The rocket launch start-up is growing quickly but burning a lot of cash.
Rocket Lab (RKLB 1.60%) is the only company besides SpaceX with re-entry capabilities for spacecraft. And yet, as we sit here today, its shares have a measly valuation of just $2 billion compared to SpaceX’s reported $200 billion as a private company.
Rocket Lab has fallen 80% from its highs at a time when many technology stocks are soaring. To be fair, the company is smaller and at an earlier stage than SpaceX, but it is the only other private rocket company that can consistently provide spaceflight services for customers, and it trades at just 1% of SpaceX’s valuation.
Let’s see why Rocket Lab stock is down so much and whether investors should buy at these prices.
No profits, but making big progress
To inch its way into the space flight business, Rocket Lab began operations with its small payload rocket called Electron. It currently launches around four Electron rockets every quarter, with plans to hopefully grow in the coming years. In the first quarter of 2024, Rocket Lab generated $32.7 million from launch revenue, up from just $19.6 million in Q1 of 2023.
On top of rocket launch contracts, Rocket Lab also produces space systems for its customers. These include solar panels, space capsules, and software systems for operating missions. This is actually a larger portion of its revenue, generating $60 million last quarter.
Rocket Lab has grown its revenue substantially in the last few years. It is up 400% since going public back in 2021. Gross profit has also improved substantially as its manufacturing locations have achieved more scale. Gross profit was negative a few years ago but hit positive $69 million over the last 12 months.
Public market investors like profits. The company will need at least a gross profit to keep inflecting higher if it wants to self-fund its ambitions and see the stock rise. Heavy research and development spend is necessary to build out these difficult technologies, as well as capital expenditures. Rocket Lab has never generated positive free cash flow, burning $137 million over the last 12 months.
The company does have over $500 million in cash to give it a large runway to invest further, but it does not have unlimited funds at its disposal.
RKLB Gross Profit (TTM) data by YCharts
When will the Neutron rocket launch
Eventually, Rocket Lab will need to start generating a profit. Otherwise, the stock will likely go nowhere but down. How does it plan to do that? One product rises above all others: the large payload Neutron rocket.
Continuing with its atomic nomenclature, the Neutron will have a much larger payload per launch than the Electron. More weight equals more revenue — all else being equal — in the rocket-launching business. Once it gets operational and launching regularly, Neutron should help the launch segment revenue inflect from $30 million a quarter to perhaps hundreds of millions. A lot of upfront costs are going into the Neutron development, which is a big reason why Rocket Lab is unprofitable at the moment.
The timeline for the first launch has been pushed back a few times, and management now believes it can be ready in the middle of 2025. Investors need to keep track of this timeline because it is a big part of the thesis for the business. Without the Neutron rocket, it is hard to see how Rocket Lab can generate positive free cash flow. A pushed-back timeline is likely why the stock has suffered.
Size this position carefully
If Rocket Lab executes on its plans, the stock should be much higher five to 10 years from now. It can 10x its annual revenue and become the second big player in the rocket launch space along with SpaceX. Its market cap of just $2 billion today could end up much closer to the $200 billion SpaceX valuation when all is said and done.
However, don’t think this means you should go “all in” on Rocket Lab stock. There is a lot that can go wrong for an early-stage business burning a lot of cash. The downside in Rocket Lab’s stock will be steep if it can’t get the Neutron rocket operational. Stock investors could be completely wiped out.
Taking both of these factors into consideration, smart investors will take a small position in Rocket Lab if they want to buy a stake for their portfolios. If the stock works out, it can still be a big winner. But if it goes to zero, it won’t end up being a huge loss, either.