Greg Smith, head of retail at Devon Funds, said investors were looking past the lack of profitability, and there was a lot of momentum priced into its shares.
“But the company has been delivering. It is gaining huge credibility through deals with national space agencies and spending here has been ramping up. There’s been the recent partnership agreed with the European Space Agency to launch satellites for constellation navigation before December.
“And there has been a string of successful launches. A rocket is being produced every 15 days, and [it has] successfully launched its 66th, 67th and 68th Electron rockets.”
He said the company’s upcoming, bigger Neutron medium-lift rocket was another driver of growth.
If it was successful, it could unlock US$5.6 billion ($9.3b) in National Security Space Launch contracts.
“The company isn’t profitable yet, so we can’t really look at earnings multiples. Even to sales it is looking high at up to 10 times, but if it keeps delivering we might yet see more momentum.”
Gertjan Verdickt, a lecturer of finance at the University of Auckland, said a significant portion of Rocket Lab’s current valuation was based on the promise of a future that was “both exciting and challenging to value”.
“How much will the space economy truly be worth in 10 or 20 years? How many applications will it lead to? It’s difficult for anyone to grapple with.
“Because of that uncertainty, optimistic investors are willing to pay a very high price today for the potential of a massive payoff down the road. They see a leader in a burgeoning industry and don’t want to miss out.
“This part of the valuation is precarious. A narrative of explosive growth and future dominance sustains it.
“If that optimism fades, even slightly, you could see a significant drop. That said, for anyone who got in early, a drop would still leave them with an amazing return.”
Satellite launches, ESA deals, and a bigger Neutron rocket fuel Rocket Lab’s rising credibility. Photo / RNZ
He said the “hype-driven” component of the share price made it fragile.
“If you think about it from a behavioural finance point of view, there is a lot of ‘fear of missing out’ going on too.
“If you missed the boat at 100%, 200% ... and you jump in late, the prices – because you are willing to buy – the stock price increases more. This leads to a momentum effect.”
He said the other aspect of the share price was the company’s cash flow.
“There is a real, tangible business generating real cash flows behind the stock price.
“Rocket Lab has already realised tremendous growth. Their revenue has increased significantly over the past few years, and they have a backlog of over $1 billion in signed contracts, providing a clear line of sight into future earnings.
“They have two core pillars of growth. First, their proven Electron rocket is a workhorse for the small satellite market. Second, and more importantly for the future, is their upcoming Neutron rocket, which is designed to compete with larger players like SpaceX for much bigger, more lucrative contracts.
“Additionally, they’re not just a launch company. Their Space Systems division - which builds satellite components and platforms - is their biggest revenue driver. They are strategically building an end-to-end space company, and their pending acquisition of the company Mynaric is another step in that direction.”
When it came to whether the 800% increase was sustainable, the level of share price was probably not, he said.
“Unless the company’s growth potential is even better than what people are currently thinking.
“However, the underlying business growth is there. There is a very real and rapidly growing company here. The ultimate test will be whether its fundamental performance can grow fast enough to justify the market’s sky-high expectations. That said, if the balloon pops, it can go real fast, real quick.”
