Growth investors would love to get their hands on SpaceX stock. The space economy is booming, and it's estimated to hit $1 trillion in spending by 2030, and SpaceX is the clear leader in the industry.
The problem is, the rocket launch company is privately owned and already worth an estimated $200 billion.
So, how does an investor gain exposure to the space economy? Enter Rocket Lab USA(NASDAQ: RKLB). The upstart rocket company is the only true private competitor to SpaceX and trades at a much lower market capitalization. Here's why it has so much potential, as well as what can drive growth for the company through the rest of this decade.
SpaceX might not have a monopoly on rocket launches anymore.
Small rockets and vertical integration
Rocket Lab was started in New Zealand by Peter Beck and has since expanded to the United States, the world's space flight hub.
In order to enter a market already dominated by SpaceX, Rocket Lab went for a smaller, more nimble rocket system it calls the Electron. It has a smaller payload capacity than SpaceX's Falcon 9, but that can be an advantage for customers with smaller budgets and different needs.
For example, the Electron takes small satellites to space, helps with research for the Department of Defense, and runs test flights for orbital pharmaceutical manufacturing (yes, that's a real thing).
Unlike other space start-ups that have tried to copy SpaceX, Rocket Lab has successfully and consistently launched payloads for commercial customers. It just hit 50 launches with minimal hiccups, making it the fastest to reach 50 launches in history.
Along with its space systems segment that develops satellites, orbital vehicles, and solar panels, growing the Electron's launch frequency has helped spur big revenue growth.
Over the last 12 months, Rocket Lab generated $327 million in revenue. This is up over 500% in just three years. But what will drive the next leg of growth through 2030? The company believes it already has the answer.
Growth has to come from the Neutron
The Electron is increasing its launch frequency, but given its smaller payload capacity, the revenue it can generate per flight is much lower than other rockets. So Rocket Lab is using its cash balance and the revenue from Electron flights to fund the Neutron, a medium-size rocket with over 40 times the payload capacity of the Electron.
The Neutron is still in development but appears to be making lots of progress toward its first flight. Recently, the company did its first test for the Neutron's engine, an important milestone.
If the new rocket begins consistent commercial launches within the next few years, it can drive a huge step change in revenue growth. With just the Electron, Rocket Lab is generating over $300 million in annual revenue. Add in the Neutron, and this can grow into billions of annual sales by 2030.
RKLB operating income (TTM) data by YCharts; TTM = trailing 12 months.
Is the stock a buy?
Right now, the business is losing $173 million in operating income each year, which is contributing to its depressed stock price. But a lot of these losses come from developing the Neutron rocket, which requires loads of up-front spending.
With its current losses, Rocket Lab stock is not worth much, and if it never flips to profitability, the stock will keep heading lower. Everything hinges on the Neutron's deployment. This could lead to billions in revenue, positive earnings, and cash generation by 2030. At a $2.5 billion market cap right now, the stock would likely be much higher by the end of this decade. For that reason, it looks like a buy for investors wanting to bet on the space economy.
Just don't make it your entire portfolio. Rocket Lab could have a lot of upside, but also downside. A small position that can grow into a bigger one over time if the company executes on its development plan is a sound approach.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.
