With A 26% Price Drop For Rocket Lab USA, Inc. (NASDAQ:RKLB) You'll Still Get What You Pay For

Rocket Lab USA, Inc. (NASDAQ:RKLB) shares have had a horrible month, losing 26% after a relatively good period beforehand. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 392%.

Even after such a large drop in price, given around half the companies in the United States' Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 2.4x, you may still consider Rocket Lab USA as a stock to avoid entirely with its 30.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Rocket Lab USA

How Rocket Lab USA Has Been Performing

Rocket Lab USA certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Rocket Lab USA's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Rocket Lab USA would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 54% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 49% each year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 8.0% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Rocket Lab USA's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Rocket Lab USA's P/S Mean For Investors?

Even after such a strong price drop, Rocket Lab USA's P/S still exceeds the industry median significantly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Rocket Lab USA maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Rocket Lab USA that you should be aware of.

If these risks are making you reconsider your opinion on Rocket Lab USA, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.