Lower Rocket Lab Target Price After Guidance Disappoints, but I'm Not Selling

I could have written this piece on Rocket Lab USA RKLB on Thursday night. I could have written it on Friday morning. Good thing I did not. 

As I put my fingertips to this keyboard with an hour to go until lunch late Friday morning, the stock has been up and down for the day after having been down as much as 18.5% earlier. The firm went to the tape on Thursday night with its fiscal fourth quarter financial results. Those were fine. Earnings, while still a loss, were on consensus while revenues managed a beat while exhibiting year-over-year growth of roughly 120%. The guidance, however, was weak, as the firm had to push out the timeline for its Neutron rocket.

Rocket Lab Operations 

For the three-month period ended December 31, 2024, Rocket Lab USA posted an adjusted EPS of -$0.06 (beating by a penny), a GAAP EPS of -$0.10 (meeting expectations) and revenue of $132.388 million. That top-line print beat Wall Street by almost $2 million and, as mentioned above, was good enough for growth of 120.7%. 

The cost of those revenues came to $95.571 million (+114.8%), leaving a gross profit of $36.817 million (+137.7%) on a gross margin of 27.8%, up from 25.8%. GAAP operating expenses grew 39.4% to $88.366 million, leaving an operating income/loss of -$51.549 million down from -$47.883 million for the year-ago comparison. 

After interest, other income and expenses and taxes, GAAP net income/loss hit the tape at -$52.345 million, down from -$50.497 million a year ago. This works out to EPS of -$0.10, which is flat from Q4 2023. The firm made adjustments worth a rough $0.04 per share or $29.151 million mostly for stock-based compensation expense, but also for the purposes of depreciation and amortization.

Accomplishments During the Quarter by Segment

Launch:

• Achieved a record year of 16 Electron launches in 2024, up 60% on the year prior.
• Selected by Kratos KTOS to support a $1.45 billion five-year federal contract for hypersonic flight testing under the MACH-TB 2.0 Contract Award.

Space Systems:

• Introduced a new low-cost satellite tailored for mass manufacture to serve large satellite constellations. Named Flatellite, the satellite is a scalable and resilient platform that offers high-speed connectivity and remote sensing capabilities.
• Completed significant program milestones across two Rocket Lab spacecraft programs advancing U.S. national defense: comprehensive multi-day design reviews for Rocket Lab’s 18 spacecraft program for the Space Development Agency's Tranche 2 Transport Layer-Beta constellation, and for the U.S. Space Force's VICTUS HAZE program (a $32 million responsive space mission with Electron and Rocket Lab’s own spacecraft).

Rocket Lab Stock Fundamentals 

For the full year, Rocket Lab generated operating cash flow of -$48.89 million, up from -$98.867 million for 2023. The firm spent $67.093 million on capital expenditures, leaving free cash flow (or cash burn) of -$115.983 million. That's an improvement from -$153.574 million for the year-ago comparison. The firm obviously is in no position to return capital to shareholders. 

Turning to the balance sheet, Rocket Lab ended the period with a cash position of $418.99 million and inventories of $119.074 million. That puts current assets at $692.621 million. Current liabilities add up to $339.525 million, which includes no short-term debt. The firm's current and quick ratios stand at an impressive 2.04 and 1.69, respectively. 

Total assets amount to $1.184 billion. Goodwill and other intangibles account for $129.657 million of that number. At less than 11% of total assets, this is not an issue. Total liabilities less equity comes to $801.889 million. Now that does include total debt (senior convertible notes and traditional long-term debt) of $389.441 million. The firm has enough cash on hand to cover that, but most of this number is in the convertible notes and could, hopefully (because that would mean it was worth exercising them) eventually dilute the stock.

Rocket Lab Stock Guidance 

This outlook disappointed investors as the firm guided towards total current quarter revenue of $117 million to $123 million with Wall Street looking for something along the lines of $135 million to $136 million. The firm is looking for adjusted gross margin of 30% to 32% and GAAP, and adjusted EBITDA of -$35 million to -$33 million, with Wall Street looking for something closer to -$28 million.

On Neutron 

Much of the recent sell-off for the stock came about as rumors spread, and a report from Bleecker Street Research had led investors to believe that the firm's new Neutron rocket program would not launch in mid-2025 as had been expected, but would be pushed out possibly as far as mid-2026 to mid-2027. 

CEO Sir Peter Beck addressed this during the call, "The landing platform is also a clear indication that we're scaling up and moving past first minimum viable product with Neutron now. With one launch set for ‘25, we're aiming to triple that in ‘26 and then the landing barge is obviously critical to that ramp-up. Now, recovery isn't planned on the barge for the first test flight, we'll be doing a soft splashdown, but we can expect return on investment to live up to its name in ‘26 when it enters service for all the future Neutron flights."

Wall Street on Rocket Lab

Since these earnings were released last night, I have come across eight highly-rated (four-plus stars at TipRanks) that have opined on RKLB. Seven of the eight rate RKLB at a "buy" or a buy equivalent. One analyst rates the stock as a hold. That "hold" did not set a target price. Four of the "buys" reduced their targets. 

After allowing for those changes, the average target price across those seven analysts is $28.29 with a high of $33 (Jason Gursky of Citigroup) and a low of $24 (Andres Sheppard of Cantor Fitzgerald). Once omitting those two as possible outliers, the average across the remaining five analysts drops slightly to $28.20. 

My Thoughts on Rocket Lab Stock

The quarter reported was solid. The cash burn is slowing. The balance sheet is solid. All that said, the guidance is not what we had hoped for.

I had warned readers that there was a closing pennant formation evolving that often leads to a volatile move. Well, that is exactly what happened. Closing pennants do not hint at which way the breakout will go. Obviously, this one went against the crowd with long-side exposure. I have bought some shares on the way down in defense of my own long position including a purchase this morning at $16.55. This has brought my net basis up to $7.80, so I am not in trouble, but that net basis is up quite a bit.

The stock has lost its 50-day SMA and appears to have tested the 61.8% Fibonacci retracement level of the late July through mid-January rally. Will there be another attempt? There could be. That 200-day SMA could act as a magnet on increased weakness. That said, I see Rocket Lab as a well-run operation and a business with improving fundamentals. I will continue to build my long position, and unlike Palantir PLTR where I have traded the stock because the gains had become so extreme, I have not sold any of this stock.

Target Price: $33 (down from $39)

Pivot Point: $26.50 (50-day SMA) 

Add: Down to the 200-day SMA ($13.50)

Panic: Loss of 200-day SMA

At the time of publication, Guilfoyle was long RKLB and PLTR equity.