Why Rocket Lab Stock Could Trounce the S&P 500 in 2026

Key Points

• Rocket Lab announced this week that it may sell up to $750 million worth of new stock.

• Investors could face stock dilution of around 3.3%.

• This secondary stock offering should give Rocket Lab enough cash to stay afloat for the better part of a decade.

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Rocket Lab (NASDAQ: RKLB) shares took a tumble earlier this week. After the company announced plans Tuesday to sell up to $750 million worth of new stock to raise cash for the rockets, satellites, and other space stuff it's developing, the stock immediately sold off, closing the trading session down nearly 13%.

And that's OK.

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Rocket Lab is not cheap

I know, I know. I've spent the last few months arguing that Rocket Lab -- while a superb space business and a leader in both high-tech rocketry and satellite development -- is also a very loftily valued stock, enough so that it's arguably too expensive to buy.

Though it's unprofitable and still burning cash, Rocket Lab is valued at an incredible 45 times trailing sales. Granted, it is also growing those sales quickly -- they've more than doubled over the last two-and-a-half years. But even so, most analysts covering the company polled by S&P Global Market Intelligence agree that it won't earn its first profit until Q3 2027.

As I've pointed out in previous articles, 45 times sales -- and an unknown multiple of profits that might not arrive on schedule -- is probably too much to pay for Rocket Lab. Buying at that level is speculation and chasing momentum rather than investing, per se.

Today, however, I want to flip this perspective and consider the other side of the coin: the possibility that Rocket Lab's premium stock price could be "a feature, not a bug" that will help this space stock soar even higher, and potentially trounce the S&P 500's returns over the next year (or longer).

A high stock price can be a (very) good thing

Take this week's announced stock sale, for example. Had Rocket Lab decided to raise $750 million through stock sales as recently as a year ago, when its stock was trading around $7.50 per share, it would have had to issue 100 million shares to make that happen.

Rocket Lab only has about 484 million shares outstanding right now, so 100 million more shares would have lifted its share count to 584 million... and diluted shareholders out of just over a 20% stake in the company.

That didn't happen, and this is a good thing for shareholders. By waiting for its stock price to rise to its highest level ever this week, Rocket Lab now has the ability to raise the same amount of money with far fewer shares. Even in the wake of the slide that followed the announcement, the stock was trading at around $48 per share on Thursday morning. At that level, it could raise $750 million while issuing only about 15.6 million shares. Should Rocket Lab elect to proceed fully with its plan, total shareholder dilution will amount to only 3.3%.

Translation: By waiting to sell stock, Rocket Lab saved its investors a lot of money and preserved a lot of their ownership stake in the company. This is one of the shareholder-friendliest moves I've seen any company make in a long time -- as well as a savvy financial move on Rocket Lab's part.

One more reason to love Rocket Lab's high stock price

At the same time as Rocket Lab has avoided massively diluting its shareholders, it has also avoided having to indenture itself to big banks in the future (again, assuming it proceeds with the stock sale).

Consider: Last year, Rocket Lab burned through $116 million in negative free cash flow. It has been burning through cash even faster this year as it races to complete development of its new Neutron rocket, true. But once its development has ended, I expect the outflow to diminish. Let's assume, therefore, that going forward, Rocket Lab's cash burn rate will return to $116 million a year -- and then probably shrink further as its revenues rise and operating cash flow rises in tandem.

At last report, Rocket Lab had $190 million more cash than debt on its balance sheet. Add another $750 million from the announced stock sales, and the company could soon be sitting on a $940 million cash cushion. That would be enough to keep it solvent for the next eight years even if it doesn't improve its operating cash flow.

In one fell swoop, Rocket Lab's share offering should eliminate any future need to take on new debt, as well as any risk whatsoever that Rocket Lab will get anywhere near bankruptcy. For a company that is (for now) still unprofitable and burning cash, that will be a load off of investors' minds -- and provide a potential reason for Rocket Lab stock to resume rising.

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