Neutron Launch And Flatellite Production Will Unlock New Markets

Key Takeaways

• Rocket Lab's strategic focus on end-to-end space services and Neutron development aims to capitalize on medium-class launches and boost long-term revenue growth.
  
• Increasing Electron launch cadence and new products like Flatellite are expected to enhance cost efficiency and margin expansion, improving earnings prospects.
  
• Execution risks, supply chain issues, and reliance on large contracts could affect Rocket Lab's profitability, cash flow, and revenue predictability amid increased competition.

Catalysts

A space company, provides launch services and space systems solutions in the United States, Canada, Japan, and internationally.

• Rocket Lab's increasing focus on end-to-end space services, including the development of the Neutron rocket for medium-class launches, positions the company to capitalize on the deployment of an estimated 10,000 constellation spacecraft in the next decade, potentially driving significant revenue growth.
  
• The company anticipates greater margin expansion as Electron's launch cadence continues to increase and as Space Systems scales, suggesting improvements in net margins and earnings.
  
• The introduction of new products such as Flatellite, a mass-producible satellite for large constellations, alongside internal manufacturing capabilities, could enhance cost efficiency and expand market opportunities, potentially impacting revenue and long-term growth.
  
• Investment in launch infrastructure and Neutron development, including reusable features that could enhance cost-effectiveness, aims to tap into demand from commercial constellations and national security, supporting long-term revenue prospects.
  
• Rocket Lab's strategic position to secure large contracts within the growing defense and national security sectors, alongside its robust backlog, suggests a promising outlook for sustainable revenue and earnings growth.

Rocket Lab USA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rocket Lab USA's revenue will grow by 41.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -43.6% today to 4.8% in 3 years time.
• Analysts expect earnings to reach $59.1 million (and earnings per share of $0.11) by about May 2028, up from $-190.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $94.0 million in earnings, and the most bearish expecting $27.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 181.9x on those 2028 earnings, up from -53.4x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 31.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

Rocket Lab USA Future Earnings Per Share Growth

Risks

• The aggressive timeline for the Neutron launch, despite being pushed to the second half of 2025, presents significant execution risk. Any delays in achieving this milestone could lead to increased R&D costs and impact projected revenues from Neutron launches.
  
• The reliance on external contractors and supply chain issues for large structures and components could further delay rocket production and elevate costs, impacting profitability and cash flow.
  
• The potential backlog lumpiness due to reliance on large contracts, particularly in the Space Systems segment, could result in fluctuating revenues and operational unpredictability.
  
• Increased competition and pressure for timely execution on contracts, particularly in defense and space systems markets, may impact Rocket Lab's ability to secure future revenues if it does not maintain its current technological edge.
  
• The plan to invest in space applications with the new Flatellite product entails substantial upfront investment, potentially impacting near-term net margins if the company does not capture sufficient market demand quickly.

Valuation

• The analysts have a consensus price target of $24.605 for Rocket Lab USA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $14.35.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $59.1 million, and it would be trading on a PE ratio of 181.9x, assuming you use a discount rate of 6.3%.
• Given the current share price of $22.4, the analyst price target of $24.6 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.