Two things can be true at the same time.
Thing 1: I’ve not been watching Rocket Lab (NASDAQ: RKLB) stock for a very long time.
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Thing 2: I’ve watched Rocket Lab stock closely for as long as it’s been a publicly traded stock, and even before its initial public offering (IPO).
So, believe me when I say this third thing: For as long as I’ve been watching Rocket Lab, it hasn’t been a particularly impressive rocket stock — at least not in terms of earning profits from launching rockets.
Despite growing its launch cadence and its annual sales rapidly these past few years, as recently as 2022, Rocket Lab’s launch services division was still producing a negative gross profit margin. As recently as 2023, its margin in launch services was an anemic 11%, and Rocket Lab was earning twice as big a margin from its less well-known space services division.
This is why, in a column late last year, I concluded that “better sales growth plus better profit margins on those sales means space systems is actually [Rocket Lab’s] most important business — not rocket launch.”
But the times, they are a-changing.
Consider: Breaking down sales from its third-quarter earnings report in a post-earnings conference call, Rocket Lab CFO Adam Spice observed that Rocket Lab’s launch division generated quarterly sales of $21 million, while sales at its space systems division (which builds everything from parts to entire satellites and spacecraft) were 4 times bigger — $83.9 million.
That fact alone wasn’t surprising. Space systems overtook launch services in terms of annual revenue already in 2022, and the division has generally outperformed launch services in terms of revenue growth. What was surprising was that, since the start of this year, launch services have steadily closed the gap with space systems in terms of the profits Rocket Lab earns on that revenue.
Again, in 2023, launch service gross profit margin was just a hair above 11%, while space systems earned a 25% margin — twice as good. But just look at how these numbers changed in the first three quarters of this year:
|
Metric |
Q1 2023 |
Q2 2023 |
Q3 2023 |
YTD |
|---|---|---|---|---|
|
Launch services |
25.7% |
26.5% |
28.6% |
26.6% |
|
Space systems |
26.3% |
25.2% |
26.2% |
25.9% |
Data source: Rocket Lab. YTD = year to date.
Space systems’ profit margin is holding more or less steady at a level above where it closed out 2023. But launch services revenue has absolutely blasted off. Indeed, it’s climbing higher and higher, and (for the time being at least) now exceeds profit margin earned from space systems sales.
Summarizing the progress made, Spice observed that margins are “pretty consistent across Launch and Space Systems right now,” despite the space systems business being roughly twice as big as launch services. And both divisions are well on their way to hitting the company’s near-term target of 30% gross profit margin.
It’s hard to overstate how significant this could be for Rocket Lab stock. Up till now, I’ve been under the impression that for Rocket Lab — as for most space companies — launching rockets would be a sort of low-margin “loss leader.” It’s a business the company must operate in order to give it an edge in building and selling satellites to its customer. But long-term, Rocket Lab would earn most of its profits from selling those satellites.
What Rocket Lab has done this year, however, is prove this thesis wrong. It’s shown that launching rockets can, in fact, be a profitable business.
This change in profitability will only get more important as Rocket Lab brings its new Neutron rocket to market. Priced at $50 million to $55 million per launch, each Neutron launched will produce at least 6 times the revenue of an analogous Electron rocket launch — and if margins hold firm, 6 times as much profit, too.
What makes this story even better is the likelihood that gross profit margin in launch services will not just hold firm, but keep on improving. Rocket Lab CEO Peter Beck explained the dynamic in an interview with Payload Space: Currently, most of Rocket Lab’s spending is going develop Neutron. But “the moment you [stop developing Neutron, start launching Neutron, and] start throwing customers at that, it flips.”
Costs flip to profits. And when that happens, predicts Beck, both Electron and Neutron could generate gross profit margins of 40% to 50%.
So what does this mean for Rocket Lab? The math here is a little tricky, but consider: Analysts polled by S&P Global Market Intelligence predict Rocket Lab will book more than $900 million in sales in 2026. If Rocket Lab can turn 45% of those sales into gross profits ($405 million), and if operating costs don’t rise much faster over the next couple of years than they did between 2023 and 2024, I see a real chance Rocket Lab might report positive net earnings as early as 2026 — a full year sooner than Wall Street is expecting.
Do you think that might be something that would excite investors, and send Rocket Lab stock rocketing even higher?
Yeah, I do, too.
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Rich Smith has positions in Rocket Lab USA. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.
Rocket Lab’s Favorite Business May Be Ready to Turn a Profit was originally published by The Motley Fool
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