As we promised (like two months ago?!?), we’ve finally gotten around to our deep dive on Rocket Lab (RKLB). Here’s our general outline of our top-down research on the company.
The “space economy” and how it operates
The “space economy” has become one of those social media-fueled investment buzz-word themes, albeit one that keeps re-occurring every few years. And perhaps for good reason. Closely tied to government spending, defense contracts, and a small but fast-growing commercialization of the space just above Earth’s surface, the “space economy” is actually quite large and growing.
Herein lies the first concern investors should have, though. The U.S. is far and away the biggest spender on space programs (data compiled by Statista: https://www.statista.com/statistics/745717/global-governmental-spending-on-space-programs-leading-countries/). With Musk’s DOGE trimming (or gutting, it’s hard to tell exactly what’s going on) various departments of the U.S. government, the space economy could take a hit. We’d assume SpaceX would suffer no such harm…
But of course there are rumblings from Western and Northern Europe, ready to inject fiscal stimulus into the economy in defense of Ukraine and other geopolitical turmoil. Perhaps, taken collectively, Europe could offset any budget cuts to U.S. space programs in the next year or two?
As with any industry, there’s a whole complex supply chain behind the ultimate satellites and communications services being built in orbit around Earth. Let’s refer to our old friend, the Hierarchy of the Economy chart.
Humans traveling into space (or more accurately, Earth’s orbit), entering the fourth quarter of its first century of history, was built at the intersection of electronics and rocketry technology. To this day, data and components based on these congruent techs still form the basis of the “space economy.” This is yet another reason we like chips that sell industrial and goverment/defense semis. They’re usually profitable ways to play space investing.
The infrastructure layer is what we’ll discuss today, as Rocket Lab is primarily playing in this part of the supply chain. But there are the beginnings of a product/service business being built here — much like SpaceX’s Starlink satellite-based internet service has created a recurring revenue stream atop the rocket (infrastructure) portion of SpaceX.
You’ll see commonality here with other industries we invest in. We like vertical integration, where a company is able to scale across its supply chain. Oftentimes this means creating the “hardware + software” type of business.
We actually have some experience in this particular market. Nearly a decade ago, we invested in a small LEO (low-Earth orbit) communications business called Iridium Communications (IRDM). We made a healthy profit, buying at sub-$8 and selling at an average of just over $40 during the pandemic.
It was a different era (0% interest rate environment), but the mid-term investment thesis was simple: Iridium was launching its NEXT satellite constellation into orbit to support its bandwidth-speed data and communications service. They were utilizing payload services from SpaceX to get the constellation in place. And as Iridium completed this project, there was a clear path to free cash flow (FCF) profitability.
The problem, though, was Iridium was lacking that infrastructure layer to the business. The NEXT constellation would soon be outdated, with service revenues (and thus cash flows) capped over time. Within a decade or so, our hunch was Iridium would get stuck in yet another nasty CapEx cycle, reliant on launch services like SpaceX. And so we took the profit and moved on.
But that’s the potential beauty of a company like Rocket Lab. It has built that crucial infrastructure layer. It offers launch services to government departments and a growing list of commercial customers with space-based service and R&D applications.
Rocket Lab has been steadily building this infrastructure layer, as well as parts and component manufacturing capabilities. For example, in early 2022 not long after its SPAC IPO, Rocket Lab acquired a small solar power manufacturer based in Albuquerque called SolAero. This little facility was awarded U.S. CHIPS Act funding (since solar panels are a semiconductor, made from a base of silicon). https://www.nist.gov/chips/rocket-lab-new-mexico-albuquerque
The old SolAero facility is one of two of its kind in the U.S., the other being a Boeing subsidiary.
Rocket Lab competitors and peers, and a potential edge in the new space race
Anyways, as RocketLab has organically grown and acquired its way into more space infrastructure, it’s going to increasingly rub shoulders with some very large defense and aerospace contractors. There are other privately held startups swimming in this growing space launch services pond too — Jeff Bezos’ Blue Origin being one, and another called Relativity Space that just landed none other than former Google CEO Eric Schmidt as CEO. https://spacenews.com/relativity-names-eric-schmidt-as-ceo-as-it-updates-terran-r-development/
Besides this list, there are numerous small contractors that also compete in building electrical and rocket parts and components. Some of them include Curtiss-Wright Corp (CW), Woodward (WWD), StandardAero (SARO), and BWX Technologies (BWXT), to name just a few.
Note that we have Rocket Lab “and peers” on the above slide. Technically, Rocket Lab’s “Electron” rocket is classified as small (see picture below of the launch site and rocket). Electron is suitable for launching small satellites and space vehicles. The “Neutron” is classified as mid-sized. By contrast, SpaceX’s rockets are large. Think of it a bit in terms of trucks. Rocket Lab offers smaller pickup trucks, versus SpaceX specializing in big semitrucks.
There is a lot that goes into comparing the cost per mission-to-payload (satellites and other space vehicles delivered via the rocket) stat, and so we call these companies generally peers, although they sometimes compete for the same contracts.
What’s also interesting about these rocketry startups, besides the rockets themselves being re-usable, is that they manufacture a lot of the components using 3D printing. Rocket Lab — a space economy and 3D printing stock all-in-one? We can hear the excitement brewing…
Here’s a link to the Electron rocket, complete with an epic video of a used rocket being recovered. https://www.rocketlabusa.com/launch/electron/
Rocket Lab also acquired facilities in New Zealand in late 2023 to support its primary launch site (a unique agreement allows U.S. govt missions to be launched from this location). A second smaller site is located in Virginia, which also supports small satellite launch missions. https://www.rocketlabusa.com/updates/from-sea-to-skies-rocket-lab-acquires-sailgp-technologies-facilities-and-team-in-warkworth-new-zealand/
Let’s circle back to our Economic Hierarchy table, though. Starting from the middle infrastructure layer, and via acquisition (like the solar power one, as well as a space software startup a couple years ago), Rocket Lab seems to be building one of those vertically integrated, end-to-end businesses that can deliver great shareholder returns. Does it have an edge over its older peers in the space economy? Let the sales growth be your guide.
The story Rocket Lab’s financials is telling
Rocket Labs has been growing fast since its SPAC IPO. However, it has been growing off of a small base. “Launch Services” have been increasing at a brisk pace, but the expansion of the “Space Systems” sales (for critical parts to satellites) in particular has been growing fast. Can Rocket Lab develop into a product-focused company, complete with supporting launch service infrastructure?
Some key performance indicators (KPIs) indicate Rocket Lab is certainly headed in the right direction. It launched 16 rockets last year, with average revenue per launch creeping up. All the while cost per launch has been decreasing. There could be some great scalability, though the company is still in the early innings of developing.
However, and this is a big HOWEVER for would-be investors to be aware of, Rocket Lab still loses money on these launches. Gross margin is climbing, up to 26% gross margin last year. But once you add in hefty operating expenses, including CapEx for development of rockets and manufacturing facilities, both GAAP earnings and FCF are deeply in the red.
And so you might be wondering, how hasn’t this company from the 2021 SPAC IPO class burned through all its cash faster than a SpaceX Starship rocket can “disassemble” shortly after liftoff? Take a look, the cash and equivalents balance actually increased from 2023 to 2024, even as FCF stayed negative.
The secret can be found in Rocket Lab’s rising share count. (Not what the diligent value investor wants to see, AMIRITE?)
Indeed, Rocket Lab announced another (aptly and ironically defined financial acronym) ATM (“at the market”) program on March 11, 2025. Basically, Rocket Lab can issue and sell new stock into the publicly-traded pool at its discretion to raise more cash.
As long as various profit metrics are negative (operating at a loss), dilution isn’t such a bad thing. If you own RKLB, the only thing getting diluted are losses! But if RKLB starts turning a profit, especially on an FCF basis, we’d want to see ATM programs like this go away.
Rocket Lab said it will be using some of these ATM proceeds to pay for the pending acquisition of laser communications equipment manufacturer Mynaric, based in Germany and pending approval in German courts since Rocket Lab is trying to pay a fraction of what was invested into the failed Mynaric startup.
When will Rocket Lab start turning a profit?
One initiative, besides the pending purchase of Mynaric, is an sea-based platform for the mid-sized Neutron rockets to land on. The platform has another ironic name, “Return On Investment.” Either this is a brilliant business in the making, or a horrible (good?) joke being played on Wall St.
Rocket Lab expects this platform to ship out in 2026.
Quick word on guidance: Revenue can be very lumpy for this business. Growth at the midpoint implies 29% YoY growth. Perhaps the pace will pick up with more Neutron missions? Expect losses to continue throughout this year.
Wall St. analysts agree on the 2025 FCF outlook. Thus the ATM program. Analysts have FCF turning positive in 2026 though. We aren’t so sure. We’d expect gross margin would need to be well over 30% before this can happen, with more missions and revenue-per-mission creeping up for operating expenses to reach a more sustainable scale.
And of course, there’s the question over U.S. government spending this year and next. This could also be a potential setback.
In all, we don’t have room to invest in a loss-making startup like this one, trading for an enterprise value (EV) of $8.5 billion — or ~15x EV to expected 2025 sales. For an infrastructure and hardware-based business like this one, with growth potentially slowing, and still operating at an FCF loss, that seems like a steep price tag. We suspect a lot of investors are using Rocket Lab as a proxy for investing in SpaceX, given it’s a private endeavor. Investing on that type of narrative seems risky right now.
However, if we were to see RKLB fall to below 10x forward EV/sales, and assuming the story hasn’t changed (say 30%+ expected sales growth and continue scale-up towards FCF breakeven), maybe we’d be interested in firing up a very small starter position. (A starter position for us is less than 0.5% of our portfolio.) Until then, we see too many potentially good deals to be had after the market correction to justify buying RKLB at this time. Perhaps we’ll circle back again later.
