80% Drop: What’s Happening to Rocket Lab Stock?

rocket lab (RKLB 1.60%) It is the only company other than SpaceX with spacecraft re-entry capabilities. But as we sit here today, the company’s stock is worth only $2 billion, compared to SpaceX’s reported valuation of $200 billion as a private company.

Rocket Lab fell 80% from its peak at a time when many technology stocks were soaring. To be fair, the company is smaller and more embryonic than SpaceX, but it is the only private rocket company that can consistently provide spaceflight services to its customers and is worth only 1% of SpaceX’s value.

Let’s find out why Rocket Lab’s stock price has fallen so much and whether investors should buy at this price.

We’re not making any money, but we’re making great progress.

To enter the spaceflight business, Rocket Lab began operations with a small payload rocket called Electron. It currently launches about four Electron rockets each quarter and plans to grow in the coming years. In Q1 2024, Rocket Lab generated $32.7 million in launch revenue, up from $19.6 million in Q1 2023.

In addition to rocket launch contracts, Rocket Lab also produces space systems for customers. This includes solar panels, a space capsule, and software systems for mission operations. That’s actually a larger portion of its revenue, which brought in $60 million last quarter.

Rocket Lab has seen its revenue grow significantly over the past few years. It has increased by 400% since listing in 2021. Gross margins also improved significantly as manufacturing locations achieved greater scale. Gross profit was negative a few years ago but has been positive at $69 million in the past 12 months.

Public market investors love profits. If a company is to self-fund its ambitions and see its share price rise, it will need at least gross profits to continue higher. Building these difficult technologies requires significant research and development costs and capital expenditures. Rocket Lab generated no free cash flow, burning through $137 million in the last 12 months.

The company has over $500 million in cash on hand to provide a large runway for further investments, but it does not have unlimited funds at its disposal.

RKLB Total Margin (TTM) data from YCharts.

When will the neutron rocket launch?

Eventually, Rocket Lab will have to start generating revenue. Otherwise, stocks will have no choice but to fall. How do you plan to do that? One product is better than the other. It’s a large payload neutron rocket.

Continuing with the atomic nomenclature, the Neutron will have a much larger payload per launch than the Electron. In the rocket launch business, more weight means more profit. All other conditions are the same. Once Neutron is up and running on a regular basis, it will help turn launch segment revenue from $30 million per quarter to perhaps hundreds of millions of dollars. Neutron development involves a lot of upfront costs, which is a big reason why Rocket Lab is currently unprofitable.

The first launch schedule has been pushed back several times, and executives now believe it could be ready in mid-2025. Investors should track this timeline because it is a big part of the business thesis. Without the Neutron rocket, it’s hard to see how Rocket Lab could generate positive free cash flow. The pushed back schedule is likely why the stock has suffered.

Size this location carefully.

If Rocket Lab carries out its plan, its stock price will be much higher 5 to 10 years from now. It could increase its annual revenue tenfold and become the second-largest company in the rocket launch space, along with SpaceX. Its current market capitalization of just $2 billion could eventually bring it much closer to SpaceX’s $200 billion valuation.

But that doesn’t mean you should go “all in” on Rocket Lab stock. There are many things that can go wrong with an early-stage business burning a lot of cash. If the neutron rocket can’t work, the fall in Rocket Lab stock could be steep. Stock investors could be completely wiped out.

Taking both of these factors into account, smart investors would take a small position in Rocket Lab if they were looking to purchase a stake for their portfolio. If the stock does well, you could still be a big winner. However, even if it becomes 0, it is not a big loss.