Should You Buy Rocket Lab Stock Before Its New Rocket Takes Flight?

Key Points

• Rocket Lab's upcoming Neutron test is crucial for the company's development.

• Over the long term, it could help Rocket Lab deploy its own satellite constellation.

• However, the stock currently trades at an extreme multiple of its trailing revenue.

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The next 12 months are crucial for Rocket Lab (NASDAQ: RKLB). After years of consistent growth with its small Electron rocket system, the company is set to test and debut a new rocket type called the Neutron later this year to compete directly with the dominant SpaceX. As an unprofitable mover in the space economy, Rocket Lab is banking on the Neutron to help bring the company to a larger scale financially and finally turn a profit. Plus, it could be the springboard for the company's long-term satellite constellation plans.

By the end of this year, Rocket Lab is scheduled to perform a test flight with the Neutron. This is the final step before commercialization and revenue generation from launch contracts. Does that mean you should buy Rocket Lab stock before the Neutron takes flight?

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Larger payloads, larger revenues

When launching a rocket, there are three important items for a commercial customer: cost, payload, and reliability (meaning the rocket is not likely to blow up). Rocket Lab's Electron rocket -- its only commercialized rocket today -- has a small payload of just 300 kilograms versus 13,000 for the workhorse Falcon 9 from SpaceX.

This has allowed it to earn niche missions to prove its reliability, but has kept Rocket Lab out of any large payload contracts. If a company wants to launch hundreds of large satellites into orbit, it will go to SpaceX, as it would be inefficient and time-consuming to use many different Electron missions.

Neutron plans to level the playing field. It will have a payload capacity similar to the Falcon 9, which will expand Rocket Lab's total addressable market for launch contracts. SpaceX has been a virtual monopoly in large rocket launches for years now, even though it competes directly with its customers through its Starlink satellite internet service. Rocket Lab can become the second player in the sector, potentially convincing customers to switch from SpaceX.

The average Electron mission costs $7.5 million for a Rocket Lab customer compared to a reported average of $67 million for every Falcon 9 mission. Rocket Lab's revenue over the last 12 months was just $500 million, meaning just a few Neutron launches a year could significantly boost the company's revenue. If it launches just 10 times at the same cost as the Falcon 9, that would more than double its current consolidated revenue.

Image source: Getty Images.

Building its own constellation

Rocket Lab is not just a launch provider. It also builds space systems for customers, which include things such as satellites, photovoltaics, and even spacecraft. This is a larger revenue generator than launch services, with $97.9 million in revenue last quarter compared to $46.6 million for rocket launches from the Electron.

Commercializing the Neutron may help rocket launch revenue surpass space systems in the interim. However, over the long term, its effect may be more felt in Rocket Lab's long-term plan for providing its own services from space to third parties. This has been compared to SpaceX's Starlink internet service, although it is unclear if Rocket Lab will be selling internet or some other service from its proposed satellite constellation. Either way, its Neutron rocket will enable the company to easily get enough satellites into orbit.

RKLB PS Ratio data by YCharts. PS = price-to-sales.

Should you buy Rocket Lab stock?

Rocket Lab's space economy business has loads of potential. Unfortunately, this potential is now priced into its soaring stock. At a share price of $50, Rocket Lab is up over 10x in the past few years and now has a market cap of $24 billion. It's going to further dilute shareholders with a new at-the-money stock offering of $750 million that it will use to fund more investments into the Neutron, manufacturing, and launch facilities.

A market value of $24 billion versus $500 million in trailing revenue gives Rocket Lab a price-to-sales (P/S) ratio of 49. That's a wildly expensive multiple, even if you believe Rocket Lab is about to start generating billions of dollars in annual revenue sometime in the near future. Neutron commercialization may bring about a step change in growth, but that step change seems to already be priced into the stock.

Avoid buying Rocket Lab stock at this expensive P/S ratio. Keep it on the watchlist for now and buy on any future dips instead.

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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.