Eonen/E+ via Getty Images
Rocket Lab (RKLB) is a company involved in the expansion of the space economy, and in this article, I will explore whether RKLB is a good way for investors to achieve above-market returns in the sector. The first section of the article will examine the two segments of the business, launch services and space systems. Then I’ll go into detail about some of the good things about the company’s balance sheet and backlog. Finally, I’ll look at how these elements fit into a valuation of the business and spend some time detailing what needs to go right for this to become viable (given that the business is currently not profitable ). All financial data extracted from the article will relate to the 9 months ending in 2021, which can be found on the 10Q here.
Overview of segments
Rocket Lab divides revenue into two segments: launch services and space systems. Launch Services provides launch services to customers on a one-to-one or carpool basis. It is the largest source of revenue with 25.102 million revenue so far in 2021 compared to 18.225 million in 2020. So far, the segment has a loss of 15.014 million in the third quarter of 2021. The company also provides a very useful statistic in its quarterly filings like how each launch affects the company’s revenue and bottom line. Basically, they give a value for the cost of each launch and the revenue for each launch. In 2020, the RPL (revenue per launch) was 5.8 million and in 2021 the RPL is now 8.8 million, an increase of 65%. The CPL (Cost Per Launch) was 6.7 million in 2020 and 10.1 million in 2021.
The company’s other segment, Space Systems, accounts for a smaller portion of revenue at $9.557 million and has a profitability of $6.430 million. This segment focuses on spacecraft engineering, program management, satellite components, spacecraft manufacturing and mission operation. Since 2020, this segment has seen revenue growth of a multiple of almost 8 and profitability growth of a multiple of 15. Given that they are outside of very low levels compared to the year previous, the segment clearly has some momentum behind it at the moment. .
Solid cash position and order book
In addition to Rocket Lab’s positioning in an expanding industry with solid revenue growth, the company also has cause for celebration financially. The company currently has a very strong cash position with nearly $792 million in cash equivalents with total liabilities of approximately $281 million. This gives them plenty of room to acquire more businesses and invest in themselves to continue contributing to their growth. The backlog also appears healthy with a backlog of $183 million, 52% of which is expected to be received next year, suggesting that demand for the company’s services is strong.
Evaluation and what needs to go well
As of this writing, RKLB is not profitable and is valued at $4 billion. It looks like revenue could be around $40-50 million for 2021, so even at the high end of that range that’s a sale price of 80. At those levels, there’s no room for a stumble in execution on the part of the company. The company must continue to increase its revenue with each successful launch, and it must also increase the number of launches in which it participates.
On last quarter’s earnings call, an analyst asked when they might hit a previously stated target of 132 launches per year. Management responded by describing this as a “high number”. Indicating that we are probably a long way from that goal given that no approximate time frame has been suggested. So we can say that this goal is 7-10 years, but again there is no guarantee on that. If we look at that target and what it would bring based on current revenue per launch numbers, that would translate to revenue of $1.161 billion, which makes this company currently trading at around 3x its sales for 7 years or more.
However, it’s part of management’s plan to increase the amount of revenue they get per launch, which they’ve done successfully, so it’s likely that number could increase in the coming years as the company continues to acquire other companies and expand its offerings. However, the unresolved issue was how, even though the revenue per launch is growing very well, the loss per launch looks pretty grim.
After acquiring more RPLs, the company then lost even more money with each launch (around $400,000 more per launch). If this habit of continuing to lose more money with each launch continues, the company will burn money faster and faster as it increases its turnover. This leads to my biggest fear for the company, which is that if earnings per launch doesn’t improve it will continue to burn cash indefinitely and in a few years it will be forced to raise more equity .
Investment thesis
I think the programs Rocket Lab is working on are very interesting, and I have a high degree of optimism that they can achieve great things in the space economy. This does not necessarily mean that it is a good opportunity for investors to make a return. At this time, I would only view this stock as speculation.
Going forward, I plan to pay attention to profit per launch, and if that number starts going in the right direction, I might consider making an investment. I think there is a good chance that in the future there will be a good opportunity to be invested in Rocket Lab, but for now I think it’s better to wait and see.
