Rocket Lab is a long-term buy compared to SpaceX, RKLB Q1 Earnings

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Rocket Laboratory (NASDAQ: RKLB) unveiled a new rocket called Neutron that is set to fly in 2024 and was inspired by SpaceX’s Falcon 9 (SPACE).

Meanwhile, as the graph shows below, its stock down more than 50% for a year, got a reprieve in May, after the Electron rocket successfully completed its 26th mission. Elon Musk’s announcement that he was seeking funding to value private company SpaceX at $125 billion also provided some stock support.

Data by Y-Charts

Thus, my mission with this thesis is to evaluate the logic of investing in Rocket Lab through a comparison with SpaceX which is now perceived as a standard bearer for space launches.

Electron from Rocket Lab

Rocket Lab’s Electron launch vehicle has been instrumental in deploying a total of 146 satellites into orbit to date. As a result, quarterly revenue grew to $40.7 million in the first quarter of 2022 (table below). As the first quarter ended in March, it does not include all revenue earned from the May 3 launch when 34 satellites were deployed.


Quarterly income statement (Looking for Alpha)

Revenues in the last reported quarter represented a growth of 48% compared to the previous quarter and a huge increase of 124% compared to 2021. On the other hand, there was a reduction in gross margins due to unforeseen expenses related the acquisition of SolAero, a company specializing in solar panels for space vehicles. Rocket Lab acquired the company in January this year for $80 million. There were also additional overheads related to a delayed Q1 launch.

Now, for those who enjoy watching rocket launches, it’s been fascinating to watch how SpaceX’s rockets, namely the first stage booster, return and land safely while the second stage proceeds to deploy satellites into orbit. . This is in stark contrast to the NASA or Russian Soyuz space missions we know well, where the propellant is usually lost when it crashes somewhere in the ocean. Thus, SpaceX is able to reuse a rocket for a second and a third, which not only saves on the costs of materials needed to manufacture a new vehicle, but also increases the frequency of launch.

Now, in an attempt to partially emulate SpaceX, Rocket Lab’s latest mission attempted to catch the rocket booster as it fell to the ground using a helicopter. The mid-air capture was only partially successful, as after hooking the rocket, the helicopter pilot had to drop it into the ocean where it was picked up by a dedicated ship. According to the company’s CEO, engineers are taking a close look at what’s left to assess which recall parts can be re-launched.

In the event that the rockets can be reused, this first means more launch revenue over a period of one year and, just as important, it also allows for an improvement in gross profits as production costs are reduced. So even though the Electron was not designed like SpaceX’s Falcon to be reusable, Rocket Labs is making efforts to capture it, paving the way for more sales.

Risks and income diversification

To this end, the company presents its revenues in two segmentsnamely launch services and space systems, as listed below.


Segment revenue (Rocket Lab IR)

A notable point here is that sales obtained from Space Systems gained momentum in the first quarter compared to last year and accounted for the bulk of the company’s revenue at 84%. This segment includes a wide range of services that cater to the satellite ecosystem, such as space engineering, spacecraft components, and manufacturing.

However, given the risks associated with launching a rocket, Space Systems is also synonymous with diversification. Moreover, if there is more competition in the launch services industry, the company can rely on this segment as another source of revenue. Space Systems is also more profitable, and its non-GAAP gross margins were 28% in the first quarter, compared to just 1% for Launch Services.

By thinking aloud, Rocket Lab can also expand other industry verticals, just as SpaceX has done with Starlink (STRLK) to rapidly deliver broadband communications services via satellite in many countries, including Ukraine. This represents a faster connectivity option instead of installing time-consuming fiber or deploying an expensive mobile wireless network.

The competition

Also with SpaceX, the company launched its Falcon 9 rockets 156 times since 2010. These have a payload of 22,800 kilograms for LEO (Low Earth Orbit) compared to 300 kilograms for the electron. With Neutron, Rocket lab will have a payload of 13,000 kg paving the way for it to compete more directly with SpaceX. That said, the Neutron has yet to be tested first, but its architecture will be based on the Electron which is operational with a strong track record of twenty six launches, including 23 successes and three failures.


SpaceX (SpaceX)

A failure occurred during an initial period when there was no satellite on board and after removing this test mission, I calculated that the company had a success rate of 92.3% (24 /26). It compares to 95.1% for SpaceX, which nevertheless has a lot longer story of flights with nine failures occurring from 2010 to 2019.

Thus, it is not a comparable comparison taking into account the number of thefts as well as the type of incidents encountered. Nevertheless, despite its newcomer status, Rocket Lab should be credited with rapidly developing its technology as the Neutron booster stage is intended to be reusable, just like SpaceX, in what has now become the new launch standard. aimed at reducing costs and increasing launch frequencies. .

Both companies have also positioned themselves to take advantage of the rapidly growing space launch services market, which is growing at a CAGR of 15.7% since 2020 and is expected to reach $32.41 billion by 2027. In this regard, Rocket Lab has signed a contract with NASA for lunar transport. CubeSats (small square-shaped satellites) using its Electron rocket with the launch window scheduled for this month. The company has previously deployed satellites into orbit for NASA in 2018. Any positive result could prove beneficial for the stock price, but any delay in launch can trigger volatility.

Evaluations and key points

In addition to space news events, there are also financial updates that can add volatility to the stock. So, after missing out on gains on May 16, it lost 19% of its value, despite battered earnings of $0.85 million. This shows that in a market where the value strategy predominates, investors tend to look primarily at profitability. Therefore, investors should be prepared for some short-term volatility.

Looking longer term and comparing it to SpaceX’s $125 billion valuations, Rocket Lab, with an enterprise value of just $1.82 billion, is undervalued by just under 70x. (125/1.82). That’s not fair considering its progress with small payloads and plans for bigger ones.

First, given the number of launches, SpaceX has 6 (156/26) times more spaceflights under its belt than Rocket Lab, and second, its payload capacity exceeds the latter by 76 (12800/300) times. By taking the average, I get 41 ((76+6)/2)) which represents the multiple by which Elon Musk’s company should be valued compared to Rocket Lab. So dividing SpaceX’s value by 41 equals $3.05 billion, which is a fairer value for Rocket Lab. This in turn leads to a target of $8.2 based on the current stock price of $4.9.

The company also has cash to fund its operations while suffering from a relatively low level of debt, as shown in the table below.


Key indicators (Looking for Alpha)

Continuing further, the company’s diversification path and capability as an end-to-end supplier is exemplified by orders for three Photon spacecraft, by Varda Space Industries, following a joint order agreement reached in August 2021. These orders for an undisclosed amount are expected to add to the approximately $300 million backlog that Rocket Lab had at the end of the first quarter.

By adopting a certain caution, there are risks that the title suffers a further decline as inflation bites harder, with some economists even speaking of a recession. For this question, the company earns a review rating of F as shown below and is rated “Strong Selling” by SA’s Quant.


Summary of Ratings and Factor Ratings (Looking for Alpha)

However, Rocket Lab can rely on wholesale (buying in bulk by customers) whereby the same rocket launch can be used to position relatively more satellites around the same orbit. This allows the company to maintain sales while keeping costs down to around $7.5 million per launch, an increase of $2.5 million from what was billed 3-4 years ago. . Therefore, the firm has pricing power.

Speaking of profitability, the real game-changer would be a successful hook-up of a drop booster by a Sikorsky 92 helicopter to be fully reused on the launch pad. It’s doable with a little more practice and a few tweaks. The company can also count on the expansion of its more profitable Space Systems segment.

Finally, after factoring in all the risk, Rocket Lab is a long-term buy at $4.9, and again taking the example of Elon Musk’s space venture, it’s a billion dollar market with huge opportunities for a reliable satellite launcher.

Michael J. Chiaramonte