Where Will Rocket Lab Be in 5 Years?

On Jan. 26, Rocket Lab (NASDAQ: RKLB) was just coming off its best stock price day ever. Before the weekend began, Rocket Lab had touched -- then passed -- $30 a share, and a lot of investors were convinced it would go higher. Even today, in fact, S&P Global Market Intelligence counts no fewer than eight separate analysts recommending that you "buy" Rocket Lab stock -- and zero analysts telling you to sell it.

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But I wasn't so sure.

Crunching the numbers, I asked myself a question similar to the one you see above: Where Will Rocket Lab Be in 1 Year? I concluded that Rocket Lab, although a terrific company, was a pretty terrible stock in the short term because of its too-high stock price. Ultimately, I thought Rocket Lab stock would go down, not up, in 2025.

Here we are two months later. What has Rocket Lab stock done? Well, at less than $19 a share, it's gone down about 28%.

Pyrrhic victory

I take no joy in telling you this. I'm a Rocket Lab shareholder myself, and I love this company and would much prefer to see its stock go up than down.

The closest thing to a publicly traded SpaceX that investors have to invest in, Rocket Lab is already America's No. 2 rocket launcher by number of rockets launched annually. Its record of success launching tiny Electron rockets is all but flawless, and Rocket Lab is making major progress with getting its bigger Neutron rocket ready for its first launch later this year. Once that happens, I think Rocket Lab will have a pretty good chance of being able to take on SpaceX and its Falcon 9 rockets on more or less equal footing -- and perhaps even outperform SpaceX.

Rocket Lab is also making progress on other fronts. In its most recent earnings report, for example, CEO Sir Peter Beck told investors that Rocket Lab had bought its first landing barge (for landing Neutron rockets at sea), convinced one of its biggest customers to double the number of satellite launches it's contracted with Rocket Lab, and even begun work designing its own satellite, the "Flatellite," which will be tailor-made for stacking within Neutron's capacious payload fairing.

Image source: Rocket Lab.

Most recently of all, Rocket Lab announced plans to buy German laser communication specialist Mynaric, aiming to dramatically increase production output at the company in order to equip more of its satellites with laser communication capability for faster communication among orbiting satellites, spacecraft in deep space, and aircraft and ground locations on Earth.

Image source: Rocket Lab.

Rocket Lab in 5 years

Rocket Lab's business is firing on all cylinders. Its stock may have been overpriced two months ago. But what about today? And how are things looking in the longer term if we look a few years out?

Well, there's good news on both those questions. Regarding the stock price, Rocket Lab's recent share price slump has made its stock more affordable. Selling just under $20 a share today, the stock currently carries a market capitalization of only $9 billion.

Granted, that's probably too expensive based on current numbers. Rocket Lab is still not profitable, and is still not generating positive free cash flow. Analysts do think Rocket Lab might turn FCF-positive in 2026, however, generating positive free cash flow of about $84 million. $9 billion divided by $84 million equals 107, so Rocket Lab has a price-to-free cash flow ratio of 107.

And yes, even that number looks more than a little pricey. Still, it's hard to judge a valuation at the breakeven point, where a stock is just flipping from negative to positive FCF, and you're not really certain how fast the positive numbers will grow.

The good news is that if we look out a few years and let the growth rates smooth out a bit, we can get a better handle on valuation.

According to data from S&P Global, most analysts see Rocket Lab growing its $84 million in 2026 FCF by10x over the next five years, and hitting $942 million in FCF in 2031. That works out to a 62% annualized FCF growth rate for the company. And the way I calculate fair value, this implies investors should be pretty safe so long as they pay no more than 62x FCF for the stock (thus giving Rocket Lab stock a price-to-free cash flow-to-growth valuation of no more than 1.0).

What does this work out to in dollars and cents? 62 x $84 million equals $5.2 billion, or roughly 58% of Rocket Lab's current market cap.

My target price for Rocket Lab stock

At 107x forward FCF today, I'm still not buying any more Rocket Lab stock. Should the stock drop another 42% or so and fall below $11.50, however, I expect to be buying pretty heavily.

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Rich Smith has positions in Rocket Lab USA. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.