3 Reasons to Avoid RKLB and 1 Stock to Buy Instead

Over the past six months, Rocket Lab has been a great trade, beating the S&P 500 by 12.9%. Its stock price has climbed to $26.26, representing a healthy 14.6% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Rocket Lab, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Rocket Lab Not Exciting?

Despite the momentum, we don't have much confidence in Rocket Lab. Here are three reasons why we avoid RKLB and a stock we'd rather own.

1. EPS Trending Down

We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Rocket Lab’s earnings losses deepened over the last three years as its EPS dropped 87.4% annually. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Rocket Lab’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 57.3%, meaning it lit $57.27 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Rocket Lab burned through $177.1 million of cash over the last year, and its $489.7 million of debt exceeds the $303.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Rocket Lab’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Rocket Lab until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Rocket Lab isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at $26.26 per share (or a forward price-to-sales ratio of 21.2×). The market typically values companies like Rocket Lab based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward a top digital advertising platform riding the creator economy.

Stocks We Would Buy Instead of Rocket Lab

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