Where Will Rocket Lab Be in 10 Years?

Last month, I climbed out on a limb to ask (and answer) the question: Where will Rocket Lab USA (NASDAQ: RKLB) stock be in five years? For a fast-growing but still-unprofitable space stock with only one rocket in service -- the tiny Electron model that's much smaller than what larger competitors like SpaceX and United Launch Alliance fly -- it wasn't an easy question to answer.

On the plus side, at least I had a few analyst forecasts, provided by our friends at S&P Global Market Intelligence and stretching out as far as 2031, to guide me in making my guesses. Today I'm going to Tarzan right off that limb, venture into completely unexplored territory, and ask (and try to answer) the question: Where will Rocket Lab stock be in 10 years?

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What we know about Rocket Lab today

Let's start the leap on solid ground. As of today, Rocket Lab is a $10 billion company, generating annual sales of $436 million (giving it a 23 times price-to-sales ratio) and no profits or free cash flow at all. Valued on sales, Rocket Lab is arguably one of the most expensive space stocks around. That's the bad news.

The good news is that Rocket Lab has a new rocket in the works, Neutron, that should open up new markets and generate significantly more revenue per launch for Rocket Lab, once it starts launching. With help from Neutron, analysts expect Rocket Lab to turn free cash flow-positive as early as next year, and to begin reporting generally accepted accounting principles (GAAP) profits as early as 2027.

By 2028, the forecast is for Rocket Lab to earn more than $1 a share, and generate more than $380 million in FCF annually.

Valuing Rocket Lab stock today

Assuming Rocket Lab hits these numbers, Rocket Lab stock today costs about 20 times the profit it might earn three years from now, and about 27 times its future free cash flow. So, like I said, Rocket Lab stock is not cheap.

But here's the thing. Assuming the analyst forecasts are correct, once it gets itself going, Rocket Lab will be growing its profits at north of 30% annually. And it could maintain that growth pace for years -- again, assuming everything goes as planned.

So what does this mean for Rocket Lab stock if we try to look 10 years out?

Image source: Getty Images.

Class, take out your crystal balls, and turn to page 2035

Working off the far-out-est analyst forecast for Rocket Lab stock, which predicts the company could generate $942 million in FCF in 2031, and applying a 30% growth rate to that number for four more years, implies that by 2035, Rocket Lab could be doing close to $2.7 billion in annual FCF. Extrapolating similarly from the farthest-out earnings forecast, for $1.05 per share earned in 2028, 30% annualized growth would imply per-share profits of more than $6.50 per share by 2035.

Very roughly therefore, and assuming all goes as planned, Rocket Lab stock today costs about 4 times its 2035 projected FCF, and 3 times its 2035 projected earnings. That's assuming the stock reaches profitability on schedule, and it then proceeds to grow its profits 30% per year thereafter.

Is Rocket Lab stock a buy?

Here's one way you might think about it. Currently, the S&P 500 index sits at 5,529, with trailing-12-month earnings of $210, resulting in a P/E ratio of 26. At its historical growth rate of roughly 10%, this implies that by 2035, the combined earnings of the S&P 500 might be $545, which works out to a 10-year forward P/E ratio of roughly 10x on the index.

Relative to Rocket Lab's hypothetical 10-year forward P/E ratio of 3 times earnings, therefore, it would appear that the average S&P 500 stock is more expensive than Rocket Lab, and Rocket Lab is therefore cheaper than the average S&P 500 stock.

Granted, we're looking very far into the future to arrive at these numbers. Granted, too, Rocket Lab stock is currently unprofitable, which makes forecasting earnings 10 years down the road a very uncertain proposition.

What could go wrong with this forecast? It might take longer than analysts are forecasting for Rocket Lab to reach profitability, potentially requiring the company to sell stock to raise cash as it continues to move toward profitability. Future profits could also be smaller than forecast, and they could grow slower than anticipated as well.

All this being said, if all goes as planned, I do see an argument to be made for buying Rocket Lab stock, even at today's apparently high prices.

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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.