Rocket Lab's Vertical Leap: How Strategic Acquisitions and Defense Contracts Signal Undervalued Growth

Rocket Lab Corporation (RKLB) is undergoing a quiet transformation from a niche launch provider to a vertically integrated powerhouse in national security space systems. With its recent acquisitions of Geost and Mynaric, coupled with a landmark win in the U.S. Space Force's National Security Space Launch (NSSL) program, Rocket Lab is now positioned to capture high-margin defense contracts while reducing costs and risks through vertical integration. Yet its stock trades at just 3.2x trailing revenue—far below peers like Maxar Technologies (MAXR) at 6.5x—suggesting Wall Street has yet to fully grasp the magnitude of its strategic pivot. For investors, this presents a compelling opportunity to buy into a company at an inflection point.

The Power of Vertical Integration

Rocket Lab's acquisitions are not mere diversification but a deliberate move to control critical components of its end-to-end space systems. The $275 million purchase of Geost, a leader in electro-optical (EO) and infrared (IR) payloads, enables Rocket Lab to design satellites with advanced sensors for missile tracking, space domain awareness, and tactical intelligence. This eliminates reliance on third-party suppliers, reducing integration risks and costs for U.S. defense programs like the Space Development Agency's (SDA) Tracking Layer. As CEO Peter Beck noted, vertical integration turns Rocket Lab into a “disruptive prime,” capable of delivering satellites and payloads faster and cheaper than traditional contractors.

The pending acquisition of Mynaric, valued at up to $150 million, adds optical communication terminals to Rocket Lab's toolkit. Mynaric's CONDOR laser links are already integrated into Rocket Lab's satellites for the SDA's Tranche 2 Transport Layer. By owning this technology, Rocket Lab can scale production for its own constellations and compete for the SDA's Tranche 3 program—projected to include over 50 satellites—while avoiding supply chain bottlenecks.

The Neutron Rocket's $5.6B Catalyst

Rocket Lab's Neutron rocket, set for its debut in late 2025, is the linchpin of its national security ambitions. Selected for the NSSL Phase 3 Lane 1 contract—a $5.6 billion program for high-priority defense launches—Neutron will compete against established players like United Launch Alliance and SpaceX. With a reusable first stage and payload capacity of 13,000 kg, Neutron targets the medium-lift market gap left by competitors focused on smaller or larger payloads. The contract's minimum 30 missions through 2029, plus potential extensions to 2034, could generate recurring revenue for years.

Rocket Lab's Q1 2025 results underscore its momentum: revenue rose 32% year-over-year to $122.6 million, with a backlog of $1.07 billion—60% from launch services and 54% from government customers. Crucially, Neutron's selection for NSSL validates its technical and operational readiness, reducing execution risk.

Why the Stock Remains Undervalued

Analysts often overlook Rocket Lab's shift from a “launch company” to a “full-stack space solutions provider.” At a current valuation of $2.2 billion, Rocket Lab trades at 3.2x trailing revenue—far below peers like Maxar (6.5x) and Ball Aerospace (4.7x). This discount persists despite its:
1. Control over high-margin segments: Payloads and communication systems typically command 30-40% gross margins, higher than launch services.
2. Defensible backlog: The $1.07 billion backlog includes NSSL and SDA contracts, with visibility through 2029.
3. Moat-building investments: Propulsion systems, now a focus for further vertical integration, could insulate Rocket Lab from cost overruns and delays.

Risks and the Bull Case

Risks include regulatory delays for the Geost and Mynaric deals, integration challenges, and reliance on U.S. defense spending. However, the Biden administration's Space Priorities Memorandum mandates a 200% increase in annual space investments by 2027, directly benefiting Rocket Lab's end market.

The bull case hinges on Rocket Lab's ability to:
- Capture 20% of the SDA's Tranche 3 program (potential $1 billion in revenue).
- Expand its NSSL backlog beyond the initial $5.6 billion through repeat missions.
- Leverage its vertically integrated model to undercut traditional primes by 20-30% on cost.

Investment Thesis

Rocket Lab's stock is undervalued because it operates in two overlooked spaces: national security and vertical integration. Its moves into payloads and laser communications, combined with Neutron's NSSL win, create a rare trifecta of growth catalysts. Investors should view the stock as a play on three trends:
1. Defense spending growth: The SDA alone plans $10 billion in satellite procurements through 2030.
2. Space commercialization: Rocket Lab's backlog includes both government and commercial contracts, smoothing revenue cycles.
3. Margin expansion: Vertical integration should lift gross margins from 22% to 30%+ over the next five years.

With shares down 25% from their 2023 high despite these positives, now is the time to position ahead of the Street's recognition of Rocket Lab's strategic transformation. The next catalyst—Neutron's first launch—could ignite a re-rating.

Action Items:
- Buy Rocket Lab (RKLB) with a 12-month price target of $25 (implying 40% upside from current levels).
- Monitor NSSL contract awards and Neutron's performance post-launch.
- Consider a put option on peers like ULA (BA) to hedge against traditional contractor declines.

The space industry is undergoing a seismic shift toward agile, vertically integrated players. Rocket Lab is leading that change—and its stock is pricing in failure. Investors who act now may look back at today's valuation as a once-in-a-decade opportunity.