Why investors are falling in love with this hypergrowth SpaceX competitor

The key is the flywheel that is built with all these possibilities. Rocket Lab is one of the few places a customer can go to get a reliable launch into orbit, making it much easier for the company to convince these customers of the capabilities of its space systems. The government thinks it’s a promising company too, with Rocket Lab recently signing a $24 million incentive deal as part of the new CHIPS Act to build semiconductors for space systems.

Longer term, investors should keep an eye on two developments for Rocket Lab to achieve its vertical integration ambitions. The first is the larger Neutron Rocket, which will increase its payload per launch and help it compete directly with SpaceX. The company has already signed up a customer for a Neutron launch, which is expected to debut in 2025.

Second, the company plans to build its own satellite constellation and sell software/services from space, which could help boost the company’s earnings potential.

There’s a lot to like about Rocket Lab’s business, and I applaud the shareholders who bought the stock over a year ago. You’re sitting on some fantastic winnings right now. However, that doesn’t mean the stock is a buy today.

At a market cap of $12 billion, Rocket Lab trades at a price-to-sales ratio (P/S) of 34, more than 10x the market average. Yes, Rocket Lab has a lot of growth potential, but this is a capital-intensive, low-margin company that doesn’t deserve to trade at more than 30x revenue.

To illustrate this point, let’s make some forward-looking estimates for Rocket Lab. Ten years from now, if the company achieves all its ambitions with minimal setbacks (an optimistic scenario), I could see the company’s revenue growing from its current annual figure of $364 million to $5 billion. With a gross profit margin of 26%, it’s reasonable to assume that Rocket Lab can achieve a net profit margin of 10% once it scales, or $500 million in profit on $5 billion in revenue.

Consider that $500 million in earnings versus the current market cap of $12.34 billion is a price-to-earnings (P/E) ratio of 25. That is not much lower than the average S&P500 The price-to-earnings ratio today, and that would be Rocket Lab’s earnings power in ten years, according to the most optimistic assumptions.

Stay away from Rocket Lab stock for now. The stock price is spiraling out of control.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Rocket Lab USA. The Motley Fool has one disclosure policy.

Up 500% in the Past Year: Why Investors Are Falling in Love with This Hyper-Growth SpaceX Competitor was originally published by The Motley Fool