Rocket Lab Stock Falls Back Down to Earth
Kids who want to be astronauts epitomize the primal desire we all have to discover the unknown. Now that our small planet can be explored by generally anyone with resources, space is truly the final frontier. Investors seem to find the NewSpace thesis particularly alluring because it’s filled with excitement and exploration of the unknown. It’s also filled with lots of risks as you would expect from any company that makes a living sending canisters of fuel rocketing into space with millions of dollars’ worth of cargo attached.
When you couple a rocket company with a charismatic Kiwi leader who is an absolute legend, you get Rocket Lab (RKLB), a company that’s attracted a solid fan base on Twitter of people who show their adoration for the stock with a little rocket icon. And they weren’t happy at all when we published a piece in November 2021 titled Why We’re Avoiding Rocket Lab Stock – RKLB in which we said the following:
Rocket Lab shares would need to trade at $5.14 before we’d consider buying them based on 2021 revenues. Smart investors don’t buy into hype, and there appears to be plenty of that right now.Nanalyze
Since we published that piece, shares of Rocket Lab have fallen 50% vs. a decline of 12% for the Nasdaq over the same time frame. That’s excellent news if you’re a Rocket Lab cheerleader because you can now buy the same quality company at half the price. Even better, Q4-2021 revenues came in at quite a bit more than expected, so our simple valuation ratio is dropping like a rock along with the stock. Today, we’re going to peruse the Rocket Lab 10-K to see if we’re any closer to liking Rocket Lab now that the hype has been dialed down a bit.
Rocket Lab’s 10-K
Overall, the company reported 2021 revenues of $62.2 million vs. their guidance of $69 million, a shortfall of about 10%. The company divides revenues into two streams – “Launch Services” and “Space Systems.”
Let’s start by looking at Rocket Lab’s core offering – launching rockets into space – which is a revenue segment aptly titled “Launch Services.” The company built approximately eight launch vehicles per year in 2020 and 2021 and launched seven vehicles in 2020 and six vehicles in 2021 (the decrease in launch cadence was partially because of – wait for it – the Rona).
The 10-K provides us with key metrics around the profitability of launches over the past several years:
Revenue per launch: $8.1 million
Cost per launch: $9.2 million
Revenue per launch: $5.5 million
Cost per launch: $6.5 million
The increase in cost per launch for 2021 was driven by stock-based compensation charges related to the SPAC offering (something that’s becoming a recurring theme now with SPACs) and “lower manufacturing absorption driven by COVID-19 impacts.” Launch services revenue for 2021 was $39.0 million (vs. a SPAC deck estimate of $49 million), an increase of $5.9 million, or 18%, over the year prior. You may be wondering why the math doesn’t add up (6 launches X $8.1 million = $48.6 million, not $39 million) but that’s probably because of their failed launch in May of 2021.
What will bring launch costs down significantly is reusability of the rocket’s components. Up until now, Rocket Lab has not yet reflown any of the recovered first stages they’ve been plucking out of the ocean. This month, Rocket Lab plans to recover a first stage with a helicopter and reuse it, a significant milestone towards bringing down the cost of launches. Expect the stock price to react accordingly. Or not. Trying to speculate on the outcome of events is best left to punters in Brixton.
Where Rocket Lab was able to exceed SPAC deck forecasts was for the “Space Systems” revenue segment which came in at $23.3 million for 2021 vs. the $20 million promised. That’s primarily because of acquisitions they’ve been making which included several in 2021.
- Advanced Solutions (October 2021) – engineering company that develops flight software, simulation systems and guidance, navigation and control systems.
- Planetary Systems Corporation (Nov 2021) – develops lightweight hardware that streamlines the process of attaching spacecraft to rockets and releasing them in space while ensuring they’re protected during the journey to orbit.
One interesting table Rocket Lab provides in their 10-K is a pro-forma look at how revenues would have looked like if both acquisitions were completed in January 2020. This helps us understand the impact these acquisitions will have on the top and bottom lines going forward.
The above doesn’t take into account the acquisition of SolAero Technologies – one of the world’s leading manufacturers of highly efficient, radiation hard solar cells – which closed in the first quarter of 2022 at a cost of $80 million.
Acquisitions are usually useful for reducing customer concentration risk, something that Rocket Lab needs to focus on. For the year ended December 31, 2021, their top five customers together accounted for approximately 69% of revenues with two customers accounting for 56% of revenues.
Another good bit of news – U.S. government revenues fell from 25% in 2020 to 8% in 2021. An overreliance on the U.S. government is a red flag because they’re a customer that has every bit of leverage at the negotiating table, something Palantir investors have been finding out the hard way.
Rocket Lab didn’t provide full-year guidance for 2022, but they did say that 60% of their $241.5 million backlog (as of December 31, 2021) would be recognized in “the next twelve months.” That’s at least $145 million, but then their Q4-2021 results deck talks about how the backlog jumped to $545 million by the end of February 2022, so we should certainly expect more. Of course, these are all fixed-price contracts that can be terminated at any time, so there are two numbers we’re holding the company to – the $176 million in 2022 revenues promised in their SPAC deck and the $42 to $47 million they’re forecasting for Q1-2022:
Those numbers should be out soon, so let’s assume they hit the bottom end of that guidance with $42 million in Q1-2022 revenues. Here’s what our simple valuation ratio looks like:
- Market capitalization / annualized revenues
3,625 / ($42 X 4) = 22
That’s a whole lot better than the last time we checked, but still rich compared to a handful of other space SPACs with revenues.
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Provided Rocket Labs hits their forecast for Q1-2022, the stock wouldn’t be considered wildly overvalued on its own, though more richly valued that its space peers. But when the company’s fearless leader eats his own hat – literally – because he said he would, there’s something to be said for that.
Going Long Rocket Lab Stock
Space is an exceptionally risky place to operate, and we’re not inclined to take on extra risk in 2022 given all the uncertainty in the air. Sure, be greedy when others are fearful, but we’re not convinced there’s true fear being felt right now in the markets (as gauged by the VIX). Rocket Lab’s revenue diversification is looking a whole lot better following their acquisitions, and it’s likely to improve even further following their biggest acquisition yet – SolAero – which hasn’t been aggregated into the financials yet. Once that happens, we should see more consistent quarterly revenues which should make our simple valuation ratio more useful over time.
Hype always subsides over time. When too many cheerleaders come around to condemn anyone who suggests their sacred cow has shortcomings, that usually translates to a rich valuation. Rocket Lab stock has settled down to a more reasonable valuation and, most importantly, they’ve provided us with sufficient information to make an informed investment decision.
We’re moving Rocket Lab from an “avoid” to a “like” in The Nanalyze Disruptive Tech Stock Catalog because we like the direction they’re taking with revenue diversification, the clarity of metrics they’re providing for the Launch Services segment such as profitability, and a valuation that isn’t excessive. The company may just find a place in The Nanalyze Disruptive Tech Portfolio Report as well. As for the company ever finding a home in our own tech stock portfolio, that’s information only Nanalyze Premium subscribers are privy to.
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