Selling Rocket Lab as 'Profitability' Concerns Emerge
I'm reducing my exposure to the aerospace darling after enjoying 382% gains.
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Space had a big day on Thursday. Firefly Aerospace (FLY) screamed as high as $73.80 early on during its first day as a publicly-traded company. The space transportation services company's shares closed at $60.35 after being priced at $45 per share on Wednesday evening. After the close, long-time Sarge-folio and core "Stocks Under $10" holding Rocket Lab RKLB released the firm's second quarter earnings.
For the period ended June 30, Rocket Lab posted a GAAP EPS of -$0.13 on revenue of $144.498 million. While that bottom-line print fell short of expectations by a couple of pennies, that top-line number was good enough for year-over-year growth of 36%. The firm successfully launched five "Electron" missions throughout the quarter. The firm also confirmed that Launch Complex 3, which will be used for the reusable "Neutron" rocket program, is on track to be completed and opened during the current quarter.
The firm also moved into production of the $515 million constellation build of 18 spacecraft for the Space Development Agency's Tranche 2 Transport Layer. The Space Development Agency is a direct reporting unit of the United States Space Force.
The CEO
CEO and company founder Sir Peter Beck commented on the quarter in the press release:
“Rocket Lab has delivered impressive gross margin expansion, and another record revenue result this past quarter, driven by our strong operational performance and program execution that has us on track for a record year of launches and spacecraft delivery. It’s also been a busy quarter of M&A activity as we've progressed our acquisition of Geost, strongly positioning ourselves to meet the needs of defense initiatives like the Golden Dome with end-to-end mission solutions across launch, spacecraft — and now payloads."
On the state of the business, Beck said, “On the launch side of the business, with five flawless missions executed, Electron maintains its leadership position as the world’s leading small orbital rocket with a rising launch cadence and increasing international demand for its services. We’ve also made steady progress with our reusable medium-lift rocket Neutron."
Operations
As revenue generation grew 37% from the year-ago period, the cost of revenue increased 24.4% to $98.11 million, leaving a gross profit of $46.388 million (+70.8%) as gross margin improved sharply from 25.6% to 32.1%. Total operating expenses increased 50.5% to $106.027 million. This left a GAAP operating income/loss of -$59.639 million, down from the year-ago comparison of -$43.274 million.
After accounting for interest, other income and expenses and taxes, GAAP net income/loss printed at -$63.339 million, down from -$40.605 million. That works out to -$0.13 per fully diluted share, which was down from -$0.08 for the year-ago period.
Guidance
For the current quarter, Rocket Lab is projecting revenue of $145 million to $155 million. This brings the midpoint of the range just below the $150.5 million that Wall Street was looking for. GAAP gross margin is seen at 35% to 37%, which would be a sharp sequential improvement. GAAP operating expenses are expected to be in line with the quarter just reported.
Fundamentals
For the first half of the year, Rocket Lab "generated" operating cash flow of -$77.467 million. Tack on capex spending of $60.719 million, and the firm is left with free cash flow of -$138.186 million. That was down from -$50.109 for H1 2024.
Turning to the balance sheet, the firm ended the quarter with a cash position of $688.136 million and inventories of $130.232 million. That put current assets at $1.006 billion. Current liabilities add up to $376.453 million, which includes $16.503 million in debt service payments. The firm stands with very healthy looking current and quick ratios of 2.67 and 2.32.
Total assets amount to $1.553 billion. This does include $124.942 million in goodwill and other intangibles. At about 8% of total assets, this is no problem. The firm also has $66.07 million in marketable securities and restricted cash not labeled as "current" but could be added to its total cash position.
Total liabilities less equity comes to $864.748 million. This does include $53.72 million in traditional long-term debt and $346.466 million in convertible senior notes. The firm could take care of its entire debt load out of pocket. This is a very, very strong balance sheet. Just keep in mind that those convertible notes could at some point end up diluting the equity.
Wall Street
Since these earnings were released on Thursday night, I have found four sell-side analysts rated at four or five stars out of five by TipRanks. All four have reiterated "buy" ratings, while two of the four increased their target prices. At this point, the average target price across the four is $51.25 with a high of $55. That would be Ryan Koontz of Needham.
My Thoughts
I don't love everything. The balance sheet is strong, cash flows are not. Gross margins are improving. Net profitability appears to be moving further away. The guidance is fine but did not leave me amazed. Beck mentioned the term long-term profitability once in the press release. Neither the word "profit" nor "profitability" did not come up at all during the call. I thought that mildly troubling.
Readers will recall that I canceled this stock's $51 target price back on July 17 when the shares were going parabolic. RKLB has been all over the place on Friday morning. It's been up and now it's down. I think I'll be selling some into strength on Friday. The shares have returned to our old pitchfork model and appear to be fumbling around for support at its 21-day EMA. Lose that line and the swing crowd will turn on the stock for now.
The stock's reading for relative strength is now neutral. The daily MACD is quite decisively postured bearishly. I do think the time has come to de-emphasize RKLB in the Sarge-folio. This name is currently my third heaviest-weighted stock and it's done a great job for us. We are up 382% on the position.
The time has come however, to ring the register, to a degree. I intend to take RKLB down to a top-10 holding, probably fifth or sixth in weighting, while elevating RTX Technologies RTX to my top five.
Rocket Lab (RKLB)
Plan: To Reduce exposure, Not exit the name
Add: Closer to the 50-day SMA than the 21-day EMA
Exit: On loss of the 200-day SMA
New pivot: $53 (recent high)
Ultimate target after re-weighting: $61
At the time of publication, Guilfoyle was long RKLB and RTX equity.
