Predicting Rocket Lab's Position in Three Years' Time
Predicting Rocket Lab's Position in Three Years' Time
Investors seeking crystal-clear insights, much like having a crystal ball, can find solace in the financial figures associated with Rocket Lab (RKLB 3.57%). Whilst crystal balls are hard to come by, investors in Rocket Lab stock have an analogous advantage: tangible data presented by Rocket Lab management and financial analysts, offering a glimpse into where the stock might stand in three years.
Should you be contemplating a long-term investment in America's second-most active space rocket launcher (after SpaceX), then it might be wise to take these figures into account before making a decision.
Current Position of Rocket Lab stock
Rocket Lab recently disclosed its Q3 earnings, which contained both encouraging and discouraging aspects.
The positive aspects include Rocket Lab's rocketry business experiencing rapid growth. Up until October 2024, 12 launches have occurred this year, as compared to the total 10 launches realized in 2023. Sales increased by 55% in Q3 compared to the previous year, and Rocket Lab anticipates doubling this growth rate in Q4, with sales potentially reaching $135 million.
On the flip side, Rocket Lab has yet to turn a profit from these sales. Although the losses were less than forecasted in Q3, they still amounted to $0.10 per share - a 25% increase compared to the losses incurred in Q3 2023.
Rocket Lab's Projections from Now until 2027
Despite the ongoing losses, Rocket Lab is persistently funding its next-generation reusable spacecraft, the Neutron medium-lift vehicle. Despite missing the initial 2024 launch date, the Neutron is expected to launch in 2025.
Additionally, Rocket Lab announced it has already secured a client for at least two Neutron launches, with an incentive for "numerous further launches," as this currently anonymous client plans to utilize Neutron for deploying its entire satellite constellation.
However, it will not be an immediate process.
In a post-earnings conference with analysts, Rocket Lab CFO Adam Spice projected that Neutron will only be launched once this year, serving as a test flight. The frequency of commercial launches will then gradually increase, with three launches slated for 2026 and five for 2027.
Rocket Lab CEO Peter Beck further specified that annual Neutron launches are expected to occur at least seven times starting from the subsequent years, and this rate may increase even further. Moreover, each Neutron launch will come with a hefty $50 million to $55 million price tag, significantly more expensive than the average per-launch price of $8.2 million for the Electron rocket.
Wall Street Analysts' 2027 Expectations for Rocket Lab Earnings
Despite strong demand for Electron and encouraging prospects for Neutron, Rocket Lab still faces profitability challenges. However, as Beck noted, "in terms of demand, that isn't something we worry about." Sales growth is promising in both of the company's market segments, while profit margins are gradually improving.
So, what does this mean for Rocket Lab's financial future, as predicted by Wall Street analysts?
According to S&P Global Market Intelligence, Wall Street analysts anticipate Rocket Lab to incur losses in 2024, experience less losses in 2025, and finally break even in 2026 - despite expecting the company to earn its first profit in 2027, around the time Neutron reaches a launch cadence of roughly every other month.
Is Rocket Lab Stock a Good Buy?
In 2027, when Rocket Lab is expected to earn around $80 million on $1.25 billion in revenue, that would translate to a price-to-earnings ratio of 128. Considering the uncertainty surrounding these projected earnings, the price-to-earnings ratio is rather hefty.
However, with Neutron's full development and fewer cash outlays on research and development, analysts anticipate Rocket Lab will generate $280 million in positive free cash flow in 2027, giving the stock a more reasonable price-to-free-cash-flow ratio of 36.6. Furthermore, this free cash flow should continue to grow at a high annual rate, potentially increasing by 36% between 2027 and 2028.
While this analysis assumes everything will go well for Rocket Lab in the coming years, it's essential to take into account the inherent risks. Under the current valuation, I would proceed with caution before advocating for purchasing Rocket Lab stock. However, the only means by which the current valuation could prove justified would be if the company manages to achieve uninterrupted success during the next three years.
In terms of investing, considering Rocket Lab's projected financial growth, particularly with the anticipated launch of its Neutron medium-lift vehicle, careful analysis of the potential returns and risks associated with a long-term investment in the company's stock is crucial.
Furthermore, while Wall Street analysts anticipate Rocket Lab to break even by 2026 and make its first profit in 2027, the company's current high price-to-earnings ratio in 2027 necessitates a prudent approach to investing, considering the inherent uncertainties involved.