The Smartest Space Stock to Buy With $500 Right Now

The pandemic made space stocks popular. Will the recovery make them profitable? In the height of the COVID-19 pandemic, small companies aiming to commercialize space exploration joined a cavalcade of hundreds of other unprofitable start-ups rushing to IPO by reverse-merging into special purpose acquisition vehicles (SPACs).

Granted, it didn't take long for investors to lose interest in space stocks. As these companies largely failed to deliver the rapid growth and easy profits they had promised their investors pre-IPO, prices plummeted 70%, 80%, and even 90% through early 2023. In 2024, though, things are starting to turn around.

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Several space stocks that survived the initial shakeout are now on the verge of turning profitable. And one of them might even be worth buying: Rocket Lab USA (NASDAQ: RKLB).

Get to know Rocket Lab

In case you aren't familiar with Rocket Lab yet, a few words of introduction may be in order. Like the name implies, it started out as a rocket company, building and launching small Electron rockets carrying small satellites (up to about 300 kg in size) to low earth orbit.

Since its founding in 2006, though, Rocket Lab has increasingly branched out and diversified its business. The company still builds expendable Electrons, of course. But it's also building a much larger Neutron reusable rocket that will be able to compete with bigger rocket companies like SpaceX and United Launch Alliance.

Rocket Lab builds other "space stuff," too, such as solar power systems, guidance systems, and parts needed for other companies' rockets and satellites. Entire Photon kick-stage spacecraft that can operate as in-orbit space tugs. Rocket Lab is even building (small) spacecraft capable of traveling to Mars and Venus.

As its product portfolio grows, so too does its revenue, which reached $245 million last year and has passed $300 million already in only the first three quarters of 2024.

Rocket Lab is growing

Analysts who follow Rocket Lab expect the company to more than double that number in 2025 and then keep growing sales past $900 million in 2026. Even better news for investors: 2026 could be the first year Rocket Lab earns a profit, with the company expected to report $0.01 per share in earnings, based on generally accepted accounting principles (GAAP), and nearly $82 million in positive free cash flow. And that's just the start.

Image source: Getty Images.

Growing -- and profitable?

Last month, I took a close look at Rocket Lab's future, focusing on the year 2027, when the company predicts its Neutron rocket should be launching roughly five times annually and generating revenue of more than $50 million per launch (as opposed to just $8.2 million from Electron rocket launches, currently).

Rocket Lab's two main fields of business -- rocket services and space systems -- should be generating roughly equal revenue totaling $1.25 billion annually in 2027. Even better, by 2027, Rocket Lab should be earning much-improved profit margins on this revenue.

The business is transitioning from spending money to develop Neutron up through next year to making money from launching Neutron in 2026. That's when it plans to launch three times, followed by five times in 2027, and seven times in 2028. Rocket Lab CEO Sir Peter Beck predicted that the company's profits would "flip" from negative to firmly positive.

Across both halves of the business, Beck foresees Rocket Lab growing its gross profit margin from 26% presently to 40% or even 50% in outlying years. On $1.25 billion in revenue, that should yield a gross profit of perhaps $560 million in 2027.

Assuming operating costs are no more than the $280 million or so Rocket Lab is spending today (they may actually be less as R&D spending trails off), this implies that Rocket Lab could produce an operating profit of perhaps $280 million and an operating profit margin of 22% within just a couple of years.

Image source: Getty Images.

Is Rocket Lab stock worth 500 of your dollars?

Admittedly, this all still leaves Rocket Lab stock looking relatively pricey. Even assuming most operating profits drop straight to the bottom line as net income (as the company applies historical losses to its income tax obligations), $280 million in profit on an $11.5 billion market cap values Rocket Lab stock at 41 times earnings.

Still, the rate at which profits will soon be growing may justify the high cost. According to analyst forecasts, Rocket Lab's earnings per share could grow from $0.01 per share in 2026 to $0.19 in 2027 to $0.41 in 2028. That's 4,000% growth in just two years.

Admittedly, that's kind of a blue-sky prediction. It might not work out. But is it smart to place a smallish $500 bet on Rocket Lab stock right now, just in case it does work out a few years from now? I kind of think it might be.

Should you invest $1,000 in Rocket Lab USA right now?

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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.