Rocket Lab's Stock Surge: Blasting Off on Defense Contracts and Strategic Moves?

Rocket Lab USA (NASDAQ: RKLB) has seen its stock surge over the past month, driven by a mix of strong financial results, landmark government contracts, and strategic moves. The company's Q1 2025 earnings beat expectations, while its progress on the Neutron rocket and acquisition plans has investors buzzing. But is this rally sustainable? Let's break down the catalysts, fundamentals, and risks.

The Catalyst: Earnings Beat and Defense Contract Wins

Rocket Lab's Q1 2025 revenue hit $123 million, a 32% year-over-year jump, outpacing estimates. The company also secured two major contracts with the U.S. Department of Defense:
1. National Security Space Launch (NSSL) Program: Selected for the $5.6 billion NSSL Phase 3 Lane 1 program, Rocket Lab becomes one of only five providers eligible for high-priority national security launches.
2. Hypersonic Missions: Awarded contracts under the $46 billion EWAAC framework (U.S. Air Force) and the UK's £1 billion HTCDF program, expanding its role in hypersonic testing.

These wins are critical. Defense work offers higher margins and recurring revenue, and Rocket Lab's Neutron rocket—designed for larger payloads—is now positioned to compete directly with SpaceX's Falcon 9 in government markets.

Fundamentals: Revenue Growth and Strategic Positioning

Rocket Lab's backlog of $1.067 billion signals strong future demand. Key drivers:
- Electron Rocket Dominance: The Electron remains the world's most frequently launched small orbital rocket, with five missions in Q1 2025. Its 30-minute launch-to-orbit capability gives it an edge over competitors.
- Margin Improvements: Q2 non-GAAP gross margins are expected to hit 34-36%, up from 30% in Q1, reflecting scale efficiencies.
- Strategic Acquisitions: The proposed acquisition of Mynaric (a European laser communications firm) adds capabilities in satellite data links, a must-have for defense and commercial constellations.

The company's transition to a holding company structure (Rocket Lab Corporation) also reduces operational risks and better aligns with U.S. government security requirements—a smart move for national defense contracts.

Risks: Valuation, Profitability, and Competition

Despite the positives, three red flags stand out:
1. High Valuation: Rocket Lab trades at a forward P/S ratio of 16.77x, nearly eight times the aerospace sector average (2.05x). This premium assumes flawless execution of its growth plan.
2. Profitability Challenges: While revenue is rising, the company remains unprofitable (Q1 GAAP net margin: -51.76%). Q2's adjusted EBITDA loss is expected to widen to $28–30 million due to Neutron development costs.
3. Competitive Pressure: SpaceX's Starship and Blue Origin's New Glenn threaten to undercut Rocket Lab's small-launch dominance. Meanwhile, established players like Northrop Grumman dominate defense contracting.

Investment Recommendation

Rocket Lab's stock surge is justified by its defense wins and strategic moves, but investors should tread carefully:
- Bull Case: If Neutron launches successfully and Mynaric integration goes smoothly, Rocket Lab could become a go-to partner for hypersonic and secure satellite projects. The $25.18 average analyst target suggests 10% upside from current levels.
- Bear Case: Overvaluation and execution risks loom large. A misstep in Neutron's development or margin pressures could send shares tumbling.

Verdict: Hold for now. Rocket Lab's long-term growth story is compelling, but the stock's current valuation leaves little margin for error. Investors should wait for a pullback to below $20 or clearer signs of profitability before buying. For aggressive investors with a multi-year horizon, a small position could pay off—if the rocket doesn't blow up.

Final note: The space race is heating up. Rocket Lab's niche in small launches and defense contracts gives it legs, but the competition isn't standing still.