Rocket Lab's Preferred Commercial Venture Appears Set to Achieve Financial Profitability
Rocket Lab's Preferred Commercial Venture Appears Set to Achieve Financial Profitability
Two things can coexist:
Thing 1: I've not been tracking Rocket Lab (RKLB -5.83%) shares for an extended period.
Thing 2: I've closely monitored Rocket Lab shares since they became publicly traded stocks and even before their initial public offering (IPO).
Thus, take my word when I assert this third point: For as long as I've followed Rocket Lab, it hasn't demonstrated remarkable earnings from launching rockets as a stock - at least not in terms of turning a profit.
Despite ramping up launch frequency and annual revenue over the last few years, Rocket Lab's launch services division had still reported a negative gross profit margin as late as 2022. In 2023, its profit margin in launch services only climbed to a skinny 11%, while Rocket Lab earned a more substantial margin from its lesser-known space services division.
Rocket Lab excels at its primary mission
Launch services
This is why, at year-end 2022, I argued that "better revenue growth and higher profit margins on those sales mean space systems is actually [Rocket Lab's] most crucial business - not rocket launches."
25.7%
However, the tides are turning.
26.5%
Consider this: In the breakdown of sales from its third-quarter earnings report, as reported during its post-earnings conference call, Rocket Lab CFO Adam Spice noted that Rocket Lab's launch division posted a $21 million quarterly revenue, while its space systems division (which manufactures everything from parts to entire satellites and spacecraft) saw revenues four times larger - $83.9 million.
28.6%
While this fact isn't new, it's still striking. Space systems surpassed launch services in terms of annual revenue in 2022, and the division has generally outperformed launch services in revenue growth. The surprise came when Spice revealed that launch services had made steady progress in closing the revenue gap with space systems in terms of the profits Rocket Lab earned on that revenue.
26.6%
Bigger numbers equal better
Again, in 2023, launch service gross profit margin was just above 11%, while space systems reported a 25% margin, twice the former. But look at how these numbers unfolded in the first three quarters of 2023:
Space systems
| Metric | Q1 2023 | Q2 2023 | Q3 2023 | YTD || --- | --- | --- | --- | --- || Launch services | 25.7% | 26.5% | 28.6% | 26.6% || Space systems | 26.3% | 25.2% | 26.2% | 25.9% |
26.3%
Space systems' profit margin is more or less maintaining its level above where it closed out 2023. But launch services revenue is skyrocketing. Indeed, it's increasing and (for now at least) now surpasses profit margin derived from space systems sales.
25.2%
Summarizing the progress, Spice noted that margins are "fairly consistent across Launch and Space Systems right now," despite the space systems business being double the size of launch services. And both divisions are on track to meet the company's near-term target of 30% gross profit margin.
26.2%
What this means for Rocket Lab shares
25.9%
It's hard to overstate how significant this could be for Rocket Lab shares. So far, I've held the belief that for Rocket Lab - as for most space companies - launching rockets would serve as a sort of low-margin "precursor." It's a business the company must operate in to gain an advantage in building and selling satellites to customers. However, long-term, Rocket Lab would derive most of its profits from selling those satellites.
What Rocket Lab has achieved in 2023, however, is to disprove this theory. It's demonstrated that launching rockets can, in fact, be a lucrative business.
This shift in profitability will only become more critical as Rocket Lab debuts its new Neutron rocket. Priced at $50 million to $55 million per launch, each Neutron launched will yield at least six times the revenue of an equivalent Electron rocket launch - and if margins hold steadfast, six times the profit, too.
What makes this story even more appealing is the possibility that gross profit margin in launch services will not just remain steady but continue to improve. Rocket Lab CEO Peter Beck explained the dynamic in an interview with Payload Space: Currently, the majority of Rocket Lab's spending is focused on Neutron development. But "the moment you [stop developing Neutron, begin launching Neutron, and] start drawing customers to it, it flips."
Costs transition to profits. And when that occurs, Beck predicts, both Electron and Neutron will generate gross profit margins of 40% to 50%.
So what does this mean for Rocket Lab? The mathematics here are complex, but consider this: Analysts polled by S&P Global Market Intelligence suggest Rocket Lab will generate more than $900 million in sales in 2026. If Rocket Lab can convert 45% of those sales into gross profits (approximately $405 million), and if operating costs don't surge dramatically over the next couple of years beyond what they did between 2023 and 2024, I see a genuine chance Rocket Lab could report positive net earnings as early as 2026 - a full year before Wall Street expects.
Do you think that might excite investors, and send Rocket Lab shares shooting upwards even further?
I do too.
In the realm of investing and finance, the potential for improved profitability in Rocket Lab's launch services division could be enticing for investors, given that it could significantly boost the company's earnings if the trend continues. If Rocket Lab can sustain its current growth in launch services profits and continue to close the revenue gap with its space systems division, it might attract more interest from financiers who are keen on money-making opportunities.