Rocket Lab: Riding ESA Momentum or Overvalued in Orbit?

The surge in Rocket Lab's (NASDAQ: RKLB) stock—up over 600% in the past year—has been fueled by its growing role in critical space missions, including a landmark agreement with the European Space Agency (ESA). While the company's recent ESA contracts for the LEO-PNT navigation system have sparked short-term momentum, investors must weigh this excitement against lingering valuation concerns and execution risks. Is Rocket Lab a buy at current levels, or does its stock price already reflect future success?

The Catalyst: ESA Contracts and LEO-PNT

Rocket Lab's June 2025 announcement of its first ESA contract—a launch of two “Pathfinder A” satellites for the Low Earth Orbit Positioning, Navigation, and Timing (LEO-PNT) mission—sent its stock soaring to an all-time high of $37.27. The satellites, developed by Thales Alenia Space and GMV, will test a low-Earth-orbit-based navigation system to complement Europe's Galileo and EGNOS systems. The mission's urgency stems from ESA's need to activate spectrum allocations with the International Telecommunication Union by early 2026.

The deal underscores Rocket Lab's value as a reliable small-launch provider. With over 200 missions completed since 2018, its Electron rocket has become a go-to for rapid, precise deployments. The LEO-PNT contract also opens doors to future ESA collaborations, including a planned 10-satellite constellation by 2027.

Short-Term Momentum: Strong Backlog and Defense Diversification

Rocket Lab's momentum is bolstered by a robust backlog of $1.067 billion as of Q1 2025, driven by government contracts like the $5.6 billion U.S. National Security Space Launch (NSSL) Phase 3 program and hypersonic testing frameworks (EWAAC/HTCDF). These agreements highlight its pivot into defense and high-tech sectors, which now account for ~60% of its Space Systems revenue.

The company's Q1 results reinforced this trajectory: revenue rose 32% year-over-year to $122.6 million, with non-GAAP gross margins improving to 33.4%. Its upcoming Neutron rocket—a medium-lift vehicle capable of carrying 13,000 kg to LEO—adds to the optimism. Set for a late-2025 debut, Neutron could unlock lucrative contracts from NASA and commercial constellation operators, competing with SpaceX's Falcon 9.

Long-Term Concerns: Valuation and Profitability

Despite the optimism, Rocket Lab's valuation raises red flags. It trades at a forward price-to-sales (P/S) ratio of 16.77x—20x higher than the aerospace industry's average of 0.83x. Analysts project revenue to grow to $1.2 billion by 2027, but profitability remains elusive. In Q1, adjusted EBITDA stayed negative at $30 million, with R&D and SG&A costs climbing as the company invests in Neutron and Mynaric (a laser-communications firm acquired in 2024).

Moreover, Rocket Lab faces stiff competition. SpaceX's dominance in medium-lift launches and European rivals like Arianespace threaten its market share. Delays in Neutron's development—or technical failures—could derail its growth story.

Risks on the Horizon

1. Neutron's Uncertain Launch: Delays or underperformance of the Neutron rocket could undermine investor confidence.
2. Profitability Timeline: With EBITDA expected to turn positive only by 2026, cash burn remains a concern.
3. Regulatory and Supply Chain Hurdles: Global semiconductor shortages and labor shortages in aerospace (13% attrition rate in 2024) could slow production.

Investment Thesis: Momentum vs. Valuation

Bull Case: Rocket Lab's ESA contract and Neutron's potential position it as a leader in smallsat launches and defense tech. A successful Neutron launch and expanding government contracts could justify its premium valuation.

Bear Case: The stock's 16.77x P/S ratio is unsustainable unless revenue growth accelerates dramatically. Without Neutron's success or a clear path to profitability, Rocket Lab could face a correction.

Conclusion: Proceed with Caution

Rocket Lab's ESA contracts and technological advancements make it a compelling play on the smallsat revolution. However, its valuation already assumes flawless execution of Neutron and flawless execution of its backlog. Investors should:

• Wait for a Pullback: Consider accumulating shares if the stock retreats to the $25–$30 range.
• Monitor Neutron's Progress: A successful first launch (H2 2025) and subsequent contracts will be critical catalysts.
• Track EBITDA Improvements: Positive cash flow by 2026 would alleviate concerns about its burn rate.

For now, Rocket Lab remains a high-risk, high-reward bet. While short-term momentum is strong, long-term investors must ask: Can this rocket sustain its ascent, or will it burn up in the atmosphere of overvaluation?