Rocket Lab USA, Inc. (NASDAQ:RKLB) shares have continued their recent momentum with a 26% gain in the last month alone. Looking further back, the 12% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Following the firm bounce in price, you could be forgiven for thinking Rocket Lab USA is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10x, considering almost half the companies in the United States' Aerospace & Defense industry have P/S ratios below 2.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
NasdaqCM:RKLB Price to Sales Ratio vs Industry August 18th 2024
What Does Rocket Lab USA's P/S Mean For Shareholders?
Rocket Lab USA certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think Rocket Lab USA's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Rocket Lab USA's Revenue Growth Trending?
In order to justify its P/S ratio, Rocket Lab USA would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company grew revenue by an impressive 41% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 47% each year during the coming three years according to the eleven analysts following the company. That's shaping up to be materially higher than the 2.7% each year growth forecast for the broader industry.
With this in mind, it's not hard to understand why Rocket Lab USA's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Rocket Lab USA's P/S
The strong share price surge has lead to Rocket Lab USA's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Rocket Lab USA maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
You should always think about risks. Case in point, we've spotted 2 warning signs for Rocket Lab USA you should be aware of.
If these risks are making you reconsider your opinion on Rocket Lab USA, explore our interactive list of high quality stocks to get an idea of what else is out there.
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