Rocket Lab (RKLB) is a space company that provides launch services. The company mainly focuses on small-class rockets that can be built in very short periods of time.
However, it is in the process of developing medium-class rockets with the ultimate aim of making both classes reusable. We are neutral on the stock.
Long-Term Beneficiary of Russian Sanctions
It's no surprise that Western and NATO countries can no longer trust Russia. The invasion of Ukraine has proven that the Putin-led nation is too volatile to reliably do business with. Thus, when it comes to the aerospace industry, relying on foreign products becomes a matter of national security.
For many decades, Russian Soyuz rockets have built up a solid reputation as a reliable and affordable way to launch things into space. In fact, as of 2021, it was the most frequently used launch vehicle in the world. However, this is now likely to change.
In comes Rocket Lab, which is in the process of building its new neutron rocket -- a reusable, medium-class vehicle; since Soyuz rockets are also medium-class, it will be a direct replacement. Indeed, Rocket Lab has been receiving questions asking if it can produce the rocket faster.
As a result, the company is considering producing three rockets instead of one by 2024. The fact that the neutron is going to be reusable was already a strong catalyst in itself for Rocket Lab, as it would significantly decrease the cost of launch. However, the Russia-Ukraine incident is likely to accelerate the shift away from the older Soyuz technology.
Rocket Lab Seeing Strong Business Momentum
The company is currently a money-losing venture, which is no surprise considering that it's a capital-intensive business. This is especially true as it begins to scale.
Nevertheless, it has seen strong demand from customers, as its backlog of orders has increased from $82 million in December 2020 to $545 million in February 2022. We expect this backlog to continue growing, especially as it continues to improve its launch capabilities.
In addition, Rocket Lab has been quite active in acquiring companies that complement its business. This is part of its vertical integration strategy, where the acquired companies will produce various components and subsystems.
The company aims to control the entire value chain, thus, being able to reduce costs and increase efficiency. This should ultimately lead to higher margins and eventual profitability.
Risks
The main risk Rocket Labs faces is execution risk. Building reusable rockets from scratch in a never-done-before way is definitely no easy feat. It is likely that the engineers will run into many technical issues along the way.
In addition, it is very expensive to develop these rockets under normal market conditions, let alone during a period of high inflation. Therefore, it remains to be seen how much pricing power the company has in order to pass on the input costs to customers.
It also doesn't help that the company has so far been relying on equity financing in order to keep operations going. Therefore, it's likely that shareholders are not done being diluted just yet.
Wall Street's Take
Turning to Wall Street, Rocket Lab has a Strong Buy consensus rating based on five Buys and one Hold assigned in the past three months. The average Rocket Lab price target of $17.33 implies 116.6% upside potential.
Final Thoughts
Rocket Lab definitely has a bright future if it can execute its plan of building reliable and reusable rockets. However, we remain neutral at the moment due to the capital-intensive business and the lack of profitability.
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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.
