Is Rocket Lab a High-Risk, High-Reward Opportunity?

Few stocks have captured the imagination like Rocket Lab (NASDAQ: RKLB), a leader among a crop of young companies racing to turn the promise of the space economy into a reality.

Rocket Lab went public in late 2020 as part of a special purpose acquisition company (SPAC) deal, and its journey since then has been full of volatility. But investors who have been along for the ride since day one are currently sitting on a 175% gain.

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Is it too late for investors to hop aboard this rocket ship, or can Rocket Lab still fly higher? Here's a look at the investment case for Rocket Lab today.

Images source: Rocket Lab.

A new force in the space race

Rocket Lab has been a disruptor from the beginning. Founded by industry outsider Peter Beck, a New Zealander who dropped out of college and was turned away from NASA and space companies when he sought internship opportunities, Rocket Lab has built a solid track record launching small satellites into orbit.

The company has built up a lot of credibility in the industry, winning the right to compete for billions in future U.S. government launches earlier this year. But Rocket Lab aims to be much more than just a launch vehicle. Beck is attempting to build a "one-stop shop" for customers who want a presence in space but don't want to hire aerospace engineers, offering services that design satellites, manufacture them, launch them, and then maintain them while in orbit.

The company is developing a new, larger rocket called the Neutron, which will allow it to deliver a wider range of payloads into space. It has also used the cash it raised when it went public to acquire companies that help it compete in areas other than launch, enabling it to grow quickly while keeping its debt in line with its cash reserves.

Valuation concerns

The opportunity before Rocket Lab is massive. Morgan Stanley estimates the space economy could grow to $1 trillion by 2040. But some of that potential growth is already priced in. Shares of Rocket Lab are up by more than 500% over the past year, and the company currently trades at 22 times expected sales. That's a premium valuation for a business that does not expect to be profitable before 2027.

Throw in questions about the timing of Neutron's introduction and uncertainty about how quickly the space economy will develop, and there is a lot of hope baked into the valuation.

Given the number of space stocks competing for the business, as well as private companies, including Elon Musk's SpaceX, there is no guarantee that revenue growth and profitability will come as expected, even if Rocket Lab gets the engineering right. That leaves the stock open to further volatility: Investors tend to sell stocks with high valuations at the first hint of trouble.

Is Rocket Lab Stock A Buy Today?

At these levels, it is easier to be bullish about Rocket Lab the company than Rocket Lab the stock. The company seems well on its way to establishing itself as the leader among the next generation of space companies. But this is literally rocket science, and projects of this complexity have a tendency to run into speed bumps and can fall off course.

For patient, long-term investors, Rocket Lab has earned the right to be part of a well-diversified portfolio. But given today's valuation, investors should be in no rush to pile in and accumulate shares. This space race will take time to play out.

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Lou Whiteman has positions in Rocket Lab USA. The Motley Fool has positions in and recommends Rocket Lab USA. The Motley Fool has a disclosure policy.