Space stocks have gathered a lot of attention from investors in 2021. Rocket Lab USA (NASDAQ:RKLB) is another company that wants to become a key player in the developing space industry. The question for investors centers on whether it is time to buy RKLB stock.
Despite vast potential for business, the area is also risky from a business perspective. There are many unpredictable factors to be faced and a lot of capital will be required.
Rocket Lab went public in late August by completing a reverse merger with special purpose acquisition company Vector Acquisition. It was one of many SPAC deals in 2021.
But there are some special characteristics potential investors should know about RKLB stock.
History Echoes With RKLB Stock
It is interesting with SPACs. In general, I am not a supporter of them, as I have explained in previous articles.
To me, SPACs tend to be overvalued. Momentum in their stock price often leads to an initial price rally that soon corrects fast. This correction leaves lucky investors who caught the uptrend with decent profits, while unlucky investors who bought near the peak see substantial losses.
In many SPACs, this common price trend occurs as soon the merger is publicly announced and euphoria kicks in.
RKLB stock was no exception from a statistical point of view. On Aug. 25, the stock went public. A high of $21.34 was reached in September. Recently, the stock was trading around $12.40 per share.
I consider that at this current price the stock is expensive. But first a few thoughts on the business plan and fundamentals of Rocket Lab.
Is Space Open for Business?
In an investor presentation in March, the company said it is an aerospace company that develops rocket launch and control systems for the space and defense industries.
On page 36 about the historical and projected revenue, it is notable that Rocket Lab estimates 2021 revenue of $69 million, to rise to $176 million in 2022 (155% yearly growth). Its 2023 revenue is predicted to be $267 million. In 2027, the company’s forecast for revenue is $1.571 billion.
Rocket Lab expects a positive EBITDA of $26 million as of 2023 and a figure of $505 for 2027. However, the projected unlevered free cash flow is expected to turn positive in 2024 ($97 million) and by 2027, it is expected to reach $465 million.
These estimates seem very optimistic to me. I would like to see details that go deeper, such as projections on costs, research and development.
Specifically, more details about the company’s reference to “minimal maintenance capital expenditures.” I believe that as Rocket Lab scales operations in 2023, the company will see increased costs and capital expenditures, not minimal ones.
For sure, Rocket Lab has already built traction. Consider these recent positive headlines:
- Rocket Lab Selected to Launch NASA’s Advanced Composite Solar Sail System
- Rocket Lab Wins $24m U.S. Space Force Contract to Develop Neutron Upper Stage
- Rocket Lab Wins Contract to Launch Orbital Debris Removal Demonstration Mission for Astroscale.
Also, the first half 2021 financial results update showed “revenue of $29.5M, representing 237% Year-on-Year revenue growth, accompanied by an expansion in gross margins from negative 67% to a positive 13%.” It is also notable that the company said “Backlog grew 136% Year-on-Year to $141.4 million as of June 30, 2021, as compared to backlog of $59.9 million as of June 30, 2020.”
So, there is strong revenue growth. But is it sustainable? This brings us to the valuation of RKLB stock.
RKLB Stock Valuation Not Cheap
With a market cap of about $6.6 billion, investors are paying 24.71 times projected 2023 revenues for RKLB stock. This is considered too high, and we need to be consider whether by 2023 there will be a breakeven point and a turn to profitability.
The fact that Rocket Lab has launched 105 satellites signals expertise and the potential to become a key player in the space industry. But it is too early to get too excited.
Despite the financial update being positive, we did not get details about other key financial metrics. To put it very simply, it is not just how much revenue you make. It is important how much is left and how the company is using cash for core operations and growth.
I think it’s best to wait and see the next quarter’s performance. That will provide more insight into key financial metrics.
Buying the RKLB stock now is too risky, given the absence of publicly announced financial data. I like the revenue growth, and the traction that already exists, but the stock is not cheap.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.