Up 600% in the Last 12 Months, Is It Too Late to Invest in Rocket Lab Stock?

Key Points

• The upstart rocket launch service provider is nipping at SpaceX's heels.

• The company is going to debut its next rocket called the Neutron later this year.

• Even though it is growing quickly, Rocket Lab's stock is overvalued at today's prices.

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Forget waiting for the SpaceX initial public offering (IPO). Investors in Rocket Lab (NASDAQ: RKLB) are seeing meteoric gains in the past year. The fast-growing space flight company's stock is up well over 600% in the last 12 months, driven by increased launches and progress for its new, larger rocket -- the Neutron. With the U.S. government backing the company with grants and contracts, investors are betting big that Rocket Lab can be one of the next big space contractors, taking advantage of this fast-growing sector.

With the stock up so much, investors looking to buy today may think they have missed the boat on Rocket Lab. But is that true? Let's dive into the numbers on Rocket Lab and see what investors can expect if they buy the stock today.

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Big investments, government support

Space economy companies have built a huge backlog of contracts to send devices such as satellites into orbit. Except for SpaceX, the actual rocket launch providers have fallen well behind the demand for launch contracts, creating a monopoly for the privately held company valued at $400 billion. Plus, SpaceX is now competing with its customers on its Starlink satellite internet service.

This has created an opportunity for new rocket launch providers to enter the sector if only they could start reliably launching for these customers. Rocket Lab has inched its way ahead of the pack as the second viable solution for satellite providers with its Electron system. This small payload rocket just performed its 70th mission and has a sizable backlog of customers across the U.S. government and private commercial players.

Along with Rocket Lab's space systems segment that helps manufacture items like satellites for these contract customers, Rocket Lab's revenue has exploded higher. Since going public in 2021, overall sales are up a cumulative 800% to $504 million. This makes Rocket Lab one of the fastest-growing businesses in the world.

Seeing this performance has made the U.S. government interested in Rocket Lab as the next key space contractor. It recently granted Rocket Lab a $24 million award for building semiconductors and sensors for space systems in order to maintain a homegrown supply chain. Along with large contracts across various government agencies, the government has a stake in helping Rocket Lab succeed as a company.

Image source: Getty Images.

Keep a close eye on the Neutron rocket

Even though Rocket Lab is the only other launch provider besides SpaceX regularly performing missions, it is still a small player due to the size of the Electron rocket. But Rocket Lab is in the process of developing and testing its next rocket type called the Neutron that will come with over 10 times the payload capacity of the Electron. This will greatly increase the contract size of each mission, which will lead to more revenue-generating potential for Rocket Lab and the potential to steal contracts from SpaceX.

Management believes it will perform its first test flight for the Neutron later this year. It recently unveiled a new launch facility for the Neutron in Virginia, a huge step forward toward testing. Investors need to watch the development of the Neutron closely as it will bring about the next leg of growth for Rocket Lab. The Electron is great, but it is still a niche product.

The Neutron will allow Rocket Lab to directly compete with SpaceX. At an estimated per-launch revenue of $50 million or more, the Neutron can also lead to a huge boost in revenue if Rocket Lab can start regularly launching the rocket multiple times per year.

RKLB Revenue (TTM) data by YCharts.

Is it too late to invest in Rocket Lab stock?

For investors looking at Rocket Lab's business, the future looks bright. It is developing innovative space technology, has the wind at its back from industry demand, and has the U.S. government supporting its product development. I wouldn't be surprised if Rocket Lab were generating well over $1 billion in revenue within a few years time.

The problem comes when looking at Rocket Lab's valuation. The stock has a market cap of $24 billion, or a price-to-sales (P/S) ratio of 47. This is a premium valuation -- to put it lightly -- and it means that investors are placing high expectations on future growth for this space stock. Launching rockets is not a high-margin business, either. Rocket Lab's gross margin is just above 30%, a figure it expects to keep climbing but likely not exceed the 40% to 50% range over the long term.

Low gross margins limit Rocket Lab's bottom-line profit potential. Even if the company reaches $5 billion in annual revenue, a 10% bottom-line margin equates to just $500 million in annual earnings, or a price-to-earnings (P/E) ratio of 48, meaning the stock would still trade at a premium earnings multiple even if revenue goes up by 10 times.

It is clear that Rocket Lab is overvalued today. Investors should avoid buying the stock after its monster run over the past 12 months.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Rocket Lab. The Motley Fool has a disclosure policy.