Should You Buy Rocket Lab Stock Below $70?
Key Points
Rocket Lab stock is down 55% from its highs.
The company is making aggressive moves to compete with SpaceX, including its recently announced proposed acquisition of Iridium.
The stock still looks overvalued right now.
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A space economy boom is turning into a stock market collapse. After the monster Space Exploration Technologies (better known as SpaceX) IPO earlier this year, space stocks began to slip, and quickly, from their highs. Rocket Lab (NASDAQ: RKLB) could be called the poster child for these wild gyrations in space stocks.
The maker of rockets and other space systems saw its stock rise by more than 150% at one point over the last 12 months before falling 55% from a high set in May. As of this writing, the stock trades at $67.50. Should you buy shares of Rocket Lab below $70?
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The answer is clear if you look at the numbers.
Image source: Getty Images.
A potentially transformative acquisition
Rocket Lab has defied the odds. It looks as if the business is poised to become the second vertically integrated spaceflight player, operating alongside SpaceX as a transportation and services juggernaut for companies wanting to operate in orbit.
It has a new rocket, the Neutron, which is undergoing testing and will bring it to payload parity with SpaceX's current workhorse, the Falcon 9. In addition to sending payloads into orbit, Rocket Lab has developed and acquired space systems products, including satellite production, space capsules, energy generation, and communications.
Combined, this aggressive push to vertically integrate space economy services has led to $680 million in trailing 12-month revenue, up over 1,000% in the last five years. Now, it is making a potentially transformative acquisition of Iridium, a satellite communications provider. This is being done to accelerate its timeline to directly compete with SpaceX's Starlink satellite internet service and to obtain L-band spectrum rights at a reasonable price. Iridium is being acquired for $8 billion and generates $871 million in revenue, more than Rocket Lab's entire business today.
If this acquisition closes and the Neutron rocket begins commercial flights, Rocket Lab's capabilities will start looking more like SpaceX's in the near future.
Should you buy Rocket Lab while it's below $70?
With a falling share price, you might think that Rocket Lab now trades at a reasonable price relative to its growth potential. However, as with many space economy stocks, shares of Rocket Lab seem to have gotten well ahead of themselves in the last few years.
After this drawdown, Rocket Lab trades at a price-to-sales ratio (P/S) of 55, which is an extreme multiple rarely seen in the stock market. Even if revenue grows more than 10 times over the next five years, it will only bring this P/S ratio down to around the S&P 500's average, before considering shareholder dilution.
For this reason, investors should not buy Rocket Lab stock right now. Wait for it to fall even more from here.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Rocket Lab. The Motley Fool has a disclosure policy.
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