Rocket Lab's New Defense Deal Highlights Persistent Risks Amid High Valuation

What happened

Rocket Lab announced a new defense contract, portrayed in a Motley Fool article as a transformative win that could reshape its future. However, the company's valuation of $43.9 billion already prices in over $1.3 billion in existing Space Development Agency contracts, with a $1.096 billion backlog that is concentrated in cancelable, fixed-price government programs. Recent operational setbacks, including a Neutron rocket tank rupture in January 2026, have exacerbated schedule and capital risks for this critical growth initiative. Despite revenue growth, Rocket Lab remains loss-making with negative EBITDA and has funded operations through dilutive ATM equity issuance, increasing shareholder dilution. Thus, while the new deal may incrementally boost backlog, it does not address the core execution challenges or justify the current premium valuation.

Implication

The defense deal announcement is unlikely to alter the investment thesis, given that Rocket Lab's stock price assumes flawless execution on large contracts and timely Neutron commercialization, both of which are highly uncertain. Backlog concentration in fixed-price government programs exposes the company to cost overruns and potential cancellations, threatening revenue visibility. Continued losses and reliance on equity financing erode per-share value, making the stock susceptible to sharp declines if milestones are missed. Moreover, the Neutron program's recent tank rupture adds to development risks, delaying any potential profitability boost. Until Rocket Lab demonstrates Neutron success and achieves EBITDA breakeven, the upside remains limited while downside risks persist.

Thesis delta

The new defense deal reinforces Rocket Lab's reliance on risky government contracts but does not alleviate the overhangs of Neutron schedule slippage, dilution, and valuation excess. It may provide incremental backlog, but the fundamental need for successful Neutron execution and capital discipline remains unchanged, keeping the strong sell rating intact.