US giant initiates Rocket Lab coverage, outlines bull and bear cases

One of the largest wealth managers in the US has initiated coverage on Rocket Lab.

And for founder and minority shareholder Peter Beck, the news is all good.

In a January 12 research note, Morgan Stanley gave Rocket Lab a "buy" or "overweight" rating, with a 12-month target price of US$17.00 (the Nasdaq-listed stock closed Friday at US$10.42 for a US$4.86 billion ($7.1b) market cap.

Rocket Lab listed at US$10.00 on August 25 following a merger with a spac or shell company. Its shares been volatile, in line with the space sector, hitting a high of US$20.72 in early September but recently falling back down to Earth.

A team of analysts from the investment bank called the Kiwi-American company "A SpaceX alternative."

They wrote, "Rocket Lab offers investors high-quality exposure to the space race. While execution and competitive dynamics drive a wide range of outcomes, risk-reward skews to the upside."

"The Space Race is back. This time, though, it is playing out not just between
nation-states jockeying for geopolitical advantage, but also between commercial
companies racing to secure first-mover advantages in zero gravity," Morgan Stanley's team wrote.

"Thanks to innovations in miniaturisation and computing power, satellites are getting smaller and as their use cases grow, mega-constellations are on the rise. To support the
commercial and military growth of space-based assets, space launch is a key gateway.

"We see Rocket Lab's track record of launching over 100 satellites to orbit as a stand-out amongst peers and view company efforts to increase rocket re-usability (and thus lower cost) as game-changing."

The US$17.00 price target was Morgan Stanley's "base" projection, which it headlined, and which under-pinned its "overweight" rating.

It also outlined two alternative scenarios. One is a "bull case" for US$40.00, which was based on Rocket Lab being able to reach its target of 35 launches per year by 2026 - which assumes the company hits its technical marks, and the small satellite market grows as predicted (its numbers exclude the thousands of satellites that will be launched for Elon Musk's Starlink, which presumably will continue to be launched on rockets from sister company Space X).

And the other is a "bear case" that saw Rocket Lab sinking to US$6.00 if "Rocket Lab struggles to scale Electron and Neutron's roll-out is delayed." It notes that like all space transportation companies, Rocket Lab has had setbacks, including its third mission failure in July last year.

The Neutron is Rocket Lab's much larger rocket, currently in development with its first launch scheduled for 2024. It will launch exclusively from the US.

An artist impression of a Rocket Lab Photon ferrying a Nasa's Capstone satellite into lunar orbit. The launch scheduled for later this year, supports the US space agency's Artemis mission, which aims to land the first woman and first person of colour on the Moon in 2023. Image / Supplied

The US military's new Space Force wing recently chipped in US$24.35m ($34m) toward the development of Neutron's upper stage. Morgan Stanley estimates the Neutron's total development cost will be between US$200m and US$250m (Rocket Lab's August 25 listing raised US$750m, which founder and CEO Peter Beck said would go toward the development of the Neutron, plus acquisitions that would help diversify Rocket Lab's business).

The Morgan Stanley team gives the Neutron good notices for a number of features, including its re-usability. If the Neutron first-stage is able to land at its launchpad as planned, that will be a cheaper and more time-efficient model than a rocket landing at sea (Space X's Falcon 9 boosters can land themselves, but on a barge out to sea).

"The Neutron will initially launch out of the United States for industrial base reasons," Beck said. "To give you a sense of the scale, if we took all the liquid oxygen that's produced in New Zealand, we'd only fill half the tank, let alone all the other kind of logistics that are associated with these very, very large launch vehicles." Image / Supplied

Morgan Stanley also praises Rocket Lab's ongoing efforts to become a full-service space transportation company, through its series of acquisitions and in-house developments to build its space services division, centred on its Photon spacecraft.

Later this year will ferry a Nasa satellite into lunar orbit in a historic first Moon launch from NZ (for a Kiwi can-do cut-price of $14m). In 2024, two Photons, commissioned by Nasa, will go into orbit around Mars.

Rocket Lab reported a net loss of US$88.0m for its September quarter, versus its year-ago net quarterly loss of US$13.0m as operating costs and R&D expenses surged while its Covid-hit revenue fell to $5.0m for the quarter from the year-ago US$11.0m.

But it also said its backlog of contracts - which was worth US$60m in June 2020 - had swelled to US$237m.

Rocket Lab founder and CEO Peter Beck. Photo / Dean Purcell

Investors also took heart at the firm forecasting a revenue bump to US$23m-US$25m for its December quarter, and space systems revenue for the September quarter rose 360 per cent over the year-ago period to represent 27 per cent of total revenue for the nine months to September 30.

Rocket Lab also guided to a narrower net loss of US$24m - US$26m for its fourth quarter (the firm has previously flagged it will spend several years in the red).

Increasing the percentage of its revenue that comes from space systems - satellites and spacecraft - is core to Rocket Lab's growth strategy and its aim to be a full-service space transportation company.

Rocket Lab's aim is for space systems to generate 40 per cent of its revenue by 2027 - a year in which it has forecast operating earnings of US$505m on US$1.57b turnover.

In mid-November, it acquired Planetary Systems Corporation (PSC), a Maryland-based spacecraft separation system, for US$42m

The deal was announced with the ink barely dry on Rocket Lab's purchase of Advanced Solutions, a Colorado-based maker of mission simulation systems, and navigation and control solutions, for US$40m - plus a potential US$5m on top if it reaches performance targets for this calendar year.

And last year, Rocket Lab bought Canadian satellite component maker Sinclair Interplanetary for an undisclosed sum to bolster its Photon platform for placing satellites into the right orbit around the Earth, or ferrying them between planets.

And mid-December, Rocket Lab said it was buying a fourth US firm, SolAero, a New Mexico maker of solar components for space, for US$80m.

The series of acquisitions has doubled staff over the past year to more than 1100 - including 425 who will join from SolAero.

Once the SolAero deal closes, Rocket Lab will have a majority of its employees in the US for the first time.