Rocket Lab has been on fire lately. In the past six months alone, the company’s stock price has rocketed 459%, reaching $25.75 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Rocket Lab, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.We’re happy investors have made money, but we're swiping left on Rocket Lab for now. Here are three reasons why we avoid RKLB and a stock we'd rather own.
Why Is Rocket Lab Not Exciting?
Becoming the first private company in the Southern Hemisphere to reach space, Rocket Lab (NASDAQ:RKLB) offers rockets designed for launching small satellites.
1. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
For Rocket Lab, its two-year annual EPS declines of 51% mark a reversal from its (seemingly) healthy four-year trend. These shorter-term results weren’t ideal, but given it was successful in other measures of financial health, we’re hopeful Rocket Lab can return to earnings growth in the future.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Rocket Lab’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 63.4%, meaning it lit $63.41 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Rocket Lab burned through $144.7 million of cash over the last year, and its $470.5 million of debt exceeds the $292.5 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Rocket Lab’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Rocket Lab until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Rocket Lab isn’t a terrible business, but it doesn’t pass our bar. Following the recent surge, the stock trades at $25.75 per share (or 23.5× forward price-to-sales). The market typically values companies like Rocket Lab based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at Chipotle, which surprisingly still has a long runway for growth.
Stocks We Would Buy Instead of Rocket Lab
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