prices? Time to dig into the numbers and find out.
A fully integrated space flight company
What is a vertically integrated space flight company? Rocket Lab management defines it as a company that can offer customers the full space flight package for any mission. It wants to provide launch capabilities, hardware systems that operate in space, and software analytics services.
Currently, it has one launch product called the Electron. This is a small rocket that entered a part of the market not dominated by SpaceX. It is for military purposes and commercial companies looking to send small payloads into space. The Electron has launched over 50 times in the five years since beginning commercial operations; Rocket Lab hopes to up its rate of quarterly launches in the next few years. If Rocket Lab can increase its launch frequency, that will lead to more revenue.
However, today the majority of Rocket Lab's revenue comes from its space systems segment, which was $76.9 million of the $106 million in revenue it generated last quarter. This segment is growing like gangbusters and is the key to Rocket Lab's backlog reaching over $1 billion last quarter, which is equivalent to roughly three years of its current annual revenue. Key to this success is the fact Rocket Lab can offer customers the ability to build its space systems and capsules while also launching them on its own Electron rocket. No company except SpaceX has this customer value proposition.
Over the long term, Rocket Lab is planning to sell services on bigger rockets (its next one is called the Neutron) as well as Space Data services. The second segment should entice investors given the high margin potential of software services compared to rocket launches. Watch these two product developments closely over the next few years, as they will be the key to Rocket Lab's momentum continuing.
Improving financials, but major profitability concerns
Rocket Lab's revenue is the highlight of its business. In the last three years, the top line is up a cumulative 425%, making it one of the fastest-growing companies in the world. With a backlog of $1 billion and around only $100 million in quarterly revenue today, percentage can keep climbing over the next few years.
What's concerning about Rocket Lab is its cash burn and losses. It has never generated positive operating income and burned $173 million in free cash flow over the last 12 months. Even as revenue scales, the business is showing little signs of generating a profit. This is not necessarily a problem as Rocket Lab is investing a ton of money into new products like the Neutron and software services that are generating zero revenue today. It just can't lose money forever; no one can.
The Neutron rocket is in development right now, and Rocket Lab is planning to perform commercial launches at some point in the next few years. This will be a big milestone if successful and should help turn the corner on profits. If the company can't get this rocket operational, that is a major concern for the stock.
RKLB Operating Income (TTM) data by YCharts
What should investors do with Rocket Lab stock?
It is difficult to tell what to do with Rocket Lab. It clearly has a lot of potential and a major tailwind at its back with the booming spending across the space economy. This should make investors bullish about the stock.
On the other hand, Rocket Lab is burning a ton of cash and has never generated a profit. The stock is also up over 100% this year and now has a market cap of $5.4 billion, which is more than 10 times its trailing sales.
I see it this way: If you bought Rocket Lab stock and rode it to 100% gains, there is no reason to sell today. You want to hold for the long term. But I don't know if I would buy shares at their current price given these valuation concerns and how much money Rocket Lab is losing.
Rocket Lab stock is a hold for investors right now. Stay cautious with this overpriced stock, but don't underestimate its long-term potential.
