Rocket Lab (RKLB)

Aerospace and defense company Rocket Lab (NASDAQ:RKLB) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 32.1% year on year to $122.6 million. On the other hand, next quarter’s revenue guidance of $135 million was less impressive, coming in 1.7% below analysts’ estimates. Its GAAP loss of $0.12 per share was in line with analysts’ consensus estimates.

Company Overview

Becoming the first private company in the Southern Hemisphere to reach space, Rocket Lab (NASDAQ:RKLB) offers rockets designed for launching small satellites.

Aerospace companies often possess technical expertise and have made significant capital investments to produce complex products. It is an industry where innovation is important, and lately, emissions and automation are in focus, so companies that boast advances in these areas can take market share. On the other hand, demand for aerospace products can ebb and flow with economic cycles and geopolitical tensions, which can be particularly painful for companies with high fixed costs.

Competitors offering similar products include Space X (private), Astra (NASDAQ:ASTR), and Virgin Orbit (NASDAQ:VORB).

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last four years, Rocket Lab grew its sales at an incredible 73.1% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Rocket Lab’s annualized revenue growth of 43.9% over the last two years is below its four-year trend, but we still think the results suggest healthy demand.

This quarter, Rocket Lab reported wonderful year-on-year revenue growth of 32.1%, and its $122.6 million of revenue exceeded Wall Street’s estimates by 0.8%. Company management is currently guiding for a 27.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 37.7% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is commendable and suggests the market is baking in success for its products and services.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Rocket Lab’s high expenses have contributed to an average operating margin of negative 63.7% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

On the plus side, Rocket Lab’s operating margin rose by 62.1 percentage points over the last five years, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

In Q1, Rocket Lab generated a negative 48.3% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Rocket Lab’s full-year earnings are still negative, it reduced its losses and improved its EPS by 24% annually over the last four years. The next few quarters will be critical for assessing its long-term profitability. We hope to see an inflection point soon.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Rocket Lab, its two-year annual EPS declines of 12.1% mark a reversal from its (seemingly) healthy four-year trend. These shorter-term results weren’t ideal, but given it was successful in other measures of financial health, we’re hopeful Rocket Lab can return to earnings growth in the future.

In Q1, Rocket Lab reported EPS at negative $0.12, down from negative $0.09 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Rocket Lab’s full-year EPS of negative $0.41 will reach break even.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Rocket Lab’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 57.3%, meaning it lit $57.28 of cash on fire for every $100 in revenue.

Taking a step back, an encouraging sign is that Rocket Lab’s margin expanded by 71.1 percentage points during that time. In light of its glaring cash burn, however, this improvement is a bucket of hot water in a cold ocean.

Rocket Lab burned through $82.9 million of cash in Q1, equivalent to a negative 67.6% margin. The company’s cash burn increased from $21.77 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Rocket Lab’s five-year average ROIC was negative 51.7%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Rocket Lab burned through $177.1 million of cash over the last year, and its $489.7 million of debt exceeds the $428.4 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Rocket Lab’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Rocket Lab until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by Rocket Lab’s optimistic EBITDA guidance for next quarter, which blew past analysts’ expectations. We were also excited its revenue and EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its quarterly revenue guidance missed. Overall, this print had some key positives, but the market seemed to be hoping for more. The stock traded down 3.5% to $22.33 immediately after reporting.

Updated: May 15, 2025 at 11:17 PM EDT

When considering an investment in Rocket Lab, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Rocket Lab is a pretty decent company if you ignore its balance sheet. First off, its revenue growth was exceptional over the last four years. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its rising cash profitability gives it more optionality. On top of that, its expanding operating margin shows the business has become more efficient.

Rocket Lab’s forward price-to-sales ratio is 20.5x. Certain aspects of its fundamentals are attractive, but we aren’t investing at the moment because its balance sheet makes us uneasy. Interested in this company and its prospects? We recommend you wait until its debt load falls or its profits increase.

Wall Street analysts have a consensus one-year price target of $25.65 on the company (compared to the current share price of $25.20).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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