The past six months have been a windfall for Rocket Lab’s shareholders. The company’s stock price has jumped 141%, hitting $48.94 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Rocket Lab, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Rocket Lab Not Exciting?
We’re happy investors have made money, but we're cautious about Rocket Lab. Here are three reasons you should be careful with RKLB and a stock we'd rather own.
1. EPS Trending Down
Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Rocket Lab’s earnings losses deepened over the last three years as its EPS dropped 87.9% annually. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Rocket Lab’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 54.4%, meaning it lit $54.37 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Rocket Lab burned through $204.1 million of cash over the last year. With $564.1 million of cash on its balance sheet, the company has around 33 months of runway left (assuming its $498.1 million of debt isn’t due right away).
Unless the Rocket Lab’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Rocket Lab until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Rocket Lab’s business quality ultimately falls short of our standards. Following the recent rally, the stock trades at $48.94 per share (or a forward price-to-sales ratio of 35.1×). The market typically values companies like Rocket Lab based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at our favorite semiconductor picks and shovels play.
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