His level 2 is definitely tricky to use. The homing ability is only useful when opponents have massed on the other side and is also pretty good for countering supers like PaRappa's and Fat Princess' level 2 when they're coming towards you. It's better to just activate it at melee range and get an easy 2-3 kills.
What makes up for it though is the fact that Sweet Tooth gets his level 1 and 2 supers really quickly. You can fire off around 3 missiles in a decent match or a whole lotta of the explosive backstabs. The backstabs can kill multiple people if used correctly, even wipe them all out if they're stuck in a corner like on either side of the LBP stage. It's very common to see Sweet Tooth get double kills with the backstab and occasionally the triple kill. One of the reasons his level 2 is basically never used is because his level 1 is so effective on the majority of matches.
I agree that his lvl 2 seems kind of weak. I always go for the lvl 1, or sometimes the lvl 3. I think his lvl 1 is great though. It may not be like everyone elses where its super easy to multi-kills, but Sweet Tooth's AP really builds up fast, so you can use it alot. And on top of that, a lot of times they fly into other opponents and you get double or triple kills. So i guess if you think his lvl three is pretty good, and his lvl 1 is too because of how often you can use it, it makes sense not to give him an amazing lvl 2.
And i'm glad its there, just in case you are facing off against someone who constantly dodges your lvl 1, you can get them easier with the rocket, or even if there is a group surrounding you and you can get them all at once.