Rocket Laboratory (NASDAQ: RKLB) is a leading rocketry company with an elite roster of customers including NASA and the Space Force. The company recently participated in NASA’s Artemis program, which will be the first human program return to the moon in a very long time.
The company went public through a 2021 SPAC merger with Vector Acquisition Corporation. Now, although many SPACs have been taken down due to zero earnings and high valuations, Rocket Lab is the opposite. This company recently beat analysts’ revenue estimates for the second quarter and has a backlog of half a billion dollars from government contracts. Additionally, the stock is inherently undervalued and Stifel analysts have a buy price of $15, indicating that the stock could more than triple from this point. Its profit margins are hard to parse, as the old joke goes how a “billionaire becomes a millionaire, starts a rocket business.” However, all joking aside, Rocket Lab has a market cap of $2 billion while SpaceX has a private market valuation of $125 billion. Now, although this company is not on the same scale as SpaceX, it offers cheap payload to space service, while SpaceX is more focused on larger scale services (like getting to Mars) with its huge Starship rocket. So, in this article, I’m going to break down the business model, financials, and valuation of the company, let’s get started.
Rocket Lab is a rocket company that aims to provide open access to space to improve life on earth. The company currently has 150 satellites deployed in orbit through 27 successful missions. It offers 132 launch slots per year which can be booked and then launches can take place from any of its 3 launch locations in the US or New Zealand.
The company’s rocket is the second most frequently launched in the United States and provides a variety of services from small to large payload launches. Its customers include 50% commercial, followed by defense at 30% and then civilian at 20%. They include big names such as NASA, US Space Force, Canon, HawkEye and many more.
About 1,700 satellites in orbit currently use Rocket Lab. The company has provided hardware and software to large-scale projects such as NASA’s James Webb Space Telescope and the Mars Ingenuity Helicopter.
These customers use Rocket Lab because they offer dedicated, cost-effective launches and fast turnaround times. For example, Rocket Lab only takes 15 days to run, which is much faster than other smaller launch vendors such as Astra which takes 115 days and Virgin Orbit which takes 164 days.
Part of Rocket Lab’s secret sauce is its ability to reuse the first stage of its Electron rocket, saving up to 65% of the total construction cost. The company achieves this through reusable fairings, and it’s even working on a parachute system that can then be captured by a helicopter, which sounds like something out of a James Bond movie.
Rocket Lab has also created the world’s most efficient space solar cell technology with an incredible 33.3% efficiency, while being 40% lighter than traditional solar cells. The technology is called Inverted MetaMorphic (IMM) and is patented by the company, providing a protective moat around the company. Moreover, it is the only technology that meets the Space Force roadmap.
Revenue was $55.47 million in the second trimester, which beat analyst estimates of $6.23 million and was up 392% year-over-year. Sequentially, revenue jumped 36% quarter over quarter, driven by strong launch systems growth of 191%. In 2022, successful missions such as NASA CAPSTONE and BlackSky Global also helped drive revenue growth.
The company has a strong backlog of $531.4 million, which is fantastic. This was prompted by a five-year NASA program for rideshare missions, which has a total budget of $300 million in launch contracts. Additionally, the company secured a contract to remove space junk from orbit for Astroscale. Rocket Lab also signed a $143 million contract to design and build seventeen 500 kg space buses for the Globalstar constellation.
Rocket Lab is on track to achieve its target operating model, which includes reduced cost of goods sold, R&D, and SG&A expenses as a proportion of revenue.
The reduction in research and development expenditure is possible because the base product is proven and reliable and therefore does not require as much future investment. The Electron rocket has a core R&D team now assembled, and therefore any new staffing is primarily for production scale-up. The company also has stronger bargaining power due to its larger size. Additionally, Rocket’s reusability should also help improve longer-term costs.
The company’s gross margin on space system components is above its target, with the exception of SolAero which has lower margins.
Despite the positive outlook for costs, earnings per share slightly exceeded analysts’ estimates of -$0.02 with -$0.08 hit. The company also recorded higher consumption from operating activities, which increased by $12 million to $38 million. This is due to higher R&D spending and stock-based compensation.
Moving Forward Rocket Lab has a total addressable market of $380 billion for launch services, space systems and space applications. This TAM is expected to reach a staggering $1 trillion by 2030 and so there is a long way to go for growth. Space companies tend to have strong competitive advantages once they reach a certain scale due to the high capital outlay required upfront. For Q3 22, Rocket Lab is forecasting revenue between $60 million and $63 million, which would represent 26% quarter-over-quarter growth.
Rocket Lab has a strong balance sheet with $546.6 million in cash, cash equivalents and restricted cash. Plus, they have long-term debt of just $98.6 million.
Rocket Lab is very difficult to value because the company has a lot of growth built into the stock. Therefore, I forecast 150% growth for next year, based on forecasts for the next quarter and then an expected acceleration in the second half. Keep in mind that the company has a low revenue base to grow and revenue grew by 392% last year. Additionally, Rocket Lab has over half a billion backlog.
I expect margins to improve to 12% over the next 10 years as the company achieves greater scale and also begins to increase software sales. In addition, I capitalized R&D expenses to increase the accuracy of the assessment.
Given these factors, I get a fair value of $11 per share, the stock is trading at ~$4.31 per share at the time of writing and is therefore undervalued by around 61%.
As an additional data point, Rocket Lab is trading at a price to sales ratio = 8.9, which is cheaper than historical levels. Additionally, the company is much cheaper than Astra Space (ASTR) which trades at a PS=20 and Virgin Orbit (VORB) which trades at a PS=31.
It’s rocket science
As the old saying goes “it’s not rocket science”, but in this case it is. Rocket science isn’t easy, and neither is launching rockets into orbit profitably. The debris also poses huge safety concerns, not to mention the human passengers. Making space travel normal will be the greatest human achievement of all time, and while I believe it is possible, let’s not underestimate the huge costs and major risks.
Governments and billionaires tend to look to the stars when major businesses on earth are doing well and need a new challenge. However, there are many serious problems on earth, including global warming, the Russian-Ukrainian war and, of course, high inflation and a waiting recession. Now, although many space companies offer to “help Earth from space”, I think fewer contracts can be signed if there is a lot of uncertainty on Earth. Rocket Lab hasn’t seen any signs of that yet, but it’s a risk for the next few quarters, as a lot of the growth is priced in to the title.
Rocket Lab is a leading rocket company that delivers fast, cost-effective payload to space service. The company has a huge total addressable market and the management has met its targets so far. The stock is inherently undervalued and relative to its competitors and therefore seems like a great speculative investment for one’s portfolio, watch this space.