Here’s why Rocket Lab stock’s 69% growth isn’t enough.

small rocket builder rocket lab (RKLB -4.78%) It’s accelerating rocket launches faster than SpaceX, growing revenue 69% annually, and moving closer to profitability.

Still, investors may be wondering. Why has Rocket Lab stock fallen more than 50% since its 2021 IPO?

Rocket Lab 1st quarter performance report

Rocket Lab reported its earnings on Monday, May 6th. The company reported a 69% increase in revenue to $92.8 million and a roughly 10% decrease in losses, despite a significant increase in spending on research and development for its new Neutron reusable rocket.

Despite rapid growth and improving earnings, the stock initially sold off on the news. It then rebounded somewhat, rising about 5% by Friday’s close. However, considering the high sales growth rate, it is not yet a large level. So what else did Wall Street expect to see in Rocket Lab’s report?

Well, perhaps for a growth stock like Rocket Lab, the Street wanted more growth. Most analysts expected Rocket Lab to report first-quarter revenue of $95 million, according to data from TheFly.com. Rocket Lab earned $92.8 million from this. did In Wall Street’s opinion, we report a “failure.”

Rocket Lab 2nd quarter forecast

But the problem is this: If Rocket Lab ‘missed’ its revenue goals in the first quarter, it will likely ‘beat’ expectations in the second quarter and beyond. Here’s why:

Late last year, Rocket Lab won its largest-ever contract, a $515 million contract from the U.S. Space Force to design, build and operate 18 new missile warning satellites under the Space Force’s Proliferated Warfighter Space Architecture (PWSA) program. The contract was announced.

Rocket Lab has already begun work on this contract, selecting subcontractors and conducting preliminary design studies for the satellites to be built. In the coming quarters, the company will begin building satellites and receive payment for production by 2027. Beyond that, the company will receive additional funding to operate satellites in orbit until at least 2030 and possibly 2033.

and Rocket Lab Could Potentially Win more When you sign a contract to launch a satellite into orbit, you need money.

Having your own rocket is a great thing

This last point highlights the interesting nature of Rocket Lab’s business, where one half of the company makes all the money and the other half of the company helps the first half get the deal done in the first place.

Think about it: Rocket Lab started as a space stock manufacturer of small rockets. We still do that. But the company has evolved into an end-to-end provider of space services, providing components for other companies’ satellites, building its own satellites, and having the rockets it uses to launch those satellites into orbit. And according to the company’s financial statements, the real money in space comes from new businesses Rocket Lab is entering.

Rocket Lab’s production of “space systems” (satellites and satellite components) generates a gross profit margin of 25%, according to data from S&P Global Market Intelligence. That’s double what the company gets from its launch services segment. But one of the reasons Rocket Lab is able to achieve such profit margins is because it doesn’t have to budget for paying someone else to launch its satellites into space. Rocket Lab has its own rocket that can do this.

It’s okay to be the boss

The second way Rocket Lab can increase its profit margins is explained by the difference in satellites built between its two largest contracts. Compare the Space Force contract with a similarly sized contract awarded by Rocket Lab to Canada’s MDA in 2022.

In the Space Force contract, Rocket Lab will receive $515 million to serve as the Pentagon’s prime contractor and will hire subcontractors to help with the work, but will keep most of the payments itself. In contrast, Rocket Lab itself is a subcontractor on MDA’s contract, building satellite buses (i.e. chassis) that MDA will convert into full satellites for its customers. global star. Although the two contracts are similar in size (the Space Force contract is for 18 satellites and the MDA contract is for 17 satellite buses), the MDA contract only pays Rocket Lab $143 million. This is only 28% of the value of the Space Force contract. .

Results for Rocket Lab Investors

It’s probably no coincidence that analysts who follow Rocket Lab now expect the company to earn its first GAAP net profit in 2027, the year it plans to deliver a satellite to the Space Force. Clearly, it is more profitable to be a major defense contractor than a subcontractor.

And now that the Department of Defense has approved Rocket Lab to perform this function, the company can expect future contracts to be even more rewarding.