The space economy is growing like gangbusters. Jeff Bezos recently said that he thinks his space flight company Blue Origin will eventually be larger than Amazon, the technology giant he founded. For reference, Amazon currently has a market capitalization of over $2 trillion. That is quite an optimistic statement from Bezos.
Unfortunately, individual investors cannot invest in Blue Origin, as it is a privately held company. They also can't invest in SpaceX, which is run by Elon Musk and is privately held. So how does one invest in the space economy as an individual? Well, some investors have found what looks like an answer: Rocket Lab (RKLB -4.29%). The stock is up 366% so far this year, and it has grand ambitions to dominate the space economy.
However, with the stock up so much, some investors might think they have missed the boat with Rocket Lab. Is the stock a buy, sell, or hold at a price of $25? Let's investigate further into this space upstart and find out.
Grand ambitions for space
Rocket Lab began its journey in a similar mold to SpaceX. Back in 2006, founder Peter Beck saw on a trip to the United States (he is from New Zealand) that there was no way for a company to reliably launch satellites into orbit. He then went on trying to build a commercial product for these satellite providers.
In 2024, I think we can say he has succeeded. The company's Electron rocket reliably launches small and precise payloads into space, making it the third most launched rocket globally this year.
In order to compete with the much larger SpaceX, Rocket Lab began its journey in the small payload market, targeting customers that don't need to launch on the heavier (and more expensive) SpaceX rockets. This specialty has helped Rocket Lab gain a foothold in the sector, with a launch on the Electron now costing $8.4 million due to the high demand for these services.
Beck's ambitions don't stop there. After the Electron, the company is preparing to commercialize its Neutron rocket, which is currently in the development phase. This will be a heavier rocket that will more closely compete with SpaceX, meaning a higher revenue earned per launch. On its latest earnings release, Rocket Lab said that it already has a commercial agreement for the Neutron, with launches expected to start in 2025.
Moving beyond just launches, Rocket Lab now has business segments that build satellites for third parties, solar arrays, and all other types of space systems that a company may need in orbit (or beyond). This vertical integration is why Rocket Lab's backlog is now above $1 billion.
The past is great, but the future is what matters
Since going public in 2021, Rocket Lab's revenue has grown at a tremendous rate, up 551% cumulatively in just a few short years. It currently sits at $364 million over the past 12 months. Profitability is a concern. Net income hit a record low of negative $188 million over the last 12 months. Free cash flow was slightly better at a $145 million loss, but it is still burning a boatload of cash each year.
However, investors should focus on the future and what it could mean for Rocket Lab. The company is spending a lot of money developing the Neutron rocket and its launch facilities today. It won't be until next year at the earliest that this new product starts generating sales. But when it does, it should lead to a big leap in revenue.
Each flight on the Neutron will likely sell for $50 million or more. Beck expects them to get to at least five launches (and hopefully more) per year within the next few years. That equates to $250 million in revenue just from rocket launches on the Neutron. Add in the Electron services and the space systems segment, and Rocket Lab's revenue has a chance to balloon for the rest of this decade.
Profitability will be the big question, but I think it can be solved once the Neutron starts generating sales. This will be a big test for the company, both technologically and financially.
RKLB Net Income (TTM) data by YCharts.
Should you buy or sell Rocket Lab stock?
It should now be clear that Rocket Lab has a lot of revenue growth potential but still needs to prove itself when generating a profit. That may not matter though when looking at the stock's valuation.
After its meteoric rise this year, the stock trades at a market capitalization of $12.33 billion, or a price-to-sales (P/S) ratio of 33.4. Even if revenue reaches $1 billion in the next few years, that is a P/S ratio of 12.3. Rocket Lab operates a low-margin business that will consistently need capital expenditures to keep pace with the competition. I think it is unlikely the company will generate hefty profit margins on a consolidated basis.
From this seat, Rocket Lab stock looks wildly overvalued after this run-up. The underlying company has a lot of promise and can turn into a profitable operation someday, so I don't fault any long-term shareholders for holding on to avoid paying taxes (you got in at a good price), but it doesn't make much logical sense to buy shares today.
Avoid buying Rocket Lab stock or adding more shares at these overextended price levels.
