Rocket Lab USA Stock: Buy, Sell, or Hold?

Rocket Lab USA (RKLB -5.28%), a developer of reusable orbital rockets, went public by merging with a special purpose acquisition company (SPAC) on Aug. 25, 2021. Its stock opened at $11.58, but it eventually slumped below $4 in April 2024.

However, Rocket Lab's stock subsequently skyrocketed to about $24. The bulls embraced the stock as the company launched more rockets and secured new contracts. Should you chase that rally, or is this little space stock getting too hot to handle?

Image source: Getty Images.

Why is Rocket Lab getting so much attention?

Rocket Lab's Electron orbital rocket can carry small payloads of up to 300 kilograms into space. It's been successfully launched 58 times, and its major customers include NASA, the U.S. Space Force, and the Swedish National Space Agency.

It grew rapidly over the past four years as it launched more rockets, but its costs also surged, its margins in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) stayed negative, and its net losses widened.

Data source: Rocket Lab USA.

It launched even more rockets in the fourth quarter, and it expects its revenue to grow 41% to 44% to $419 million to $429 million for the full year. It expects to post a negative adjusted EBITDA of $102 million to $103 million, which would equal a midpoint margin of 24%.

The reasons to buy and hold Rocket Lab's stock

Rocket Lab might seem like a speculative stock, but it has plenty of irons in the fire. Last August, it shipped two research satellites for NASA's next Mars mission. In September, it signed a contract to deploy an entire constellation of 25 satellites for Kinéis, a global Internet of Things (IoT) connectivity provider, through five separate Electron launches. In October, NASA awarded it another study contract for its upcoming Mars mission to bring rock samples from Mars to Earth.

Rocket Lab will launch its next rocket, the Neutron, this year. This bigger rocket can carry much bigger payloads of up to 13 metric tons, which makes it comparable to SpaceX's Falcon 9 rocket.

It's already attracting a lot of attention. Last November, it signed a Neutron contract with a confidential satellite network operator which will include two launches in 2026. This January, NASA added new Neutron launches to its existing VADR (Venture-Class Acquisition of Dedicated and Rideshare) contract.

Rocket Lab also recently joined a team, led by Kratos Defense & Security Solutions (KTOS -0.77%), to test hypersonic flights. The total potential value of that contract, which will be split with other companies over five years, is $1.45 billion.

All of these catalysts could significantly boost Rocket Lab's revenue over the next few years. From 2023 to 2026, analysts expect its revenue to have a compound annual growth rate (CAGR) of 56% from $245 million to $926 million. They also expect its adjusted EBITDA to turn positive by the final year as it scales up its business.

With an enterprise value of $12.3 billion, Rocket Lab might seem a bit pricey at 13 times its projected sales for 2026. But if it maintains its streak of successful Electron launches, gains more customers with its Neutron rocket, and rolls out even more advanced rockets over the next few years, it could be undervalued relative to its long-term growth potential. Its rival SpaceX, which is still private, was valued at $350 billion last December.

The reasons to sell Rocket Lab stock

Rocket Lab might have plenty of growth potential, but it could struggle to break even on the basis of generally accepted accounting principles (GAAP). It could also be tough to keep pace with SpaceX, which also holds big contracts with NASA and the U.S. Space Force.

Moreover, SpaceX founder Elon Musk's close relationship with President Trump -- along with Trump's recent appointment of Musk's friend Jared Isaacman as the new head of NASA -- could also potentially drive more government contracts to SpaceX instead of Rocket Lab. But on the bright side, Isaacman could drive NASA to dole out more contracts to SpaceX, Rocket Lab, and their other industry peers -- and that rising tide could lift all those boats.

Over the past 12 months, Rocket Lab's insiders sold 41 times as many shares as they bought. That chilly insider sentiment suggests that too much of its future growth has already been priced into its soaring stock.

As for its leverage, its debt-to-equity ratio of 1.7 looks manageable for now -- but it could rise quickly over the next few years as it accelerates its launches and ramps up its production of bigger rockets like the Neutron.

So what's the right move?

Rocket Lab is still a speculative stock, but it might generate massive gains if it starts launching over 100 rockets annually like SpaceX. I think it's smart to buy a few shares and hold them at these levels, but investors should brace for a lot of volatility.