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Duolingo Stock: Value Play or Value Trap? Plus, An Update On Rocket Lab With Simon Erickson
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Will The Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options, earn interest, get it right and earn $1 per contract at ibkr.com predictions last trading day June 17.
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Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now. Please enjoy this episode.
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A
Welcome into the Chit Chat Stocks Podcast, a podcast to help you find your next great investment. My name is Brett Schaefer and I'm joined by Ryan Henderson. Today we bring back back on recurring guest Simon Erickson, old friend, one of the first guests on the podcast when this was a small little outfit, but Simon runs the Investment Research Service 7 investing. The link to that will be in the show notes. You can check out more of that after listening. Simon was recently on our show. I believe in late 2024. I get years mixed up now. The AI boom has mashed everything together. But we talked Rocket Lab and that interview has aged quite well, I think. Honestly, the first time we talked Rocket Lab may have been even earlier. So again the space economy stocks have taken off. We are going to be talking about Rocket Lab at the end of this episode as a bit of an addenda, but first we are going to be focusing on Duolingo, the beleaguered language learning app. Simon has been following this company. I guess the first question is the stock went from $100 to $500 back to $100. What has happened to Duolingo in the past few years?
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B
Oh man, Brett, first of all, it's such a pleasure and a joy to get to talk shop with you guys about stocks. Again. Thanks again for having me on the show. To answer the question with Duolingo man, Battleground. What a battleground stock. Like you said, it tops out over $400 a share. Now we're back to $100 a share. This is one that's got a lot of momentum working for or against it because there are a lot of narratives on what's going on with AI out there and Duolingo can either be at the positive, optimistic, glass half full side of the narrative or they're completely the opposite and we've seen both of those in recent years. I think that that is what happened. When the stock peaked a few years ago, everyone was like, this is going to be a natural winner from the AI trade. You've got a CEO who we can talk about in a minute here who's kind of at the forefront of a lot of these things. And then more recently, there's been a lot more concerns about what's going on with OpenAI, what's going on with Google, as some of these larger tech companies are also embracing AI but have much deeper pockets. Is that going to displace Duolingo as a whole? Is it going to make it irrelevant as a business? So I think that's, it's. A lot of this is narrative driven, which is out of touch with the fundamentals of the business. But I do think that that's kind of why the stock's going up or going down in any given year.
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C
Yeah, it's pretty amazing. We've put out episodes and content about Duolingo, and either way, it provokes serious strong opinions, which I wouldn't have expected for sort of almost a small cap language learning app. But people either seem to love it or think it's going to be an AI loser. So let's maybe touch on the AI loser portion. What is the narrative there? Why do I guess, why does Mr. Market at the moment seem to deem Duolingo an AI loser?
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B
The large language models that underpin OpenAI and Google Gemini are very good at translating. It makes it very easy. If you've ever used a service, I know that I have, you speak something in one language, it immediately translates it to another language and then it just spits it on your phone. And so there's a lot of concern of, do you really need to learn another language anymore? Being that at our fingertips, you can immediately translate almost to any language on the globe immediately. That is very different, in my opinion, Ryan, than learning, than actually spending the time to learn another language and then kind of doing it natively. I know, Brett, you are in a different country right now, which is not primarily speaking English all the time. You could go around and just talk through your phone, which a lot of people are doing. But I think that there is some merit, but that this is not a direct Apples to Apples competitor when you're looking at a translation app versus a language learning software. But I do think, at least from what I've seen and a lot of the narratives that are out there, people are wondering, are people even going to learn languages anymore? Is this even something people are going to pay money for to learn a language knowing that it's free, that you could translate immediately Okay, I. I definitely
- [04:49]
A
understand that thesis, maybe, is the analogy. Okay, Google Translate. How? I. I can't remember when that was released. Maybe over 10 years ago when it got really good. That didn't impede Duolingo's growth before the AI revolution. Is that something where. Okay, yeah, we had that translation app and now they're even better with the large language models. Is that kind of like, all right, well, it's just a totally different ball game, especially if someone wants to become at least somewhat fluent in another language.
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B
It's kind of like a shortcut, Brett. You know, if you want the shortcut, you just want to use the translate. Fine. But, you know, really what Duolingo is trying to compete more against is kind of like the universities and the private tutors, you know, the proficiency of the language being spoken by the learner. Are you actually learning something or are you actually just taking the shortcut for it? And what's even interesting, too, is recently, outside of even language learning, they've kind of expanded into new things. ABCs for children, mathematics, even chess, you know, anything that is learning based. That's kind of why Luis started this company. He didn't just want to create something you can talk into and really quickly, immediately translate for. It's not, again, in my opinion, apples to apples.
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A
Okay. They do. I think a lot of listeners will know roughly what Duolingo is. There may be some that use the app. They do have millions of users. But maybe before I ask about whether they could be an AI winner, can you take us through their basic business model? I just want to make sure all the listeners can get caught up here.
- [06:20]
B
Yep. If you want to learn another language. Duolingo offers more than 40 languages, you know, across the world. It goes everything from English and Spanish to things like Swahili and even Klingon. The Star Trek language. Yes. Is actually on the platform.
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A
That's a huge TAM right there.
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B
You know, that's really. You gotta. Gotta go for that. Gotta go for the Star Trekies. But, you know, the whole concept, you know, when he started, it was, you know, this is a massive market, you know, 8 billion people or so on the planet, all of which would be interested in perhaps learning another language. It's just a matter of how can you do this at scale, knowing that companies like Rosetta Stone&2U and other education kind of software companies have failed at that in the past. It was just really hard to get something, first of all, that could be distributed globally and then do it profitably. And so, in my opinion, this has been just a really tough nut to crack for decades. And it's taking the right person, Luis Von Ahn, the father of crowdsourcing, to go out there and say, hey, I want to do just this massive AB testing on everything about how we, how we structure the language plans, about how we get a new subscriber out there, about how we launch into a market out there, about just anything about how people are using and engaging with the app. Like, every single interaction that you have with the Duolingo app is being tracked and that means that every single day they are making it better. So if you're trying to start on day one and do something to compete against these guys, and now they've been around for 15 years iteratively machine learning and computer science to doing this better every single day, I think that's a competitive advantage in and of itself. But to answer your question, what is it is an app that you download off of your smartphone, you pay $84 to $156 a year, and you're primarily using it today to learn another language.
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A
Okay, let me ask the maybe counterintuitive question. I think when investors look at deemed AI losers, they almost go, well, this company is going to be neutral to negative, and you have to either decide whether it's going to be status quo or they're going to get totally wiped out by the AI revolution. Is kind of a yes or no there. But I think a lot of investors don't really look at whether a lot of these existing apps can be potential AI winners. Kind of like you hinted at. Is there a pitch that Duolingo, especially with this, really who I think smart, intelligent, founder, they could actually be that AI winner and they're getting priced like an AI loser.
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B
That's exactly it. There's no stronger statement you can make about this. It's misunderstood by the market as being an AI loser. This is, in my opinion, one of the biggest AI winners there is. I mean, Luz Von Von, the guy who founded the company, is a PhD in computer science from Carnegie Mellon, has been using AI his entire career. Severin Hacker, the chief Technology Officer, co founder, PhD from Switzerland, has been the forefront of AI his entire life. Like, these guys are incorporating AI aggressively into the product line. One example is how you communicate with the app. You know, the early days of Duolingo, you kind of picked the picture. You know, you maybe kind of said the words and to figure out if you were saying it with the right intonation. It was basic stuff. Now you're having Full video conversations with AI within the app. And it's catching every single thing that you say and it's correcting you. It's making it just like you're talking in a native tongue, but it's not intimidating because you're talking to a computer rather than a human being. I mean, stuff like that. When you hear about Duolingo incorporating AI, it's in video, it's in conversational intelligence, it's in things that are just like bringing this from. Find the picture of the dog that's in Spanish to have a conversation about a dog and then it's going to tell you what you said correctly and whatnot. And that's just the tip of the iceberg. I mean, this is going to get even better as you start using AI to iterate the app and to keep making it better. It's definitely, in my opinion, one of the biggest AI winners that is being labeled incorrectly as an AI loser.
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C
So before we get to some of the, I guess, current talking points and headwinds that everyone's, I guess, kind of discussing what went right over the last five years, because monthly active users went from I think around 27 million to pulling it up here, 138 million today, roughly. And assuming some basic churn assumptions they've probably had, they've probably interfaced with, you know, three times that in terms of people that have used the app at some point. So what allowed them, because there have been a lot of language learning apps. What allowed them to become sort of the verb like the language learning app?
- [11:00]
B
Just the scale that they were growing this at. You know, what went right is the metric that they're looking at primarily is daily actives, not monthly actives. And we're at about 56 million daily actives right now, 21% year over year. And Louis says 20% a year. That's what their internal goal is always first and foremost. Now when you do that, there's a couple ways you can bring in new subscribers. One is you could just spend a ton of money on advertising. You just go out and blast Duolingo on every website out there and every podcast and they sponsor everything. They spend a zillion dollars on marketing and get as many people in the front door as you can. That's actually not the case, Ryan. They're actually being very conservative in their marketing spend. They prefer word of mouth marketing or people telling their other friends, oh, you got to check out Duolingo. They have a marketing budget, it's there. But if you compare that to other Software companies, especially consumer facing software companies, it's a small fraction of that because when they do stuff they would like to iterate on it, they like to make it better, they like to rather than shotgun blast approach, start small, incrementally grow. So I think that's one thing they're doing really well is growing the DAUs and using their marketing budget conservatively. The second is improving the proficiency of the language learners themselves. You know, I think the Duolingo, you don't want just to be another language learning app. You want to be the best language learning app. Like if you're going to use one, you really want to learn a language. Show me that this works as well. As a private tutor, I think they've done very well. And then the third thing is more of an investor perspective thing which just is an incredibly efficient business. I would like to talk about return on invested capital here with you all and free cash flow conversion because this is a business that as a compounding machine, dual lingo is not just an app that's getting blasted out there and is unprofitable or you know, trying to figure out how to make money out there. These guys are printing cash flows and they're putting it right back into the business today. But we just started seeing them do a share repurchase plan. You can start using this in ways that are going to be friendly for investors going forward when you have this efficient of a business. I refuse to accept that it's an AI loser, that it's getting its, its lunch eaten in this market out there. It's printing cash right now, gentlemen.
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C
Yeah, on the marketing point, I mean it feels like they did a lot of like very successful viral marketing with the mascot. I mean, I guess in general. How many mobile apps have a mascot?
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B
Duo Green Owl. Yeah, yeah.
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A
And didn't the owl pretend to pass away or something like that?
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B
It killed Duo. Yes. And then they brought him back, he resurrected him. It was very controversial. You know, when Duo the Owl.
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A
Hey, all marketing's all attention's good marketing or whatever that saying is.
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B
But it shows you though, that's all social media. You know, the posts that they put on there, very, very low cost. You put out stuff on that social media, you're not paying anything for that, you know.
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C
Yeah, that's a good point. You mentioned today they're at I think around 50, 57 million daily active users now. User growth has been really high for the last few years. It's come down a bit and that seems to be sort of one of the knocks against them right now is sort of the top of know, how do they get to 100 million DAUs from here? Is it the same marketing playbook? Do they have to change something? What do you think the next few
- [14:24]
B
years looks like they did change something. They, they pulled back a little bit on the advertising on the free side of the app. You know, they wanted to have it a little, which is, which is a, you know, a decision you make. You're going to make less money if you use less advertising, but it's going to prioritize user experience. You want to get as many people in there using as much as possible. Again, they kind of say that's. What are they calling it? User friendly, mass market appeal, I think, or something along that kind of language of like, how are you going to get this app out there at a low cost, get people using it on a monthly basis at first, hopefully on a daily basis going forward, and then give them a reason to pay you the $84 or up to $156 a year for the service itself. I think that's the strategy, Ryan, is just kind of, how can they incorporate AI, Maybe use video, maybe start iterative testing, you know, some of these marketing campaigns they've done before. But how do you get this into everyone's hands in, you know, to the point that you've got basically doubling of the DAUs by 2028, you have 56 million today. You want to be at 100 million by 2028. That's two fiscal years. That's kind of the metric we're going to hold them to as investors.
- [15:32]
A
Have they given any numbers on the total addressable market? Because of course, you know, there's some people, they learn a language, maybe they either give up or, you know, they become fluent and they, they live in a country. There's going to be some cyclicality there. But at any one time have they given out, how many people at any one time are trying to learn a language? Is it a couple hundred million? A billion? Any data there?
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B
Let me pull up some data on that. You know, we've got some market data. I don't think Luis ever thinks about it really that way. You know, I think he's always just kind of said everyone in the world is his potential market because he's an educator. He wants to do this as a, a teaching tool that doesn't even have to just be language learning. Right. It could be some of these other things too. I think that he just kind of goes out there and he finds Something that works because keep in mind, Duolingo has evolved as a business several times. Right after he sold Recaptcha to Google, he at first was going to be kind of an enterprise translation software that would translate into different languages. Right. You want to do the chit chat podcast in Portuguese down in Brazil. Brett, how would you do that? You could hire somebody like Duolingo to do that. He said, no, there's a limited market for that. I want to go after this big market that can have more data and then iterate more times off of that. From the numbers that I, that I have. This is my own, this is my own estimations. But I think that Duolingo by the year 2040 is going to get up to more than 200 million daily active users. In fact, that might be very low if they're going to get to 100 million by 2028. To say they're only going to double that a decade later might still be a very conservative estimate. But I do think there's not a stretch to say this will be several hundred million users who are using the app on a daily basis within the next decade or two.
- [17:13]
A
Okay, yeah, I think that makes complete sense. I think a lot of people do forget. Yeah, they are trying to expand just outside of the language learning only model. Let's talk a little bit more about the stock capital returns. You really mentioned the repurchases. They started that this quarter. What do they said about that and how do you view capital returns in the equation? Because if we can look at the, the current stock price, we're at about a little over $100. We're at a market cap of $5 billion and the price to, let's say gross profit is about six maybe, give or take. How beneficial? Like how much can they reduce their shares outstanding in your view?
- [17:58]
B
Good question. The first step to answering it is that they had 43% free cash flow growth year over year. And that is now at a 51% free cash flow margin. 51 cents of every dollar of revenue is falling into the bank. What do you do with that money? You've got a new cfo. He just brought in Gillian Munson in January. New cfo. Interestingly, her last two companies she was CFO of, they had successful exits, they got acquired. I don't know what to make of that just yet, but it's kind of an interesting footnote. But you know, the first step, if you're, if you're generating a ton of cash and you're only using it internally for the business, but you still got more than enough to use is you offset your stock based compensation, you stop diluting your shareholders by at least saying, okay, any shares that we offer from stock based compensation, which I do not think is excessive by any means, but let's at least use the equivalent amount of free cash flow to buy back those same amount of shares. We don't want to dilute shareholders anymore. The next step, as you alluded to there Brett, is going to be you're actually going to be reducing the share count, right? We can look at some numbers on that, you know, make some assumptions about the current stock price and market cap and how much free cash flow they're generating. I think the next step would be that. And then once Duolingo starts gaining scale, not only with its 40 languages that it's offering today and every variation of that, right, English to Arabic, Arabic to Spanish, Spanish to French, whatever you want have. Once the curriculums are start building up for that, then you're going to start seeing these new optionality ideas if you will, these new business lines, the chess, the mathematics, the ABCs and all these kind of different things. Language learning. First get a steady state. Business is very profitable about that. Then start doing some capital returns for shareholders and then start exploring some other things. That's probably 10 or 15 years of work right there. But it's kind of a nice Runway that they got plenty of growth ahead of them.
- [19:49]
C
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B
You got to get consumers to pay for it, Ryan. I mean, the hardest thing of all this is not deep pocketed businesses. You got to get people like you and me to say, I'm going to cough up 84 bucks a year. And by the way, it's a pretty crappy economy out there right now. The price of gas is skyrocketing. Everyone has less money in their pocket. Do you want to go out there and spend money on a language learning app right now? Probably not. Right? And he's always been consumer facing consumer discretion. And this is just a tough business for any app. I mean, was the last time you guys actually paid money for an app anyway? People don't want to pay money for apps anymore. It's just, it's just a tougher business model, especially than getting, you know, an enterprise where there's just a budget. You just pay it every single month. You don't even think about it. I think that the bear case on this is that you've got a consumer who's already strained in his pocketbook anyway and you've got competitors who are offering things for free. Google Translate, OpenAI, whatever it is. That maybe it just pushes out the relevance of Duolingo, even though it's nice. Yes, it's better proficiency. Yes, you're learning better. Yes, it's not exactly directory head to head competitors. But is it necessary in everyone's life every single day? You can make an argument that it is not. And that would be the bear case.
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C
Let's talk valuation. Brett alluded to it earlier with the EV to gross profit figure. Maybe I'll just put some headline numbers up here for listeners. So market cap today of about $5 billion, I think, and correct me if I'm wrong on any of this, Simon, about a billion or so in net cash. So enterprise value just below 4 billion. The cash flow over the last 12 months. Sorry, I'm making sure I get these numbers right. Stands at about 400 million. So a little over 10 times free cash flow. Cheap, I guess. What kind of assumptions do you have to make this work? What do you think they can grow at? Do you see margins expanding over time as well?
- [23:15]
B
Absolutely. They're definitely going to expand margins. I've got a full discounted cash flow I updated last year. So this is a little bit out of date. Take it with a grain of salt. But you know, I can make a case today based on the growth rates and based on the optionality and everything, that DuoLingo is worth $256 a share. Which, where are we at today? Where are we at right now? 100, 100 and change, maybe 110. So there's a strong case to be made that this is a double if a company does what I always put in as conservative assumptions, but it's a year out of date. So they did say that they're going to be a little bit less on the monetizing, going to be a little bit more on the user growth and then they're going to kind of flip the switch to turn out the cash later on. So maybe, maybe we're a little bit optimistic on that forecast. Even if it's directionally close. Say it's not worth 256. Let's knock that down by 30% or so. I mean say this, this stock is worth 180 a show. That's an 80%, you know, delta from where we're at today or 60 wherever we're at. I mean this is, this is an undervalued stock right now because of the concerns about the business, the concerns about the competition, concerns about the consumer discretionary spend out there. Again, when you look at it from a numbers perspective and if they do what they're going to say they're going to do, which they've done very well and if you maintain margins, which they've always been very conservative on how they spend their money, the margins have increased over time. You look at those fundamental growth rates that they report in every single one of their shareholder letters. This is a long term opportunity at 10 times cash flow, 10 times free cash flow.
- [24:51]
A
So on. On our show we talk a lot about the importance of betting on the right management team. This is, as you've mentioned, founder led. How important is that? I always forget his name. But the founder of Duolingo, he's still there. If he was to leave, like how is that a key man risk here or how important is he to your thesis and what he believes he can bring, you know, Duolingo to over the next decade?
- [25:15]
B
Very important in the, in the best way possible. I say that it's very important. It's super important to this business, right? Co founder It's Luis Von Ahn. Brett. He's a cool guy, man. He, he Likes to bring food to all of his meetings. You know, whenever you go to a meeting in the, in the headquarters, he always shows up with like tacos, you know, dessert and cake, you know, stuff just to get. Just kind of a fun guy, but also a really, really smart guy. You know, like I said, PhD in computer science, previously built the, the recaptcha. You know, they click on the images that have a stop sign that got bought by Google for less than ten, less than $100 million. Between ten and a hundred million dollars, I think it was on the higher side of that, he goes in, he starts Duolingo. He's a Guatemalan born software engineer. You know, found some other engineers, they started this business on top of an Italian restaurant in Pittsburgh and then now all of a sudden they've grown up to this publicly traded company. I met them where they were still privately held. I interviewed him, I said, if they ever go public, I am buying Duolingo shares because this guy is mission driven and really smart and also understands the business and investing side of it. So to answer the question is very important. I would be sad, I would be very saddened if he ever stepped away. I'd probably be less excited about the company if Luis wasn't at the helm because he's done so many great things. He's built a great culture there, he's built a very profitable business there, he's built a mission driven company and he's laser focused on bringing this to as many people as he possibly can. Package all that together and you've got a pretty compelling investment for the next decade.
- [26:42]
A
Yeah, and he has the combination of PhD from Carnegie Mellon, which we'll call Ivy League plus, you know, and kind of that same range there, and also can run a business that generates a profit. I don't think there's many of those combinations in the world. Usually the scientist focused ones don't really care about the actual business quality. All right, anything else on Duolingo? We had a listener question about Google Translate, but I think you've already answered that. Anything else? Before we switch gears and talk about a stock that may be turning into one of the hottest in the entire market now. Rocket Lab.
- [27:18]
B
Yeah, I mean, just keep an eye on the, the average selling price. I think that that's something just we didn't touch on a whole lot. They don't really, you kind of have to back calculate. They don't go out there and really explicitly report it in the quarterly results. But what I like to look at is, excuse me, I Looked at the subscription bookings divided by the number of paid subscribers kind of gives you a feel of how much are people paying for the app. And it's the same price based on the region that you're in. You know, it's $84 a year for most people that they're paying. But you've also got this other, you know, Duolingo. Duolingo Max is the highest priced product that they have, which last I checked was $168 a year. So naturally, if you start seeing that aspect go up, people are transitioning from the lower priced product to the higher priced AI Incorporated product. That's something I want to see. I actually saw ASP decrease year over year from about $22 a year ago to about $21, 21 and a half dollars this year. Again, they're trying to get this in as many people's hands as possible. So they're initially going for the lower priced product, which is really only $7 a month or so. But I do want to kind of see that tick up kind of maybe as a sign that you're getting a bang for the buck of all that work you put into the AI and the conversational intelligence. It'd be nice to see ASP trending higher over time.
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C
I want to ask one more question before we switch gears here. What do you think is the most common misconception about Duolingo from, I guess the other side of the fence, People that are, I guess, not as optimistic.
- [28:58]
B
This is the AI loser thing that we keep talking about. I don't know why they're getting branded as this, like they're going to get beat by AI or like they're just a small company that's never going to compete with Google. It's just these are, these are, these are tangential companies that are not going to go head to head. Duolingo doesn't want to go head to head with Google Translate. It tests markets for the reasons of finding out where is its niche and where can it grow iteratively and profitably. And I think it's, it's found a pretty neat niche with that too. And it's got a couple other options lined up. But again, I do think that there's a narrative right now, Ryan. I mean, that's why the stock has gone from $400 a share to $100 a share. Not coincidentally, these large language models and everybody's using GPT. What are people going to pay for? What are people not going to pay for? That's the same narrative that's hit so much of enterprise software as well here recently with the last year.
- [29:43]
C
All right, let's talk Rocket Lab. Very different returns over the last year compared to Duolingo. What has I. Brad, I think you said we last spoke to Simon about Rocket Lab a little over a year ago. Aside from.
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B
Aside from we hit it first here, by the way, Ryan, I feel like we were talking about it here on your show before the rest of the market caught onto Rocket Lab.
- [30:08]
A
That's right. We've had many a comment that says we appreciate that discussion because I got to figure out Rocket Lab before pretty much the entire world, it seems like nowadays, went skyrocketing.
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B
Man, you heard it here first. Chit chat stocks.
- [30:25]
C
Yeah, that's a great sales pitch for us. Aside from incredible stock returns, what has happened to Rocket Lab over the last year?
- [30:35]
B
Oh, incredible execution. I mean, this is a business that you want to reward for doing things right. And Peter Beck has done so many things right. You look at just the metrics that run this business. Again, Rocket Lab is launching satellites in outer space. A lot of times they're manufacturing the satellites too, and then they're launching those for customers in outer space. They might even build a Constellation or they're managing all the infrastructure and they just pay them for a monthly basis. But in terms of the revenue per launch, that went up, in terms of the cost per rocket launch that went down, in terms of the cost of the business per, you know, in terms of gross margin profile, cost of goods sold as a percentage of revenue that went down, gross margin went up, operating margin went up. The headcount didn't go up as fast as we were expecting to. I'm like, basically, in terms of running this business, if Peter Beck tells you publicly he's going to do something, he's going to do it. And he's probably going to do it even better than he said he was going to do it. Wall street loves that. Wall street loves someone with credibility. That's going to knock it out of the park when it comes to their own forecasts. And they've done that. And the market has responded incredibly well. I think there's so much momentum going into Rocket Lab right now that everybody wants to buy these shares and. And nobody wants to sell their shares. So the stock price goes skyrocketing.
- [31:47]
A
Yeah, that's a. That's a succinct way to put it. Let me give another stat using our friends Fiscal AI. Use our link. Fiscal AI chitchat. The link will be in the show Notes and you can get 15% off any paid plan. Their backlog from December 2021 went from 240 million to 2.2 billion. That's a 68ish percent compound annual growth rate. Really strong stuff there. I mean, they are, you know, they're not the second SpaceX yet, but it looks like they're well on their way. One big question is the progress on the Neutron, which is there. I. I think it's almost the exact same size as the Falcon 9, maybe even a little bigger. You, you probably know the details better than me, but what's the progress there? We've seen a little bit of delays on the testing and the commercialization, which happens with almost every rocket. But yeah, it's very important to the business. And what are your thoughts on the updated timeline for the Neutron?
- [32:46]
B
It's. This is going to be kind of the step change for the business.
- [32:49]
A
Right.
- [32:49]
B
You know, Electron is cool. You can carry something the size of a vending machine into outer space. Maybe place two, maybe three satellites with a single launch. A Neutron will place an entire constellation of satellites in a single launch. Right. This is a $50 million launch versus a $9 million per launch kind of thing. So the economy is a scale picket. Catch on for your customers, but also catches on for Rocket Lab, who spends all this time and manpower to develop and to build the rocket, and then all of a sudden you get a much better bang for your buck on actually doing it. The question was always, how soon could they get it to the pad? As soon as you actually launch this thing. And then would you actually have customers signing up to do it? Regarding the first of those, it's taking longer than we expected to actually get Neutron to launch. We have not had a successful commercial launch with Neutron just yet, but Rocket Lab says it'll be by the end of 2026. We also expected it was going to be at the end of 2025. Then we expect it was going to be the first quarter of 2026. Now we're expecting by the end of 2026. I'm not faulting leadership for being conservative and pushing this out. You don't want to send that thing up there and then it blows up. You got to make sure it's right. It's perfect for the first launch especially. But it is a longer timetable than we were expecting. And then the second one we got was undisclosed customer. We do not know who it is yet. Assume it's military has already signed on for five launches with Neutron through the year 2020. 9. So you've got customer demand that as soon as this thing goes live and you get that first launch, everything seems to indicate that there's going to be a huge amount of demand for customers that want to place Constellations into outer space. Really, really good news.
- [34:24]
A
And let me maybe paint a scenario that you can tell me if it is incorrect or bad logic. SpaceX right now is launching its own Starlink satellites. They're focused on that. They kind of have a monopoly in these larger rockets. You know, Blue Origin and Rocket Lab are making a little bit of progress there. But all these other customers, which can include Amazon, ast, Space Mobile, many, many of these customers out there want to launch and they don't want to launch with SpaceX necessarily, if they're one going with their prioritizing their own satellites and are almost a direct competitor. So they want this democratization, the monopoly to be broken. And that is where there should just be an explosion of demand. Well, we don't use that term in rockets, but a nice boost. That's a better term for the rocket analogy in demand for, for Neutron once we start getting commercialized.
- [35:17]
B
Yeah, yeah, that's exactly it. You know, for Starlink, you know, which is SpaceX is, you know, Constellation for telecommunications. Right. Internet all over the globe. That's Elon's primary use case for what he wants to launch for. You can piggyback on it, you can do rideshare, but they're going to kind of get you a spot when they have availability based on the orbital plane they're going to. It's kind of like you want to get on the bus, you got to get off of the bus stop where Starlink's going to. And by the way, that means you have to have fuel to move the satellite around, get it where you want, all sorts of other things. Rocket Lab said we're going to change that entirely. We're going to do a completely dedicated launch for you, Mr. Customer. Here's what the price is going to be. We'll put you exactly where you want to be and take care of all that for you. And now all of a sudden you move up mark and you say, hey, rather than, you know, just carrying 200, 300 kilograms at a time, carry 1,000 kilograms or more at a time of payload. That's really kind of cool for a customer, like you said, that might be competing against Starlink, might be doing telecom stuff, might not want to wait around for Elon to launch, you know, on his own schedule. I mean, there's going to be demand for this. No doubt about it.
- [36:19]
C
I believe over the last 12 months, they've made three different acquisitions. We can talk a little bit about those. The three I'm seeing are motive, Space systems, Minarik, I might be saying that wrong. And then optical support. What's the rationale for these? And I am assuming I don't have the details in front of me, but I'm assuming they're using stock to make these purchases. Do you think that's the right approach?
- [36:50]
B
It's both, yes. There are a lot of acquisitions they've made. It's kind of normally a combination of an upfront cash payment and then more stock going forward. I think that really what Rocket Lab wants to be is not a launch company, but an end to end space company that can do a lot of things really well. You can launch satellites into space, but then you can also manufacture the satellites. What do satellites need? Well, they need solar because they need to be powered. They need to have propulsion because they need to go into the place that they want to. You need robotics, so, you know, move things around when they're up there. I mean, there's all these kind of capabilities you can add on so that when you're going out and you're bidding for a contract, say it's for the golden dome for the United States Department of Defense, rather than saying, hey, we can do this much, which for those who can't see my hands on the video right now, it's a very small group of what you're able to do. You want to be much larger, so you get a bigger part of that contract. So when you go out and you bid on it, you're not getting, you know, $100 million, $200 million of contract. You go out there and you get $800 million or a billion dollars of the contract, and then you start getting everybody to work. And so these acquisitions are as much about the capabilities and you know that the technology that they're acquiring, but it's also about the teams. You know, a lot of these guys have had relationships with the government in a small capacity for decades. And now all of a sudden, you fold that into a larger contract. It just works out really well economically.
- [38:04]
A
It seems to me, like, okay, the space economy is growing quickly. It's almost the second frontier for defense and government initiatives where you have, with the defense industry, the prime contractors, Lockheed Martin, Raytheon and others. And Rocket Lab is trying to get big enough and has that wide enough scale to be considered a prime contractor for space. With that along with SpaceX, maybe Blue Origin, I don't know their business very well, but they want to be not like a subcontractor, but they want to be considered one of the primes when dealing with the US Government.
- [38:36]
B
I think that is correct, Brad. I would call that too. And you know, even, even Department of Defense and military spending in the US is evolving, right? You know, I got Space Force, you know, I got the Space Defense Agency. There's a lot of space and space related acronyms that are finding their way into government agencies that have got budgets to spend on these things. And that's good. When you got Rocket Lab, that's a credible supplier that you know is right there and able to win these deals. They tend to build upon themselves. Just like a Lockheed would have a contract previously and then they'd extend that contract. They make it a little bit bigger. Typically when you get in with something, you find your niche, you prove your worth, and then you grow it over time. One of the big things that Rocket Lab really did well was the hypersonic program. The HASTE program is what they call this if you see it in their press releases. This is hypersonic missile testing and surveillance because things that are traveling faster than the speed of sound are very important in military defense right now. There's some crazy stuff going on with Russia and China right now that they're testing some things that the US Government is very, very interested in being able to respond to. And so that's why you see hypersonic and haste winning so many of these deals, which are a larger payload than electron was even supposed to do. But there's a reason that some of these initial deals are going so quickly.
- [39:55]
A
Okay, let's talk more on the stock. I guess looking at after the SpaceX S1, it seems that, and I think the number was they spent $15 billion so far building Starship. My first question is not is, it's almost a specific one. You know, Rocket Lab has raised a billion dollars, maybe, maybe $1.5 billion from raising from selling stock over the past year. Right now their market cap's $85 billion. Do you think the optimal move for them if they ever want to get on par with SpaceX is to they might need to go in order of magnitude higher and raise $10 billion to really invest to make an even bigger, bigger rocket ship?
- [40:35]
B
After the Neutron, I would do it if I was them. We just saw them announce an after the money ATM offering. You can raise up to $3 billion of stock right now. What's the market cap is what, 80 something, 80, $90 billion right now. I mean let's call it 3% dilution. A little bit less than 3 maybe. I would do it. I put it all to work right now. $143 a share. Wherever we're at $150 a share, put that money on the balance sheet when your stock's at a premium. We actually just saw there's some higher level chess going on in the CFO office for Rocket Lab right now. They actually paid off all the most of their convertible debt. They converted the shares that they had before. They took that future dilution off the balance sheet and just said, okay, let's get this off of there. And then concurrently they do this at the money offering for up to $3 billion in new stock. You're replacing debt which was incurring you interest payments before that would dilute your shareholders later. You're now kind of front running that. And then you're also adding a whole bunch of cash to your balance sheet at a time when your stocks at a pre. I mean this is great. Amazing. Just like what they did with the SPAC IPO. What'd they do? They raised $770 million when they IPO'd. They went and they bought all the other companies when they were failing because they couldn't get profitable on their own. And they brought in all those capabilities and now Rocket Lab is manufacturing everyone's satellites rather than just launching them. I don't think Rocket Lab's gonna build their own starship. I don't think they ever want to get into large launch. I think they just wanna do medium lift or stay kind of where they are. Neutron, I think is gonna be more than enough for the time being. But you'll likely see them make more of these kind of bolt on acquisitions like Monaric, like Geost, like with these other ones that you've seen in recent years to just say, okay, there's big contracts out there. Let's go from A where we were before to A plus B to A plus C and D and get these economies of scale kicking in as they're able to do more and more for those government agencies.
- [42:23]
A
Okay, let's talk more specifics on valuation. I think a listener for any listeners, we have a substack chat. The link is in the show notes completely free. We do a lot of pre show quote questions on their pre show discussion. They had a great question I think can talk lead right into this. We'll also talk about SpaceX as well here. Here we go. Is it fair to call Rocket Lab a bubble stock? And what is the definition of a bubble stock in my opinion? Is it if a company is priced in a way that even if they deliver, the stock price could be flat or down 10 years from now?
- [43:00]
B
Man, I don't know. How do you even answer that? Right. For those of us that have been in Rocket Lab for a long time, even calling it a bubble is kind of offensive. It's one of those words that sounds like a dot com crash kind of bubble reminds me of something like that. Rock Lab is not a bubble. It's winning contracts, it's growing its business, it's scaling, it's doing everything right. Is it expensive right now? Absolutely. This is hard for me to say because I've been such a long term Rocket Lab bull that was pounding my fists on the table when it was $4 a share saying buy as much of the stock as you can because I think it's worth $27. And then that proved to be right. And then it was $50 and then it was $80. Now it's $150. And I think it's kind of responsible as someone who considers themselves an objective investment analyst out there to say I'm not aggressively buying this stock at $150 a share. I think it's gotten ahead of itself. I think the expectations are very high. And even though Peter Beck does what he says he's going to do and he's growing backlog and he's scaling the business margins and he's getting those deals and everything else, I just don't think it makes sense fundamentally where the stock is trading right now. I think it's based off of momentum and technical patterns. And you know, people are in funds, are getting calls about saying, why do we not have Rocket Lab in our portfolio? And all these other things. And just the fundamental analyst in me thinks that it's probably really, really overpriced. But that doesn't mean you should go out and sell your shares tomorrow because it's too expensive. I mean, this is a business can be a lot bigger than it is today in five or 10 years. But I would probably use a lot of caution before jumping in and yelling yolo and doing a cannonball into the deep end and buying a whole bunch right now.
- [44:49]
A
Yeah, it still looks fairly cheap from the 5 to $20. You could buy it at maybe 18 months to 24 months ago. And I almost feel like, yeah, this is one where kind of go with the David Gardner approach. Coffee can it. And if you bought right, sit tight, right? I think that's what people say.
- [45:10]
B
So much of investing, too, is like, people get a bad taste in their mouth about a company if they buy it high and then it goes down. How many listeners, even of this show will be like, oh, I love that company was doing so good. And then I bought Nvidia at the peak and then it fell 50% on me. What a crappy company that is. No, Nvidia is not a bad company. Just because the share price gets very high. That's actually a really good thing for a company that it's being rewarded with a high or premium valuation multiple. It shows the market has confidence that it's doing what it says it's going to do. Like, don't hate the game being what it is. Just be cautious about you want to buy low and sell high, not the opposite way around.
- [45:46]
C
That was kind of going to be my question. When we had this discussion a little over a year ago, it was very different. It was like, if things do go right, the returns are going to be great. Now, at these prices, the expectation is things need to go right. How do you handle a situation where you love the business? You think, well, I was gonna say sky is the limit, but in this case, it's literally not the limit. But, you know, in the short term or right now, it's the best thing they could do is issue stock, which is kind of like a weird situation to be in. Is the solution to just close your eyes and just hold it for the time being and kind of extend your
- [46:34]
B
time horizon again, this is one of those things. Ryan, I always say investing is personal, right? Like, if you. If you're going to lose sleep at night because you need the money that you have in Rocket Lab stock, that's a very different situation. If you're just like, I'm just going to hold this for 10 years. Right. I don't think you should expect this stock to have the same trajectory over the next 18 months that it did for the last 18 months. And if that concerns you or you're losing sleep over that, maybe you should reassess your portfolio decisions and your risk tolerance for this. But again, it's personal for everybody, right? If you need the money. I never say there's anything wrong with taking money out of stocks based on the lifestyle you want today, versus in five years, versus whatever we're investing for our own personal interests. Investing is always a personal thing. I'm comfortable with any stock knowing that any of them in my portfolio can go down at 50% because most of the time I want to hold on to them for at least four or five years, given that they're doing what they're saying they're going to want to do for the business. So. Tough question to answer. Investing is personal, but the company itself is doing fantastic.
- [47:37]
A
Yeah, it is tough. Everyone has their own, you know, different ages, different, different goals. And I will mention for the listeners, I know sometimes the bull market can get to us, but the stock from. And I looked at our release date from. Our release date, September 18, 2024. So actually in. Yeah, a year and a half. Ish. Even. Even a little bit more since. Since we had you on the top. Rocket Lab, it's up pretty much 2000% now. That is even in a home run scenario, that's probably a decade's worth of return in 18 months. So any listener that expects that every 18 months, just start running the math and it kind of becomes unsustainable, I think.
- [48:14]
C
Before we go to Simon, by the way.
- [48:17]
A
Yeah, good. Nice call. Nice call.
- [48:20]
B
If you guys are okay with me putting a shameless plug out there. You know, I'm working Now through my 10th iteration of a full discounted cash flow for Rocket Lab and what that means, it's a full valuation model that says based on the cash flow that this business is going to create over the next 15 years, discounted back to the present. What is the shares? What are the shares worth today? I've always used this as a baseline, grounding myself on what Rocket Lab is worth. And that's where I had the conviction to go out there and say, yes, pound the table, buy it at $4, buy it at $10, buy it at $15. The last DCF I did last year, I put it out publicly and I thought it was worth $27 a share, which was still a little bit upside, but it wasn't a six bagger upside like it was before. Now that fair value, I'm expecting is going to go up because it beat my expectations on revenue per launch, on cost per launch. Neutron. Now we've got some on the books. There's some things that they outperformed, but I think it's probably going to be too big of a jump to go from $27 to $150 a share. And I'm going to objectively share the research that I've done with seven Investing for that for the next week. I don't think I'm going to publish it as publicly as I've done in the past. But this is the 10th iteration. This is a fine tuned machine. Now it was very right before and I want to use that again to be like, all right, if we're looking at these shares as an investor, what is a fair intrinsic value based on the free cash flow this business is generating for us as shareholders?
- [49:40]
A
Okay, I think that is a great listeners understanding that you have this long term expertise on Rocket Lab are probably going to have questions about SpaceX as well. And in the subscriber chat we had that people asking about the comparison here, I think there was a lot of questions, but generally they wanted to compare rocket lab and SpaceX. Really just, you know, is the stock going to be traded similar and any big differences in the business? I know the stock one is probably just a shrug, but mainly on the business side of things, like what are the big differences between SpaceX and Rocket Lab?
- [50:17]
B
I mean from my understanding, Elon is raising the $75 billion that he is from SpaceX because he wants to put orbital data centers out in outer space. Like that is a big ask, man. That's a lot different than, you know, launching a satellite or even a constellation of satellites. I mean this is some big ambitions that Elon always goes goes after. Right? That's very different in my opinion. And it's not as customer focused as Rocket Lab is. I think SpaceX is more of like, hey, we're gonna go do this. You know, we want to go launch rockets. Some of those rockets are going to blow up. We're going to put some data centers out of space. I'm Elon, I want to get to Mars. Like they're going to do what's internally, right for their business. Whereas Rocket Lab has been much more customer focused. Let us build this for you, let us launch this for you. Maybe let us maintain the operations and infrastructure for this for you. They're just kind of a very different business overall. They're both launching things in outer space, but I wouldn't compare them head to head. I think there's a lot of differences between SpaceX and Rocket Lab.
- [51:15]
A
Okay, yeah, that's great context because it seems like today they kind of get that. Well, any rocket launch company gets tossed in with the same narrative. All the space economy companies get tossed into the same narrative and everything's just going up and to the right today. When we look at the business though, why does. And I guess I don't have the numbers in front of me, but it's been like almost a thousand percent revenue growth since they've gone public. Why does that continue in the years ahead for Rocket Lab? What lay out for the listeners why this business goes from. I think we're at something in the hundreds of millions of revenue. Why does that get into the billions?
- [51:54]
B
Yeah, it's going to be more on the manufacturing side of the business. You know, it was Rocket Lab initially, years ago, was just launching other stuff into space. Now they can do the manufacturing of the satellites themselves. And you keep seeing these acquisitions. They can do more and more. They got more and more capabilities. The contracts are getting bigger. You know, those, those deals that they sign with DOD or Space Force. You've got follow on contracts that are going to go with those. Now you can make bigger contracts, you know, again from 100, $200 million to maybe a billion dollars, you know, or, or more. I think, I think long term, 70% of this business is going to be the space systems manufacturing arm. And then maybe 10 to 20% is going to be launch and then 10 to 20% is going to be like the infrastructure, kind of like cloud computing is for the Internet, kind of something like that where you manage all the operations for your customer in a constellation out in outer space. But again, you know, how high can you push those margins, Brett? You know, if you're going to manufacture stuff, first you got to have the capabilities to the manufacturer, you got to have the buildings and the people and you know, all the fixed costs associated with it. But you get larger contracts, you don't have as many of those fixed costs up front. You start to scale the business. I mean, you can have a very, very profitable manufacturing side of this business, especially since it's kind of differentiated. Not a whole lot of companies out there that can do that. You start winning big, bigger deals and get the right pricing in place, you're going to be a very profitable business.
- [53:14]
C
All right, Brett, any more follow ups?
- [53:19]
A
I don't think so. What, what, what's maybe to tease the listeners. I know we've talked Rock Lab a bunch with you. What stock is on your radar? I know no one, you know, nothing's financial advice. No, no one can guarantee 2000% returns over 18 months. That's a special performance. But what stock is on your radar is another kind of hyper growth high tech company that has the same characteristics as Rocket Lab that you're looking at at seven investing.
- [53:47]
B
Yeah, this is always fun. I always like having a good watch list. Two that caught my eye recently. Back in February, I put a company called Inflection on our watch list. Infq. This is a quantum Computer company that is doing its computing at room temperature using lasers rather than trapping ions like is traditionally out there. This is one that just kind of went public very recently. Stock's up 52% since we put on the watch list. That's one I've been keeping an eye on. Really neat technology pre revenue, Brett. So a lot of risk with this, but doing some cool stuff. Might even be working with Nvidia in the near future. And then the month after that in March, I put a company called Bloom Energy onto the radar as well. This is a company that's making solid oxide fuel cells. They're modular so you can immediately provide on demand power for AI data centers. Stock went up 149% since late March. Since we had, I mean, that's another one just kind of skyrocketed. Might not be done yet though. I mean, there's so much demand for power in this AI data center build out. But ticker on that one is be there's two for your watch list. Inflection, Infq, Bloom Energy, BE2 high tech stocks that are growing very quickly.
- [55:00]
A
All right, Ryan, anything else from you or I'm going to get put in the disclosure. Okay. I guess before we get out of here, Simon Elevator pitch for seven Investing.
- [55:10]
B
Man, I love this. I love talking shop about stocks, whether it's Rocket Lab, whether it's Duolingo, whether it's anything. I mean, I think that as individual investors, we get the freedom to go out there and buy whatever we want to. We have to be stuck in a style box like so many of the institutional funds are doing. And so it's always been my mission to go out and find the best opportunities and talk about them, whether it's a new recommendation, whether it's a best buy, whatever it is. Let me give you investing ideas every month and then it's up to you. Like we were talking about earlier on the show, you know, investing is personal. Are you buying this one because it's a higher growth? Are you buying this one because it's a lower risk, whatever it might be? Let me give you the buffet of options. And so SevenInvesting.com subscribe if you do sign up, you get your first seven days absolutely free. There's no strings attached, no commitments. Just go out and see my stock picks for this month and next month and get set up. Or then if you wanted some free content too, you know, YouTube.com investing talking about some really cool ideas out there as well. So just from one guy who loves stocks to you guys who also love stocks, too. There's a lot of opportunity for individual investors to vastly outperform the broader market indexes out there.
- [56:15]
A
I think so as well. All right, we'll put the link to both of that, both of those in the show. Notes, as a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy or sell them in the future. Thank you everyone for tuning in, and we'll see you next time.