Here's Why 69% Growth Wasn't Good Enough for Rocket Lab Stock


Rocket Lab isn’t profitable yet, but it’s on the right path.

Small rocket-maker Rocket Lab (RKLB -4.78%) is performing impressively — accelerating rocket launches faster than SpaceX, growing its revenue 69% year over year, and inching ever closer to profitability.

And yet investors may be curious: Why is Rocket Lab stock down more than 50% since its 2021 IPO?

Rocket Lab Q1 earnings report

Rocket Lab reported earnings on Monday, May 6. The company reported 69% sales growth to $92.8 million, with losses slimming by about 10%, despite a sizable increase in spending on research and development for the company’s new Neutron reusable rocket.

Despite the rapid growth and improvement in earnings, shares initially sold off on the news. They’ve turned around a bit since, rising about 5% through Friday’s close. But that still isn’t much considering the high revenue growth rate. So what else did Wall Street expect to see in Rocket Lab’s report?

Well, perhaps unsurprisingly for a growth stock like Rocket Lab, the Street wanted to see even more growth. According to data from TheFly.com, most analysts expected Rocket Lab to report $95 million in Q1 sales. That made the $92.8 million that Rocket Lab did report a “miss,” in Wall Street’s opinion.

Rocket Lab Q2 forecast

But here’s the thing: If Rocket Lab “missed” revenue targets in Q1, it seems likely to “beat” expectations in Q2 and beyond. And here’s why:

Late last year, if you recall, Rocket Lab announced its biggest contract award ever, a $515 million contract with the U.S. Space Force to design, build, and operate 18 new missile warning satellites under Space Force’s Proliferated Warfighter Space Architecture program (PWSA).

Rocket Lab has already begun work on this contract, picking subcontractors and conducting preliminary design studies for the satellites it will build. In future quarters, the company will begin building the satellites, and receiving payment for their production through 2027. Beyond that, the company will receive additional funds for operating the satellites in orbit through at least 2030, and perhaps as long as 2033.

And Rocket Lab could potentially win even more money if it’s awarded the contracts to launch the satellites into orbit.

It’s nice to own your own rockets

This final point highlights the curious nature of Rocket Lab’s business, where one half of the company makes all the money, but the other half of the company helps the first half win the contracts in the first place.

Consider: Rocket Lab started out life as a space stock manufacturing small rockets. It still does that. But it’s also evolved into an end-to-end provider of space services, contributing parts to other companies’ satellites, building its own satellites, and possessing rockets with which to launch those satellites into orbit. And as the company’s financial statements make clear, the real money in space comes from the new businesses Rocket Lab has been entering into.

Producing “space systems” (satellites and satellite parts) generates gross profit margins of 25% for Rocket Lab, according to data from S&P Global Market Intelligence — twice what the company gets from its launch services division. But part of the reason Rocket Lab can earn these profit margins is because it doesn’t have to budget for the cost of paying someone else to launch its satellites into space. Rocket Lab has its own rockets that can do that.

It’s also nice to be the boss

A second way Rocket Lab seems likely to grow its profit margins is illustrated by the difference in terms of satellites built between its two biggest contracts. Compare the Space Force contract with the similar-sized contract Rocket Lab won from Canada’s MDA in 2022.

In the Space Force contract, Rocket Lab is paid $515 million to act as a prime contractor to the Pentagon, hiring subcontractors to help it with the work, but keeping most of the payment for itself. In contrast, Rocket Lab is itself a subcontractor on the MDA contract, building satellite buses (i.e. chassis) that MDA will turn into complete satellites for its customer Globalstar. Although the two contracts are similar in scale (the Space Force contract is for 18 satellites; the MDA contract is for 17 satellite buses), the MDA contract pays Rocket Lab only $143 million — just 28% of the value of the Space Force contract.

The upshot for Rocket Lab investors

It’s probably no coincidence that analysts who follow Rocket Lab now expect the company to earn its first GAAP net profit in 2027, the year it’s due to deliver its satellites to Space Force. Clearly, it’s more lucrative to be a prime defense contractor than a subcontractor.

And now that the Pentagon has approved Rocket Lab to perform this function, the company can expect future contracts to be significantly more rewarding.



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