Should You Buy Rocket Lab While It's Below $27?

Rocket Lab (NASDAQ: RKLB) is on a roll.

Recovering quickly from its first-quarter earnings miss earlier this month, shares of the manufacturer of small satellites and the small rockets to launch them zoomed higher after the company issued a series of press releases. Among other things, Rocket Lab has announced:

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• A contract to experiment with point-to-point cargo transportation by rocket for the U.S. Air Force Research Laboratory (AFRL).
• A NASA contract to launch the Aspera spacecraft to "study the formation and evolution of galaxies and provide new insights into how the universe works."
• Another successful synthetic aperture radar (SAR) launch for Japan's Institute for Q-shu Pioneers of Space, Inc. (iQPS).
• And a third launch and recovery of a W-class space capsule for "orbital pharmaceuticals" company Varda Space Industries.

At a price just under $26 today, Rocket Lab stock has now bounced back so high that it costs 9% more than it did before the earnings miss on May 8. But the stock's also still 20% below an intraday high set back in January. With momentum seemingly firmly on its side, investors may now be wondering: Should you buy Rocket Lab stock here at $26, before it rockets even higher?

And the answer is a definite maybe. (Although I'm leaning toward no.)

Image source: Getty Images.

The biggest reason not to buy Rocket Lab stock

Don't get me wrong. I happen to think Rocket Lab is a great company, and with great long-term prospects. I just don't think you should overpay to own a piece of those prospects.

If you look out five years, analysts polled by S&P Global Market Intelligence anticipate that Rocket Lab will grow into a solidly profitable company, doing $3.5 billion in annual revenue, and translating $1.1 billion of that revenue into real profit according to generally accepted accounting principles (GAAP). Viewed from this perspective, Rocket Lab stock that costs $12 billion today (or just under $26 per share) looks pretty attractive, costing just 11 times earnings.

The problem is, these are forward earnings. Very forward earnings. And they might not arrive either in the quantity, or according to the time frame, that analysts predict. (Case in point: In 2022, these same analysts were forecasting Rocket Lab would earn its first profit in 2025. But three years later, opinions have changed -- and Rocket Lab is forecast to lose $193 million this year.)

Meanwhile, valued on the facts as they stand today, Rocket Lab has a meaningless earnings multiple due to having negative earnings. And it costs more than 27 times trailing-12-month sales (which is about 6 times the average valuation on unprofitable space stocks).

This, then, is my first argument for not buying Rocket Lab stock today: It may look cheap based on hopes and dreams for what it might earn five years from now. Based on its performance to date, however, the stock looks expensive.

A reason not to buy Rocket Lab stock today

My second reason for saying Rocket Lab stock is not a buy, though, is better news: Rocket Lab stock may cost too much today, but there's plenty of reason to expect it will become cheaper before long.

Why is that? Right now, with no earnings to hang a P/E valuation on, Rocket Lab acts a lot like a momentum stock: shooting higher on positive press releases, only to turn around and plunge on negative earnings reports. Simply put, its stock price is driven by headlines, both good and bad.

Now, the biggest good headline for Rocket Lab at present is the prospect that its new Neutron reusable rocket will launch later this year, maybe as early as July, but probably not. I believe this good news is priced into the stock already. And if I'm right, this means that the biggest upcoming catalyst will most likely be new news that Neutron will in fact launch on a date later than it's expected to.

A launch delay in Neutron, I believe -- even a small one -- might spook momentum investors and lower Rocket Lab's stock price, without at the same time materially changing the company's growth prospects, or making the stock less attractive to long-term investors. Were I in the market to buy some more Rocket Lab shares (in addition to the shares I already own), this is the catalyst I'd be looking for: negative news that scares off momentum investors, without materially damaging the business.

I might not buy Rocket Lab stock at $26. But if such a catalyst drives the stock down into the teens or lower, then I probably would buy more Rocket Lab stock.

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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.