Investors have the potential to profit significantly from Rocket Lab stock if purchased at an appropriate price.
On January 26, Rocket Lab (NASDAQ: RKLB) experienced its highest stock price day to date. Before the weekend, the stock reached and exceeded $30 per share, leading many investors to believe it would increase further. As of now, S&P Global Market Intelligence reports that eight analysts recommend buying Rocket Lab stock, with none advising selling.
However, one analyst had reservations. After analyzing the data and pondering the potential future of Rocket Lab, the conclusion was that, despite being a stellar company, its stock value was inflated in the short term. It was anticipated that Rocket Lab’s stock price would decrease, rather than increase, in 2025.
Two months later, Rocket Lab’s stock price fell to below $19 per share, marking a 28% decrease.
This decline is met with mixed feelings, especially from shareholders who are enthusiastic about Rocket Lab. The company is viewed as a viable alternative to publicly traded SpaceX investments, given its status as the second-largest rocket launcher in the U.S. by the number of launches. Rocket Lab’s success with its Electron rockets is nearly impeccable, and significant strides are being made toward launching the larger Neutron rocket later in the year. This development positions Rocket Lab to potentially compete with SpaceX’s Falcon 9 rockets on comparable terms, and possibly outperform them.
Additionally, Rocket Lab is making advancements in other areas. According to the latest earnings report, CEO Sir Peter Beck announced the acquisition of the company’s first landing barge for Neutron rockets, a significant contract expansion with one of its major clients for more satellite launches, and the commencement of its own satellite design, known as the “Flatellite,” tailored for Neutron’s payload fairing.
Recently, Rocket Lab revealed plans to acquire Mynaric, a German laser communication specialist. This acquisition aims to boost production to equip more satellites with laser communication capabilities, enhancing communication efficiency among orbiting satellites, spacecraft in deep space, and Earth’s aircraft and ground locations.
Looking ahead to five years, Rocket Lab’s operations are fully engaged. Although the stock was overvalued two months ago, the recent decline to below $20 per share makes it more accessible, with a current market capitalization of $9 billion.
Despite this, the stock’s current valuation is still deemed high. Rocket Lab is not yet profitable nor generating positive free cash flow. Analysts project that Rocket Lab might achieve positive free cash flow of approximately $84 million by 2026. Given the $9 billion market cap and the projected free cash flow, the price-to-free cash flow ratio stands at 107.
This ratio suggests overvaluation; however, assessing a company transitioning from negative to positive cash flow can be challenging until growth stabilizes.
Looking further into the future, and allowing growth rates to normalize, a clearer valuation emerges. S&P Global data indicates that by 2031, Rocket Lab might increase its $84 million free cash flow by tenfold to $942 million, signifying a 62% annualized growth rate. Calculations suggest that paying no more than 62 times the free cash flow for the stock is advisable to maintain a balanced price-to-growth valuation.
In practical terms, this equates to a value of $5.2 billion, which is approximately 58% of Rocket Lab’s current market capitalization.
Currently, at 107 times forward free cash flow, there are no additional stock purchases planned. However, if the stock price drops by approximately 42%—falling below $11.50—a significant buying opportunity is anticipated.
