Rocket Lab has become a fast-growing player in the budding space economy.
It is expanding with the Neutron rocket and eventually space software and services.
The stock looks expensive but should trade higher if Rocket Lab fulfills its growth plans.
Space has become a real industry in the last decade. Inspired by the incredible growth at SpaceX, dozens of companies are now working on rockets, space systems, and services to fulfill customer demand in the new space economy. Rocket Lab(NASDAQ: RKLB) is one of the new emerging leaders in the sector.
Closing in on $500 million in annual revenue, the rocket launch and space systems company is growing like gangbusters with plenty of new products under development. It has an audacious plan to compete with SpaceX and be one of the few vertically integrated launch companies serving the space economy.
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Where will this all land Rocket Lab stock in five years’ time? Let’s dig into the numbers and find out.
Rocket Lab is known for its small and nimble Electron rocket, which has now performed dozens of launches for commercial customers. However, most of its revenue now comes from its space systems where it builds satellites, space capsules, and energy systems for third parties. Some of these products may launch on Rocket Lab vehicles, but they can be for other rockets as well.
This segment is growing rapidly, hitting $311 million in revenue last year compared to just $23.3 million in 2021. Some of this growth was due to inorganic revenue coming from acquisitions, but it has been an impressive feat nonetheless. The company is not yet profitable, but it is making progress to expand gross margins and improve its unit economics. It is working aggressively to fulfill its large backlog from customers. As this normalizes and matures, profits should eventually show up.
The space economy is growing quickly. Image source: Getty Images.
Another reason for the lack of profits at Rocket Lab is the major spending on its next Rocket system called the Neutron. Much larger than the Electron, the Neutron will put Rocket Lab in direct competition with SpaceX for contract competition, which could lead some customers to switch and diversify their launch provider needs. Regardless, there is a ton of demand to launch satellites and other space systems, meaning there is room for both companies to not just survive, but thrive.
The problem rests with actually getting the Neutron reliably and consistently launching missions for customers. It is still being designed and assembled, with test flights coming later this year. Investors should be tracking the timeline of Neutron commercialization closely.
Neutron is a big risk for Rocket Lab, but also provides a huge opportunity for revenue growth. Each Neutron rocket launch should cost around $50 million or more due to its large payload capacity. If the company eventually gets to nine Neutron launches a year, that would equate to its entire current annual revenue just from this segment, and this is before considering add-on purchases from space systems for customers.
It may not happen within five years, but if Neutron can reach 10 or more launches annually, then Rocket Lab’s total annual revenue as a company should grow to multiple billions of dollars a year.
After the Neutron, Rocket Lab is planning even more revenue segments to fully develop its space economy services. These include building its own space systems such as satellites and selling software and services applications to third-party customers. Unlike its rocket and space systems segments, software should have high gross margins and generate tons of profits for the company if it can get the systems up and running. Luckily, it already has some rockets it can use to get the satellites up into space.
The exact details of these applications are not clear yet, but investors should have faith that the company will execute on its plans. It is one of the few space economy companies that actually gets products reliably to market.
So, where will Rocket Lab stock be five years from now? I think the company’s revenue can keep growing at a rapid pace and eventually pass $1 billion, if not $2 billion within five years depending on how fast it can get products to market. Today, Rocket Lab trades at an expensive-looking market cap of $10.6 billion versus its trailing revenue. However, given its huge growth potential, I think this premium price is warranted. If Rocket Lab can execute on all its growth plans, I think the stock is much higher five years from now.
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