Although Rocket Lab (currently trading at $71.89 per share) has gained 5.7% over the last six months, it has trailed the S&P 500’s 16.2% return during that period. This may have investors wondering how to approach the situation.
Given the relatively weaker price action, does RKLB warrant a spot on your radar, or is it better left off your list? Find out in our full research report, it’s free.
Why Are We Positive on Rocket Lab?
Becoming the first private company in the Southern Hemisphere to reach space, Rocket Lab (NASDAQ: RKLB) offers rockets designed for launching small satellites.
1. Skyrocketing Revenue Shows Strong Momentum
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. Luckily, Rocket Lab’s sales grew at an incredible 68.9% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers.
2. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Rocket Lab’s margin expanded by 59.4 percentage points over the last five years. Rocket Lab’s free cash flow margin for the trailing 12 months was negative 48.3%, and continued increases could help it achieve long-term cash profitability.
3. New Investments Bear Fruit as ROIC Jumps
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, Rocket Lab’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.
Final Judgment
These are just a few reasons why we think Rocket Lab is a high-quality business. With its shares trailing the market in recent months, the stock trades at 2,869.8× forward P/E (or $71.89 per share). Is now a good time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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