After Rallying 75% in the Past Month, are Shares of Rocket Lab (RKLB) Still a Buy?

Headquartered in Long Beach, California, Rocket Lab USA, Inc. (RKLB) is an end-to-end aerospace company that provides secure launch services, satellite components, spacecraft, and on-orbit management. The company also produces and sells Neutron and Electron orbital launch rockets. RKLB’s services are in demand among customers from the commercial, military, civil, and academic sectors. 

RKLB went public through a SPAC deal with Vector Acquisition Corporation on the Nasdaq Capital Market on August 25th this year. RKLB raised about $777 million from the merger deal, which is expected to fund the development of its reusable 8-ton payload class Neutron rocket and support further R&D, thus accelerating the company’s growth. Notably, the stock opened at $10.20 on its first trading day and has rallied 54.7% since then to close Tuesday’s trading session at $15.78. 

With that being said, let’s analyze the company from a qualitative and quantitative standpoint to determine if RKLB stock is still a buy after a recent rally.

Recent‌ ‌Developments‌ ‌ ‌

On September 8th, Rocket Lab announced that it has entered into a five-launch agreement with a global Internet-of-Things (IoT) connectivity provider, Kinéis. Under the terms of the deal, the company will deploy Kinéis’ whole IoT constellation across five missions with its launch vehicle, Electron. 

On September 1st, Rocket Lab announced the construction of a new production facility, allowing it to supply up to 2,000 reaction wheels per year amid increasing demand from satellite constellation clients. In addition, RKLB reaction wheels production is expected to benefit from Sinclair Interplanetary’s superb satellite hardware. In my view, it’s a positive development that will help to support Rocket Lab’s long-term expansion. 

Recent Financial Results

The company’s revenue increased 237% year-over-year to $29.5 million for its 1H FY2021, which ended June 30th, 2020. This growth was caused primarily by a 183% increase in Launch Service revenue.

However, the company’s R&D and SG&A expenditures increased by 156% and 21% to $15.6 million and $13.7 million, respectively. As a result, its net loss per share stood at $3.74 as of 1H2021 compared to a $2.87 loss per share in the year-ago period. 

Also, the company’s backlog has risen 136% year-over-year to $141.4 million.

Liquidity Position and Analysts’ Estimates

As of June 30th, 2021, the company had total cash on hand of $107.93 million as well as $777 million in gross proceeds raised from the SPAC deal on August 25th, while its total debt came in at $124.7 million. Cash used to run the company’s operations during the first half of 2021 was roughly $36.6 million, up 202% compared to the 1H2020 figure. According to the company’s 8-K report, the cash burn rate is expected to increase as the company plans to continue its investment in new products and technologies. However, I would expect the cash on hand to be sufficient for at least 12 months.

For the third quarter, the analysts expect RKLB’s revenue to come in at $5 million, which is almost in line with the company’s guidance of $4.5 million at the midpoint. Besides, the company expects to generate revenues of $50 – $54 million in 2021. 

How much volatility are options traders expecting for the stock? 

Looking at the October 15th, 2021 option chain, we can calculate the expected price movement using the long straddle options strategy. Hence, my calculations indicate that RKLB’s stock could rise or fall by about 31% by the October expirations from the $16.00 strike price. So, we can see that the options market expects significant fluctuations in the stock. Additionally, let’s take a closer look at the number of open calls and put contracts as well. As of September 14th, there are 665 calls to 591 puts. This divergence suggests that options traders are currently neutral on Rocket Lab stock. 

The Bottom Line 

In my opinion, the potential for the company’s growth is immense and I’m bullish on Rocket Lab for the long-term. However, currently I am neutral on this stock after its recent run-up. Even though Rocket Lab’s liquidity position is strong, I would like to see additional earnings reports to determine if this higher valuation is justified. In the meantime, if the stock pulls back, I would consider initiating a small position.