Rocket Lab USA(NASDAQ: RKLB), the creator of the Electron orbital rocket, went public by merging with a special purpose acquisition company (SPAC) three years ago. The combined company's stock started trading at $11.58, soared to an all-time high of $20.72 just two weeks later, but now trades at less than $7 a share.
Like many other SPAC-backed companies, Rocket Lab set the bar too high during its pre-merger investor presentation. When it missed those estimates, its stock price tumbled. Rising interest rates exacerbated that pressure by crushing its valuations.
Could this out-of-favor space stock blast off again over the next three years?
Image source: Getty Images.
How does Rocket Lab USA make money?
Rocket Lab was founded in New Zealand in 2006, and it became the first private company in the Southern Hemisphere to reach space with its launch of the Ātea-1 suborbital rocket in 2008. It relocated its headquarters to California in 2013.
It has launched 52 of its Electron rockets since its maiden launch in 2017. It also launched its first Photon satellite bus in 2020, and it's deployed 192 satellites so far. It currently operates three dedicated launch pads and serves a wide range of customers like NASA, the U.S. Space Force, the Swedish National Space Agency, Capella Space, and BlackSky.
Rocket Lab might initially seem similar to SpaceX, which also produces partially reusable rockets, but the two companies focus on different markets. Rocket Lab's Electron rocket can only carry about 250 kilograms of cargo into space, while SpaceX's Falcon rocket can carry up to 10 times that amount. Rocket Lab expects its next rocket, Neutron, to carry even heavier payloads of 15,000 kilograms when it arrives in 2025.
How fast is Rocket Lab growing?
During its pre-merger presentation, Rocket Lab predicted it could grow its revenue at a compound annual growth rate (CAGR) of 97% from $35 million in 2020 to $267 million in 2023. It ended up growing its revenue at a slightly slower three-year CAGR of 91% from $35 million to $245 million.
Rocket Lab's business is still growing at a healthy rate. It launched six Electron missions in 2021, nine missions in 2022, and 10 missions in 2023. It's already signed 17 new launch contracts in the first half of 2024. Its adjusted gross margin also improved from negative 29% in 2021 to positive 28% in 2023 as it expanded its higher-margin space systems unit to reduce its dependence on its lower-margin launch services unit.
Those growth rates are impressive, but the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) missed its original expectations by a mile. It originally claimed it could generate a positive adjusted EBITDA margin of 10% by 2023 -- but that figure actually landed at negative 37%.
From 2023 to 2026, analysts expect its revenue to grow at a CAGR of 54% to $887 million, but they don't expect its adjusted EBITDA to turn positive until 2026. That grim outlook indicates its business model might be unsustainable.
But Rocket Lab won't go bankrupt anytime soon. At the end of its latest quarter, it was still sitting on $497 million in cash, cash equivalents, and marketable securities with a manageable debt-to-equity ratio of 1.6. Its share count only rose by about 10% over the past three years, so it isn't severely diluting its investors with new stock offerings.
So where will Rocket Lab's stock be in three years?
With an enterprise value of $3.7 billion, Rocket Lab's stock still looks reasonably valued at 6 times next year's sales. However, it could still face more competition from SpaceX and bigger aerospace companies like Boeing as the private space race heats up. That pressure could make it tough to scale up its business and rein in its expenses.
If Rocket Lab continues to sign new contracts, carry out more successful launches, expand its lineup of rockets, and acquire more space-oriented start-ups, its stock might stabilize and head a lot higher over the next three years.
That said, it's still a highly speculative stock that won't attract much attention until interest rates decline and the macro environment warms up again. Investors should realize this stock could be easily cut in half before it doubles -- but it could generate some life-changing gains for patient investors who can ride out the near-term volatility.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.
