Up 500% in the Past Year: Why Investors Are Falling in Love With This Hypergrowth SpaceX Competitor

Rocket Lab (NASDAQ: RKLB) investors just keep on winning. The space flight company is up around 500% in the last 12 months, which is more than double the returns of Nvidia in that same time frame. It has been an incredible run for the stock, led by its increasing performance in space launches and satellite manufacturing, helping it compete with the dominant player in the sector: SpaceX.

Here's why investors are uber-optimistic about SpaceX competitor Rocket Lab, and why the stock is up around 500% in the last year.

Accelerating small rocket launches

SpaceX has a dominant position in private commercial rocket launches. In fact, just a few years ago, the Elon Musk-led company was virtually the only Western company able to reliably launch rockets into orbit. What happened a few years ago? Rocket Lab began competing for contracts.

In order to enter the market, Rocket Lab targeted rocket launches with much smaller payloads (i.e., the mass on board) compared to SpaceX's workhorse Falcon 9 rocket. This led it to produce the Electron rocket, which can take small and experimental payloads to orbit. Electron will be the third most launched rocket globally in 2024, which is an impressive feat and shows how much Rocket Lab is making progress to catch up with SpaceX.

Just a few days ago, Rocket Lab showed its true potential with its rocket launch services, performing two missions (on separate launch pads) in less than 24 hours. Investors have gotten excited about these missions, showing that Rocket Lab has a chance to greatly increase its launch cadence in the coming years. The demand is there, too. Rocket Lab has a growing backlog worth over $1 billion and thousands of satellites waiting from commercial customers to be deployed.

More launches mean more revenue, and eventually profit generation. Since entering the public markets in 2021, Rocket Lab's revenue has grown 551%, making it one of the fastest-growing businesses in the world. If it can increase its launch frequency, investors are betting that this growth will continue for the next few years as well.

Vertical integration ambitions

Rocket Lab has larger ambitions than just the Electron rocket. Through internal investments and acquisitions, the company has built up capabilities to build the payloads (satellites, solar cells, and space pods) for its commercial customers. Space systems revenue has grown at a rapid rate in the last few years and now makes up the majority of Rocket Lab's overall revenue.

The key is the flywheel that gets built with all these capabilities. Rocket Lab is one of the few places a customer can go to get a reliable launch into orbit, making it much easier for the company to upsell these customers on its space systems capabilities. The government thinks it is a promising business as well, with Rocket Lab recently signing a $24 million incentive agreement as part of the new CHIPS Act to build semiconductors for space systems.

Over the long term, investors should watch two developments for Rocket Lab to further its vertical integration ambitions. First is the larger Neutron Rocket, which will increase its payload per launch and help directly compete with SpaceX. The company already has a customer signed on for a Neutron launch, which is expected to debut in 2025.

Second, the company is planning to build its own satellite constellation and sell software/services from orbit, which could help boost the company's profit potential.

RKLB PS Ratio data by YCharts

Should you buy the stock?

There is a lot to like about Rocket Lab's business, and I applaud the shareholders who bought the stock over a year ago. You are sitting on some fantastic gains at the moment. That doesn't make the stock a buy today, though.

At a market cap pushing through $12 billion, Rocket Lab trades at a price-to-sales ratio (P/S) of 34, more than 10x the market average. Yes, Rocket Lab has a lot of growth potential, but this is a capital-intensive low-margin business that does not deserve to trade at over 30x sales.

To illustrate this point, let's perform some forward-looking estimates for Rocket Lab. In 10 years, if the company achieves all of its ambitions with minimal hiccups (an optimistic scenario), I could see the company's revenue growing from its current annual figure of $364 million to $5 billion. With a 26% gross profit margin, it is reasonable to assume Rocket Lab can hit 10% net income margins once it scales, or $500 million in earnings on $5 billion in revenue.

Consider that $500 million in earnings versus the current market cap of $12.34 billion is a price-to-earnings ratio (P/E) of 25. That is not much lower than the average S&P 500 P/E ratio today, and that would be Rocket Lab's earnings power in 10 years under the most optimistic assumptions.

Stay away from Rocket Lab stock right now. The stock price is getting out of control.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.