Rocket Lab USA’s RKLB shares have surged a solid 29.6% in the year-to-date period, outperforming the Zacks aerospace-defense industry’s decline of 5.6%. It has also outpaced the broader Zacks Aerospace sector’s rise of 1.2% as well as the S&P 500’s gain of 17.7% in the same time frame. As a renowned manufacturer of spacecraft and launch vehicles, RKLB rides high on the growing demand for commercial space systems and launch services, along with increasing orders from government defense agencies.
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A similar stellar performance has been delivered by other industry players, such as Embraer ERJ, Leidos Holdings LDOS and RTX Corp. RTX, which have witnessed a surge of 88.6%, 44.2% and 41.2%, respectively, year to date.
With Rocket Lab riding high, individuals may rush to add the stock to their portfolio. However, before making any hasty decision, it would be prudent to take a look at the reasons behind the surge, the stock’s growth prospects as well as risks (if any) to investing in the same. The idea is to help investors make a more insightful decision.
What Led to RKLB Stock’s Price Surge?
The commercial market for space technologies like communication, earth observation and navigation services has been witnessing notable growth over the past decade. This, in turn, has boosted the demand for Rocket Lab’s launch services, spacecraft design services, spacecraft components, spacecraft manufacturing, as well as other spacecraft and on-orbit management solutions.
Governments across the globe are increasingly strengthening their national security amid the growing hostility worldwide. This has also been bolstering the demand for satellite deployments for varied military applications. Rocket Lab’s Electron small launch vehicle plays the part of a major growth catalyst for the company as small payloads serve the purpose of quick real-time intelligence needs.
Since its maiden launch in 2017, Electron has become the leading small spacecraft launch vehicle delivering more than 190 spacecraft to orbit for government and commercial customers across 46 successful missions through June 30, 2024. This substantiates Electron’s strong demand.
To maintain its prowess in space technology, RKLB makes steady innovations. One such innovation is its reusable-ready medium-capacity Neutron launch vehicle. This launch vehicle will increase the payload capacity of RKLB’s space launch vehicles to approximately 15,000 kg for expendable launches to low Earth orbit and lighter payloads for reusable configurations and into higher orbits. Neutron is expected to have the capability of launching nearly all of the spacecraft configurations that Rocket Lab expects to get launched through 2029.
Is RKLB Stock’s Growth Sustainable?
As per a report by the World Economic Forum, published in April 2024, the space economy is expected to be worth $1.8 trillion by 2035 as satellite and rocket-enabled technologies become increasingly prevalent. This bolsters the growth prospects for Rocket Lab, with its Electron being the second most frequently orbital launched rocket by companies operating in the United States. Rocket Lab was the fourth most frequent orbital launcher globally in 2023.
The consensus estimate for RKLB’s long-term (3 to 5 years) earnings growth rate is currently pegged at 6.6%.
A quick sneak peek at its near-term sales estimates mirrors similar growth prospects.
Upbeat Sales Estimates for RKLB
The Zacks Consensus Estimate for RKLB’s 2024 and 2025 sales reflects an improvement of 72.8% and 30.9%, respectively, year over year.
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Risks to Consider Before Choosing RKLB Stock
Despite the aforementioned growth opportunities, there are certain challenges that RKLB faces currently. One should consider these risks before investing in the stock. One such risk is the high operating expenses that the company incurs as it consistently makes investments in developing new products and enhancing existing products. These products include RKLB’s medium capacity Neutron launch vehicle, Electron’s first stage recovery, and family of advanced configurable spacecraft features and capabilities, as well as expanding its portfolio of spacecraft components and subsystems.
Such high operating expenses largely offset the benefits of strong revenue growth, thereby causing RKLB to incur losses in the quarterly results. To this end, Rocket Lab expects its operating expenses to increase in the future. If its revenue growth does not increase enough to offset the anticipated rise in operating expenses, the company may not be able to achieve profitability.
RKLB has experienced, and may continue to experience delays or other complications in the design, manufacture and commercialization of new rocket launch services, mission services, spacecraft, spacecraft components and related technology. If the company fails to develop and successfully commercialize new technologies, it could materially and adversely affect its operating results.
RKLB Trading at a Premium
In terms of valuation, RKLB’s forward 12-month price-to-sales (P/S) is 6.89X, a premium to its industry’s average of 1.56X. This suggests that investors will be paying a higher price than the company's expected sales growth compared to that of its industry’s.
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Should You Buy RKLB Stock Now?
To conclude, investors interested in Rocket Lab should wait for a better entry point, considering its premium valuation and the challenges it is facing in terms of high expenses.
However, those who already own this Zacks Rank #3 (Hold) stock may stay invested as the company's upbeat sales estimates, benefits of the steadily growing space economy as well as strong product portfolio offer solid prospects.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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Rocket Lab USA, Inc. (RKLB) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
