Rocket Lab Is Becoming a Clear 2nd Place to SpaceX

Rocket Lab USA Inc (NASDAQ: RKLB)

Current Price: $13.50

Price Target: $30.00

Company Overview:

Sector: Industrials
Revenue: $55.88M
EBITDA: $-45.52M
Mkt Cap: $6.1B
Price/Sales: 109.16

Note: Financial Figures are TTM Actual as of Q2 2021

Rocket Lab mission statement: “Rocket Lab is an end-to-end space company delivering reliable launch services, spacecraft, satellite components, and on-orbit management.” 

Rocket Lab USA, Inc., an aerospace company, focuses on developing rocket launch and control systems for the space and defense industries. The company provides launch services, spacecraft components, satellites and other spacecraft, and on-orbit management solutions; and designs, manufactures, and sells Electron and Neutron launch vehicles, as well as offers Photon platform for spacecraft solutions. It serves customers in commercial, civil, defense, and academic sectors.

Long Thesis:

While most would agree that SpaceX is the front-runner of the space industry for the foreseeable future, there are dozens of other space companies being funded and built to become relevant in this fast-growing industry. SpaceX has been trading on the private markets via Special Purpose Vehicles (SPVs) and has a valuation approaching $100 billion. In addition, private investors agree to exorbitant fees on these SPVs. Therefore, we believe IF SpaceX was to be publicly traded, it would be valued at much higher market capitalization than $100 billion.

We see Rocket Lab as becoming a clear 2nd place to SpaceX for the rest of this decade, for any business related to Lower Earth Orbit and beyond. The other current space companies with valuations in the billions of dollars are unproven and have not sent much of anything to Lower Earth Orbit yet. By contrast, Rocket Lab is the second most frequently launched rocket with 21 launches to date and over 100 satellites sent into orbit. Rocket Lab is also vertically integrating to become more of an end-to-end solution: designing and building satellites as launch vehicles, along with controls to operate the satellites for their customers. 

Significant Cost Advantages

Rocket Lab’s vertically integrated strategy has proven to give them an edge amongst competitors in the industry, with roughly 90% of their rocket components being produced in-house. In addition, Rocket Lab purchasing their own launch pad in New Zealand gives them a unique advantage by offering unmatched launch frequency, up to 120 launches per year, due to the low amount of aircraft traffic interference. Owning their launch pad also provides stability in costs and fast lead times for their launches. Between their 3 launch pads, they are capable of 132 launches per year which is more than all US ranges combined.

Compared to competitors such as Firefly, Relativity, Astra, etc., Rocket Lab has the only reusable orbital-class small rocket (Electron), enabling higher launch frequency without expanding production and lowers launch costs. This is extremely important for profitability considering the first stage accounts for a large majority of the vehicle cost. This has been frequently reiterated by Elon Musk, stating that the only way to succeed in the rocket industry long-term is through rapid reusability. 

Potential for High Growth

As noted in Rocket Lab’s mission statement, we believe there is room for significant growth opportunities within several business segments of a fast growing space industry.  The space industry as a whole has been forecasted to grow to a $1.4 trillion TAM by 2030. Rocket Lab estimates to surpass $1B in annual revenue by the year 2026, and continuing to grow to over $1.5B the following year. We believe this is achievable considering their current bookings for 2021 represent 90% of their forecasted revenue and they will greatly benefit from their existing customers and the repetitive-nature of their business model. 

Rocket Lab is developing a medium lift class vehicle named Neutron, set to first launch in the year 2024. Neutron will be the first of its kind in the medium lift class and will have a unique advantage to SpaceX’s Falcon 9 which is in the large lift vehicle class. Neutron will provide Rocket Lab a unique position to take advantage of the medium lift market segment given that others will either not have the payload capacity or not be able to offer competitive pricing due to the size of their rocket. For example, constellation satellites need to be launched in batches to different orbital planes and large rockets are simply unreasonable for this use case. Rocket Lab has done an analysis of large constellations and came to the conclusion that an 8-ton class rocket provides the ideal lift capacity. 

Strong Leadership

While SpaceX has Elon Musk, Rocket Lab has Peter Beck. We have studied Mr. Beck extensively and find him to be extremely competent with a clear vision for the company. For example, he successfully persisted in getting government approvals as a US company to conduct rocket launches from their New Zealand facilities. He has led the company to several other industry breakthroughs such as the first 3D printed rocket engine and the first fully carbon composite launch vehicle. Our conviction in Peter Beck as a visionary founder continues to grow.  We believe his competency is critical for Rocket Lab’s long-term success.  Their executive team has previous experience working with SpaceX, NASA, Intel, and more. 

Investment Overview:

Good Soil has developed a financial model and we strongly feel that Rocket Lab is undervalued given its unique position in a fast growing industry. We developed this valuation model based on Rocket Lab’s revenue projections through the year 2027.  We’ve applied what we feel to be a realistic Price to Sales multiple and equity discount rate, arriving at our price target of $30. Another strong signal of investor commitment was the abnormally low 3% SPAC redemption rate, which suggests that investors are very fond of Rocket Lab’s story given that the Q3 2021 average redemption rate is estimated to be ~70%. 

We entered our Rocket Lab position in July via both Vector Acquisition’s SPAC (VACQ) shares and warrants. Since the official merger to Rocket Lab’s ticker RKLB, this has grown to be one of the larger positions in our Fund’s portfolio.  We would not be surprised to see it grow to become our largest position as investors come to consensus on Rocket Lab being the best publicly traded company for exposure to a fast growing space industry.






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