Rocket Lab Has a Good Week, but Its Share Price Suffers

This week, Rocket Lab Inc. launched its first rocket from US soil, delivering a payload of small satellites to orbit for a paying customer. This marks a significant milestone for the Long Beach, California-based startup, which now has a launch site in Virginia in addition to its existing facility in New Zealand. This success bodes well for the future of the fledgling space industry, which includes a number of other startups.

For a brief moment after Tuesday evening's launch, investors seemed to take notice. Shares jumped by as much as 11% in early Wednesday trading after Stifel Financial Corp. analyst Erik Rasmussen, who has a buy rating on the stock, said the launch is an important milestone that puts Rocket Lab on a trajectory to meet the increasing demand for low-earth orbit satellite launches.

The initial excitement around Rocket Lab's latest mission quickly faded, with shares returning to their previous pattern of decline. Rocket Lab shares fell on both Wednesday and Thursday following the mission, before posting a small gain of 1.2% on Friday.

Investor skepticism is summed up by Credit Suisse analyst Scott Deuschle. "There's a lot of exaggeration about what the market opportunity is here," he said in an interview. "The reason I don't get excited because they launched a rocket is because they don't generate positive gross profit on a launch."

Despite the challenges of the past year, Rocket Lab, Virgin Orbit Holdings Inc., and Astra Space Inc. are all hopeful for a better 2023. This may also be the year that they catch the attention of more investors, who have largely been putting their faith and money in SpaceX. All three companies saw their stock prices drop significantly in 2022 due to operational issues, which were made worse by the Federal Reserve's aggressive interest rate hikes. Investors also lost interest in companies that went public via merger with blank-check companies. By comparison, privately-held SpaceX continued to be a favorite among investors last year, with its valuation rising to around $140 billion.

Rocket Lab's Electron rocket took off from the company's new launchpad on Wallops Island, Virginia. The company is targeting between four and six more launches from Virginia this year, Chief Executive Officer Peter Beck said in an interview with Bloomberg Television on Wednesday.

Deuschle is the only analyst tracked by Bloomberg with a bearish rating on Rocket Lab, with a $3 price target. The average analyst 12-month price target is $9.86, more than double where Rocket Lab currently trades. However, analysts' price targets are less than half of where Rocket Lab was trading in September 2021 after its IPO.

"The market has been indiscriminate in the pull back of the Space-SPAC companies regardless of execution," said Morgan Stanley's Kristine Liwag. Liwag, who has the equivalent of a buy rating on Rocket Lab, sees a healthy market for the startup's services. "Demand continues in 2023 and capacity hasn't really increased significantly."

Rocket Lab has a proven track record of successful missions, with nine launches in 2022 and a total of 32 successful missions to date. This is in contrast to Virgin Orbit, which has only had four successful launches. Virgin Orbit's recent attempt to launch from the UK ended in failure, highlighting the difference in experience and success between the two companies.

"Rocket Lab is one of the few space startups that have proven to be successful, with a working product and demonstrated growth opportunity," said Chad Anderson, a managing partner at Space Capital. Anderson's firm, with $100 million under management, was an early stage investor in Rocket Lab.

SpaceX is still much smaller than Space Exploration Technologies Corp. (formally known as SpaceX). In 2022, SpaceX carried out 61 orbital missions, most of which were to launch its own Starlink satellites into orbit. However, a much smaller proportion (just four last year) were "ride share" payloads with satellites from paying customers, similar to what Rocket Lab could offer.

Rocket Lab's Electron rocket is much smaller than SpaceX's Falcon 9, only being able to carry 300 kilograms (661 pounds) of payload to orbit. This makes it much less expensive per launch, at only $7 million. However, the Falcon 9 can carry 22,800 kilograms at a reported cost of $65 million a launch, meaning it has a better dollar per kilo ratio. Rocket Lab is currently working on their next generation rocket, the Neutron, which is designed to lift 13,000 kilograms into orbit. The Neutron will be ready to launch starting in 2024, Beck said.

Rocket Lab is also working on a larger, self-landing reusable booster, hoping to make their Electron reusable as well. The company is testing a system that would use a helicopter to catch the booster midair, but they have yet to be successful. Beck said in an interview with Blomberg TV that there is a real capacity crunch in the 2025 to 2027 time frame for medium-size launch vehicles, which is why they are developing the Neutron launch vehicle.

Rocket Lab currently dominates its niche market, even though it is not yet profitable. Astra announced in August that it was ceasing work on its Rocket 3.3 system and shifting strategy. ABL Space Systems, a privately held company, recently saw its RS1 rocket crash back down to earth just 11 seconds into its debut orbital mission from a spaceport in Alaska. A fire in the RS1's avionics system may be to blame.

According to Deutsche Bank analyst Edison Yu, there is a path to success for stragglers in the satellite market. The war in Ukraine showed how few rockets are available at short notice to get a wide range of satellites into orbit. Yu has a buy rating on Rocket Lab and is the only analyst tracked by Bloomberg covering Astra.

"When we realize that there are not enough rockets to take everyone up, we're going to see a lot of pricing power," said Yu.