Is Rocket Lab Stock a Buy Now?

It's hard to keep a good company down, and Rocket Lab (NASDAQ: RKLB) investors are happy to realize this.

Earlier this month, as you may recall, Rocket Lab shares tumbled after missing on first-quarter earnings but beating on sales and guiding investors lower than expected for Q2. It didn't take the company long to right the rocketship, however. In quick succession, Rocket Lab announced:

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• A launch contract for the U.S. Air Force Research Laboratory (AFRL) to attempt point-to-point cargo transportation, launching a Neutron reusable rocket from point A on Earth and then landing it at some other point B -- also on Earth.
• A separate contract with NASA to launch the "Aspera" astrophysics science mission, which will "study the formation and evolution of galaxies and provide new insights into how the universe works." (Both these missions will launch in 2026. Neither one had a price disclosed.)
• The successful launch under an existing contract of a third (of eight total) synthetic aperture radar (SAR) Earth-imaging satellite for Japan's Institute for Q-shu Pioneers of Space, Inc. (iQPS).
• And the third (of four) launch and recovery of a W-class space capsule for orbital pharmaceuticals researcher Varda Space Industries.

So it's been a busy week and a half for Rocket Lab, and all this activity has helped lift the stock nearly 25% off its post-earnings lows. In fact, Rocket Lab stock now costs 10% more than it did before investors sold it off on the earnings miss, which again, I should point out, happened less than two weeks ago!

Image source: Getty Images.

Investors can't make heads or tails of Rocket Lab

Granted, momentum investors can be a fickle bunch, selling like lemmings when news looks bad and displaying irrational exuberance when a former dog starts to look a bit like a growth stock. Still, this has been quite a roller-coaster ride. And it presents investors with an important question today:

Were investors right to be worried by Rocket Lab's failure to hit its targets a couple of weeks ago? Or is the good news that Rocket Lab has seen in the days since that earnings release good enough to make the stock even more valuable now than it was before "missing earnings"?

How to think about Rocket Lab

As a longtime shareholder in Rocket Lab myself, let me tell you how I look at it. Rocket Lab stock is volatile, but that kind of comes with the territory when investing in unprofitable start-up stocks that are hard to value on the earnings-that-they-don't-have-yet.

It's going to remain volatile, too.

Don't get me wrong. As America's second-most-frequent launcher of rockets, Rocket Lab does stretch the definition of "start-up." Still, the company lost $190 million last year and burned through $116 million in negative free cash flow. According to analysts polled by S&P Global Market Intelligence, moreover, Rocket Lab is still nearly two years away from reporting its first generally accepted accounting principles (GAAP) profit and probably won't generate positive free cash flow before Q3 2026 -- about 18 months away.

That's the bad news. The good news is that Rocket Lab remains on a strong growth track. Once Neutron begins launching regularly, revenues are forecast to explode, quadrupling to more than $1.8 billion by 2027, for example, with GAAP net income passing $300 million and free cash flow hurtling past $500 million.

The question for long-term investors to ask, therefore, is whether it's reasonable to pay $11.8 billion for Rocket Lab today in hopes of seeing $300 million-ish profits (39x 2028 earnings) and $500 million-ish free cash flow (23x 2028 FCF) tomorrow.

So is Rocket Lab a sell or a buy?

And the answer? I believe it actually is reasonable to make this investment, assuming you're willing to accept the risk that Rocket Lab takes longer than expected to hit these numbers and assuming the company's growth rate remains strong after it does so.

That being said, I also think it's reasonable to anticipate Rocket Lab will hit bumps in the road between now and 2028. For example, as recently as 2022, analysts were forecasting Rocket Lab would earn its first profit in 2025. We now know that's not going to happen. It's therefore reasonable to anticipate other complications emerging as well -- a delay in Neutron's first launch to next year, for example, a delay in first profits past 2027, or similar "known unknowns."

With Rocket Lab stock already well off its lows and trading for a rich 27 times trailing earnings, I just don't see a lot of room for error in the stock's valuation today. My advice would be to wait for a pullback and buy only after the margin of safety looks a bit wider.

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Rich Smith has positions in Rocket Lab USA. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.