Rocket Lab

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Rocket Lab is an end-to-end space company that designs, manufactures, and launches rockets and satellites, providing space-based services with an ambitious mission to democratize access to space.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Rocket Lab’s business is segmented into three key areas: Launch Services, Space Systems, and Space Applications.

  • Launch Services: This segment focuses on providing dedicated launch services to low Earth orbit (LEO) for small satellites using their Electron rocket and, in the future, Neutron. These services can be performed using their owned launch infrastructure in New Zealand and in the United States.

  • Space Systems: This segment concentrates on designing, manufacturing, and selling spacecraft components and entire spacecraft systems, including the Photon satellite bus, and providing end-to-end mission capabilities to their customers.

  • Space Applications: Rocket Lab leverages their internal space and manufacturing infrastructure and combines those with acquired technologies and businesses like spacecraft components, to develop and deliver space solutions to clients. This segment also includes their ongoing efforts to create a new space vehicle called Neutron.

Revenue Distribution: While Rocket Lab is trying to diversify its revenue streams, currently revenue is primarily driven by their Launch Service segment at 64% of revenue in the first three quarters of 2022 with the other segments comprising 36%. They also have a limited number of primary customers with U.S government services accounting for 48% of the total revenue.

Industry Trends: The space industry is experiencing rapid growth, driven by increasing demand for satellite launches, particularly in the LEO segment, and increasing demand for solutions and components in space. This is a capital and technology-intensive industry that experiences technological advances quite rapidly. The space industry is also very fragmented with new entrants entering every year. The demand in this industry is driven mostly by the government and a few private entities.

Competitive Landscape: The space launch market is highly competitive. Rocket Lab is one of the few players with a dedicated small-satellite launch platform. Major competitors in the small-satellite launch market include SpaceX, Virgin Orbit (which has filed for bankruptcy) and other smaller players, such as Rocket Factory Augsburg. Competitors in the satellite and space-systems market include industry giants like Lockheed Martin and Boeing.

What Makes Rocket Lab Different? Rocket Lab distinguishes itself through its focus on small satellites, its in-house manufacturing of rockets and satellites, its vertical integration, and its increasing focus on space infrastructure. By controlling most of the supply chain, Rocket Lab is aiming to offer more control over their operations, which can make them more resilient and flexible.

Financials In-Depth:

While the revenue has been growing rapidly the company still has not achieved a positive operating profit.

  • Revenue Growth: Rocket Lab’s revenue grew by 19% YOY to 66.7m in the first three months of 2023 and 35% to $213 million in the 9 months of 2023, driven by increased launch service revenue and expansion in their space systems division.
  • Gross Margin: Gross margin has improved significantly in the past few quarters. It went from 20.6 percent in 2021 to almost 30.5% in the first three quarters of 2023. This is driven by an increase in launch service pricing and increase in volume of the space systems component.
  • Operating Expenses: These have also increased YOY, due to R&D expenditure related to Neutron, growth, acquisitions, and increase in headcount.
  • Net Income: Rocket lab is still posting net losses, primarily due to its large expenditure in the development and ramp up of their new rocket, Neutron. Net Loss for the first three months of 2023 is at -$73 million, and 9-months net loss is at $-166.5million.
  • Free Cash Flow (FCF): FCF is still negative, but that is mainly because of expansion costs. The negative FCF of RKLB for the 9-months of 2023 was $-102.8 million.
  • Balance Sheet: Rocket Lab’s financials for the most part indicate a growing enterprise with a large amount of working capital and relatively low debt. The company has cash and cash equivalents of $337.2 million and total liabilities of $391.4 million.

Recent Concerns, Controversies, and Problems:

  • Neutron Development and Delays: One major concern is the timeline and costs associated with the development of their Neutron rocket. Multiple times during earnings calls, the executives have admitted the Neutron schedule has been significantly delayed, citing global supply chain issues and the increased number of testing that needs to occur. This has caused market skepticism, which is why their valuation is extremely volatile with the rise and fall of sentiment regarding Neutron.

  • Stock Dilution: RKLB’s executives have also often spoken about the need to dilute share count in order to fund future development, raising concerns about shareholders who may not be happy about potential dilution. The company has diluted shares consistently throughout the past decade to meet its operational requirements, and with its plan to continue doing so in the future, the current shareholder base may be wary.

  • Uncertain Path to Profitability: Although Rocket Lab has posted great revenue numbers and gross margins, the question of when the company becomes profitable is a pertinent concern among analysts and investors. They believe that due to the aggressive spending on development and acquisitions, the path to profitability may be long and uncertain.

Moat Rating: 2/5

  • Positive:
    • Rocket Lab is one of the few companies providing dedicated launch services for small satellites, positioning them as a key player in a high-demand segment.
    • Their vertical integration (in-house development and manufacturing of rockets, satellites and components), provides some competitive advantage.
    • They have some notable regulatory tailwinds, as companies need licenses to launch rockets, and it is not so easy to get such licenses.
  • Negative:
  • The barriers to entry into space exploration is relatively low and many new players are coming into the market.
  • Their products don’t have any clear differentiation other than being tailored for small satellites.
  • They still do not have an established market or customer base for their satellite manufacturing division. * The risk from more experienced players like SpaceX is still eminent.

Understandability: 3/5

Rocket Lab’s business model is relatively straightforward, as it involves launch services, and spacecraft sales. However, understanding its complicated financial structure and technical metrics of performance is fairly complicated for someone unfamiliar. Therefore, the business is not particularly easy to understand as the moat and operations have more nuances than some other companies.

Balance Sheet Health: 3/5

The balance sheet is decent, showing a growing enterprise with strong cash and not much debt. The presence of goodwill and intangible assets are something to monitor and may be a point of contention for some. The risk is that if Neutron continues to be delayed and require a lot more funding, RKLB might start bleeding more cash, and it can affect the financial health negatively. Another risk is share dilution as the company seeks more funds from market to cover its ambitious plans.