Should You Buy Rocket Lab While It's Below $40?
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The stock has soared close to 600% in the last year.
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5 min read
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investment
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June 28, 2025
06:05 PM
The Motley Fool
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The stock has soared close to 600% in the last year
Space and defense stocks have gone to the moon this market cycle (pun int)
Rocket Lab (RKLB -2. 10%) is one of the great beneficiaries of this trend, as the rocket launch, space systems, and defense company has seen its stock soar close to 600% in the last 12 months, absolutely crushing the broad market indices
It recently surpassed a price of $33, hitting a new all-time high in recent weeks
Investors are optimistic the future of this space flight disrupter as it aims to compete with SpaceX
Should you buy the stock while it is still below $40
Or is it too late to add Rocket Lab to your portfolio
The answer may surprise you
Building the future of space, competing with SpaceX Rocket Lab is the only independent space vider to come anywhere close to competing with SpaceX, the dominant player in the sector
It began its journey the small and nimble Electron rocket, which ferries commercial and defense payloads into space with extreme accuracy
Earlier this month, the 65th Electron rocket was launched into space, with many more waiting in Rocket Lab's backlog
The next step for Rocket Lab is the debut of its larger Neutron rocket, which will directly compete with SpaceX in size and capabilities
The Neutron will have a much higher payload capability than the Electron, which means more potential revenue per rocket launch
A Falcon 9 launch at SpaceX can cost over $50 million, which should be a comparable figure for the Neutron once it starts performing for customers
Management believes the Neutron will debut its first launch in 2025, with commercial launches planned in the years after
Rocket Lab's total revenue was only $466 million over the last 12 months, meaning that just a few annual Neutron launches could be quite meaningful to top-line growth
On top of launches, Rocket Lab has built and bought capabilities in the space systems sector, which encompasses items that you put onto payloads in space such as satellites and solar arrays
It just acquired a company called Geost to help further its vertical integration into the defense satellite sector, a highly important capability to have today
In fact, over 70% of Rocket Lab's Q1 revenue came from the space systems segment, making it a much larger market opportunity than just rocket launches
Image source: Getty Images
A bright but uncertain future A vertically integrated space company is an ambitious goal, and Rocket Lab is aiming to build it from launch to space gear to eventually software services, according to management
It has a nice narrative, but it is not guaranteed to work
For one, the Neutron rocket has never even performed a test launch
As investors have recently seen with SpaceX and its Starship tests, mishaps in testing can lead to disastrous (and expensive) results
Rocket Lab is currently unfitable, burning $177 million in annual free cash flow as it builds out the Neutron and other space system segments
With just over $500 million in cash and equivalents, the company is only a few years of cash burn and failed tests of the Neutron rocket from running into a liquidity concern
These are unven, and while Rocket Lab is innovating in a field that could potentially be worth tens of billions of dollars someday, its plan comes with a lot of risks
RKLB PS Ratio data by YCharts Should you buy Rocket Lab stock
After soaring 600% in the last 12 months, Rocket Lab now trades at a market cap of $15 billion
That brings its trailing price-to-sales ratio (P/S) to a sky-high level of 36
For reference, the S&P 500 trades at an average P/S ratio of 3, or 10% the level of Rocket Lab
Yes, Rocket Lab has a higher growth potential than the average stock, and could easily be generating billions of dollars in revenue in the future
It is not guaranteed to do so, though
Even if Rocket Lab reaches $3 billion in sales -- close to 10x today's level -- it is un how much of that would translate to bottom-line fits due to its low gross margins below 30%
If it achieves a bottom-line fit margin of 10%, that would equate to $300 million in annual earnings, or a price-to-earnings ratio (P/E) of over 50 compared to its current market cap
And these earnings will not materialize for many years, if they end up doing so at all
However you slice it, Rocket Lab looks an overvalued stock that has gotten ahead of itself in the last year or so
Avoid buying Rocket Lab for your portfolio
Brett Schafer has no position in any of the stocks mentioned
The Motley Fool has positions in and recommends Rocket Lab
The Motley Fool has a disclosure policy.
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