Rocket Lab: Still A Buy Despite High Valuation

Rocket Lab (NASDAQ: RKLB) has long been a darling of the space economy, but its valuation has become a lightning rod for debate. With a market cap of $9.49 billion as of May 2025—up 440% year-over-year—the company’s stock trades at a price-to-sales (P/S) ratio of 23.9x, far exceeding the 2.1x industry median. Critics argue this premium is unsustainable, citing cash burn and production hurdles. Yet, Rocket Lab’s strategic momentum, government contract wins, and diversification into space systems suggest the stock could remain a compelling long-term bet. Let’s dissect the numbers.

Financial Performance: Growth Amid Growing Pains

Rocket Lab’s Q1 2025 results underscore a company in transition. Revenue rose 32% YoY to $122.6 million, driven by its Space Systems division (now 71% of revenue), which builds satellites and components for government and commercial clients. Backlog hit a record $1.07 billion, with 54% tied to U.S. government contracts like the National Security Space Launch (NSSL) program.

However, challenges linger. Gross margins dipped sequentially due to lower-priced Electron launches and $6.9 million in R&D spending for its Neutron rocket. Free cash flow turned negative ($82.9 million in Q1), reflecting capital-intensive growth. While Q2 guidance calls for sequential revenue growth to $130–140 million, profitability remains elusive, with an adjusted EBITDA loss of $28–30 million projected.

Strategic Momentum: Neutron’s Pivot to Profitability

Rocket Lab’s valuation hinges on its ability to execute on two pillars:
1. Neutron Rocket: The company’s medium-class launcher, now on the U.S. Space Force’s NSSL program, could unlock high-margin national security launches. With Stage 2 engine testing complete and a planned 2025 debut, Neutron’s success could reduce reliance on smaller Electron launches and boost profitability.
2. Space Systems Dominance: The acquisition of laser communications firm Mynaric and launches of standardized products like STARRAY solar arrays position Rocket Lab as a full-stack space solutions provider. Mynaric’s tech, once scaled, could become a high-margin product line, diversifying revenue beyond launches.

Valuation Drivers: Backlog, Government Contracts, and Scalability

Rocket Lab’s $1.07 billion backlog—up 60% from Q1 2024—offers visibility into future revenue. Government programs like NSSL and the U.S. Air Force’s hypersonic transport experiment (scheduled for 2026) provide stable demand. Meanwhile, its Mynaric acquisition and standardized products aim to leverage economies of scale in satellite manufacturing, which currently suffers from production bottlenecks.

The P/S multiple, while high, reflects investor optimism about these tailwinds. Analysts project 41% annual revenue growth over the next three years, far outpacing the aerospace sector’s 8% average. Even at 23.9x P/S, Rocket Lab’s growth trajectory justifies some premium—if executed.

Risks to Consider

• Cash Burn: With $517 million in cash as of March 2025, Rocket Lab must manage Neutron’s development without overextending. A delayed first launch or cost overruns could strain liquidity.
• Margin Pressures: Sequential revenue declines and reliance on lower-margin Electron launches may persist until Neutron scales.
• Production Challenges: Mynaric’s historical underperformance requires Rocket Lab’s swift intervention to meet demand.

Conclusion: A High-Risk, High-Reward Bet

Rocket Lab’s valuation is undeniably aggressive, but its strategic progress merits attention. The backlog’s growth, government contracts, and diversification into space systems suggest a path to long-term profitability—if Neutron succeeds and production bottlenecks ease.

For investors, the trade-off is clear: tolerate short-term volatility for exposure to the space economy’s growth. With a backlog worth over $1 billion and a foothold in national security launches, Rocket Lab’s fundamentals align with its valuation for those willing to ride out execution risks. While the P/S ratio is a red flag for conservative investors, bulls can argue it’s a premium paid for first-mover advantage in an industry where winners take all.

In short, Rocket Lab remains a buy for long-term investors, but the journey will be bumpy. The stars may align—if the company can light its own rocket.