Rocket Lab(NASDAQ: RKLB) stock has taken off like -- what else? -- a rocket. Over the past 52 weeks, shares of the maker of tiny satellites and the only slightly bigger rockets that launch them has soared 521%, gaining about 10% per week. At nearly $27 per share currently, Rocket Lab carries a market capitalization of more than $13.3 billion, and is valued at 31 times its annual sales.
Whatever might Rocket Lab be able to do to justify such an optimistic valuation?
Image source: Getty Images.
Rocket Lab's second act
That's the question I asked myself (and CEO Peter Beck) when I interviewed him about the company's plans to build a new Neutron rocket -- and about the company's plans beyond Neutron -- a couple years back. And I came away with the firm opinion that Rocket Lab's most likely course, to expand its revenue streams and help justify its steadily increasing market capitalization, would be to build (or buy) its own satellite constellation.
Turns out, though, Rocket Lab has decided to take neither of these routes, or at least not for now. Instead, Rocket Lab's next act will be to begin making spy satellites, and become a prime contractor selling such satellites directly to American spy agencies and the military.
Rocket Lab's path to this new business goes by way of Geost, LLC, a tiny privately owned manufacturer of electro-optical payloads for the spy satellite market. Last week, Rocket Lab announced it will pay $125 million cash, plus $150 million in Rocket lab stock, plus another $50 million cash "in potential additional cash earnout payments tied to revenue targets" to buy Geost from the private equity firm that currently owns it.
The purchase is slated to take place sometime in the second half of 2025. Once it happens, Rocket Lab will be able to build its own spy satellite "payloads," to couple with the satellite "buses" that it already builds to carry other companies' payloads.
What Geost does
"Geost delivers advanced EO/IR sensor systems for missile warning and tracking, tactical intelligence, surveillance, and reconnaissance, Earth observation, and space domain awareness," explains Rocket Lab, referring to electro-optical and infrared sensors (or in more common parlance, "cameras").
What buying Geost does for Rocket Lab
Rocket Lab notes that these are precisely the kinds of cameras that the U.S. Pentagon is currently deploying en masse as part of the Space Force's Proliferated Warfighter Space Architecture (PWSA) program, for which Rocket Lab won a $515 million contract in 2023. These same kinds of cameras would be needed in even greater numbers to construct President Donald Trump's Golden Dome.
Geost has until now been building these sensor suites for sale to major defense contractors such as Northrop Grumman and L3Harris, both of which are also major players in PWSA, and both of which are hopefuls for the Golden Dome project. Now, Geost will bring these capabilities in-house and help Rocket Lab to build entire spy satellites directly, "cementing the Company's role as a disruptor in national security space," and allowing the company to provide even more "end-to-end space capabilities for the United States and its allies."
Simply put, it gives Rocket Lab a huge leg up in competing for future awards under PWSA, under Golden Dome, and for other spy satellite work -- not just for the U.S., but internationally as well.
Is Rocket Lab stock a buy?
And let's be honest here: Rocket Lab really needs a boost like this, if its enormous valuation is to be justified.
Priced in excess of $12.3 billion, but with less than $500 million in annual revenue and no profit or free cash flow, and not expected to turn profitable for another couple of years at least, Rocket Lab stock sells for a sky-high valuation of 26 times sales. Even assuming analyst forecasts are correct, it will be 2030 before Rocket Lab's sales (projected to be $3.5 billion that year) reach a level that brings the stock down to an ordinary valuation for a space stock -- somewhere between 2 and 4 times sales.
Granted, growth stocks like Rocket Lab often sport excessive valuations to present-day sales. But to justify its valuation, Rocket Lab needs a really big growth driver, capable of rapidly expanding its annual sales. Buying Geost, and putting itself in contention to win prime contracts under the $175 billion Golden Dome project, just might be a catalyst big enough to make that happen.
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Rich Smith has positions in Rocket Lab USA. The Motley Fool has positions in and recommends L3Harris Technologies and Rocket Lab USA. The Motley Fool has a disclosure policy.
