Rocket Lab (RKLB 3.29%) — like the name implies — is a company that makes rockets.
Small, expendable “Electron” rockets, for the most part (although Rocket Lab has plans to test fly a new medium-size and reusable “Neutron” rocket in either 2024 or 2025). On Wall Street, a lot of analysts have pegged the introduction of Neutron as the event that flips the switch on Rocket Lab and turns the rocket company from just one of many unprofitable space stocks into a bona fide profit-making corporation. Within a year of Neutron’s introduction, analysts polled by S&P Global Market Intelligence say Rocket Lab will be earning about $0.10 a year and keep growing from there.
The truth is more complicated than that.
For investors, it’s also arguably better than that.
Rocket Lab’s best business
Its name notwithstanding, as far back as 2022, Rocket Lab was already generating more business from building “space systems” (i.e., satellites and satellite hardware) than it was from building and launching rockets per se. In 2023, Rocket Lab made $100 million more revenue from space systems than it did from “launch services.”
Why is this important? Not to put too fine a point on it, but: Launching rockets doesn’t pay very well. Out of $72 million in revenue generated from launch services in 2023, Rocket Lab kept just $8 million as gross profit. And its operating profit from the division was less than zero. In contrast, space systems earned Rocket Lab $43 million in gross profit.
That’s still a gross profit margin of only 25%, but it’s more than twice the 11% margin Rocket Lab got from launching rockets.
Why this is important
Which brings us to Rocket Lab’s latest news: Two weeks ago, the company announced that the U.S. Space Force had tapped it to launch the new VICTUS HAZE Tactically Responsive Space (TacRS) mission. For $32 million, Rocket Lab will “design, build, launch, and operate a rendezvous proximity operation (RPO) capable spacecraft” in 2025.
(An RPO, by the way, simply refers to a spacecraft moving into “proximity” with another spacecraft. But it’s a crucial operation that needs to be refined if unmanned spacecraft are to dock one with another for repair, refueling, or cargo transfer missions in the future.)
The launch part of this mission will likely fall under the ambit of Rocket Lab’s launch services division. Still, the bulk of the monies awarded will probably yield the higher profit margins of a space systems contract and move Rocket Lab correspondingly closer to profitability. It doesn’t hurt, either, that seeing as this is a U.S. Space Force contract, it appears to be yielding significantly higher revenue for Rocket Lab than the company ordinarily gets from its commercial contracts.
Thus, a double-dose of good news for Rocket Lab: more revenue, and higher margins on that revenue.
What it means for investors
Viewed in the context of Rocket Lab’s December 2023 Space Force satellite production contract — which, at a value of $515 million, was literally the company’s biggest deal ever — it’s starting to become clear which side of Rocket Lab’s business deserves the most investor attention going forward. Now that Rocket Lab is officially a U.S. defense prime contractor, the company’s best chance of reaching profitability will come not from Neutron, but from winning satellite-building contracts for the government.
Granted, this doesn’t mean Neutron isn’t important; it is. But I suspect we’ll see Neutron’s importance grow more based on its utility as a delivery vehicle for government cargo — and specifically, a delivery vehicle of satellites that Rocket Lab also builds for the government — than as a commercial launch vehicle.
I could be wrong about this, of course. But the more I study the profit margins here, and the clearer the trend lines of space systems eclipsing launch services as a revenue driver become, the more I’m convinced that Rocket Lab’s biggest opportunity is working as a contractor for the U.S. government.
