Out of This World!

Small Cap Pick: Rocket Lab (RKLB-US, $9.93B MCAP)

Space — the final frontier!

The whole world witnessed one of the most impressive engineering feats of all time. A 400 ft tall marvel weighing 11 million pounds was just caught out of mid-air by mechanical chopstick arms.

Space has become a playground for the mega-wealthy over the last couple of years — whether its Jeff Bezos, Richard Branson, or (head and shoulders above the rest) Elon Musk.

And while it might be headline-grabbing to launch other super-rich people into space with a super high ticket price, there are many other commercialization opportunities that actual make economic sense.

This week’s company is not owned by a super rich famous person, but is laser focused on unit economics without much flash instead.

Time to get out of this world!

• Why now? 👉 Unit Economics Drastically Improving

• Overview 👉 What Does Rocket Lab Do?

• Business Model 👉 Launch (The Electron, Neutron), Space Systems

• How Do They Make Money? 👉 Space Systems + Launch

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Why now? 👉 Unit Economics Drastically Improving

Reusable rockets have revolutionized the space industry by significantly reducing the cost of accessing space. Historically, rockets were single-use, with each launch resulting in discarded stages, making space missions costly and inefficient. The shift toward reusability began in earnest in the 2010s, led by companies like SpaceX and Blue Origin.

SpaceX’s Falcon 9 was among the first to demonstrate a reusable first stage, landing back on Earth after launch, and has since achieved multiple recoveries and re-launches. Blue Origin followed suit with its New Shepard suborbital vehicle, also capable of reuse, which paved the way for more economical commercial launches.

By reusing rockets, space companies can drastically reduce production costs, maintenance, and turnaround time between launches. Each Falcon 9 re-launch saves tens of millions of dollars, allowing providers to offer lower prices to customers, which include government agencies, commercial companies, and scientific research institutions. This economic advantage helps lower the entry barriers to space, attracting a wider array of clients and expanding the potential for innovation in satellite technology, space exploration, and beyond.

The success of reusable rockets has transformed the space market, with competitors now developing their own reusable systems to remain economically viable. This shift supports the growth of the “space economy,” including satellite internet constellations, space tourism, and other commercial endeavors, fostering a sustainable model where frequent, lower-cost launches drive further industry expansion. In essence, reusability has turned space from a government-funded venture into a competitive, scalable market, making the cosmos more accessible and economically feasible.

There’s a new kid on the block that not many people know about… Rocket Lab.

Overview 👉 What Does Rocket Lab Do?

Rocket Lab is an end-to-end space company that provides reliable launch services, spacecraft, satellite components, and on-orbit management. Their capabilities span the space economy, including satellite design and manufacture, space software and components, and reliable launch services.

The company operates the Electron rocket, a reusable orbital-class small rocket, and is developing the Neutron 8-ton payload class launch vehicle. They also design and manufacture a range of components and subsystems for the Photon family of spacecraft and broader merchant spacecraft components.

Headquartered in Long Beach, California, Rocket Lab operates facilities including advanced manufacturing and mission operations centers in Virginia, New Mexico, Colorado, Maryland, Toronto, and New Zealand. With their launch vehicles and spacecraft, they've simplified space, making it easy and affordable for companies, scientists, researchers, governments, entrepreneurs, and students alike to get their ideas to orbit.

Business Model 👉 Launch (The Electron, Neutron), Space Systems

Electron

Rocket Lab's Electron rocket is designed to provide dedicated launch services for small satellites, addressing the growing demand for cost-effective and reliable access to space. The Electron rocket is capable of delivering payloads up to 300 kg to low Earth orbit (LEO), making it suitable for a variety of missions, including communications, Earth observation, and scientific research.

A key component of Electron's business model is its unique Kick Stage, which enables precise deployment of multiple payloads into different orbits during a single mission. This flexibility allows Rocket Lab to offer both dedicated launches and rideshare opportunities, catering to a diverse clientele ranging from commercial satellite operators to government agencies.

One of the repeat customers is Synspective. The launches are earth-observation constellations, with this customer representing the largest electron contract to date. They also have 4 launches signed with a confidential commercial customer that is a constellation operator with vertical integration, as Rocket Lab’s separation system will be used on all launches.

These factors have contributed to Electron reaching 50 launches faster than any other commercially developed rocket in history, as well as putting it on track for fastest to 100 launches, even beating the Falcon 9!

Neutron

Rocket Lab's Neutron rocket is a medium-lift launch vehicle under development, designed to deliver payloads of up to 13,000 kg to low Earth orbit. It aims to serve the growing demand for launching satellite mega-constellations, conducting deep space missions, and supporting human spaceflight. Neutron's design emphasizes reusability and cost-effectiveness, featuring a unique architecture that integrates the fairing into the first stage, allowing both to be reused together.

Neutron's business model is focused on rapid turnaround and high launch frequency. The rocket's first stage is designed for return-to-launch-site landings, eliminating the need for complex offshore recovery operations and reducing refurbishment time. This approach aims to lower operational costs and provide customers with more flexible and reliable access to space.

Neutron is also being developed to meet the needs of national security and defense customers. Rocket Lab plans to submit a proposal to include Neutron in the U.S. Department of Defense's National Security Space Launch (NSSL) Phase 3 program, positioning it as a competitive option for government missions.

Space Systems

Rocket Lab's Space Systems division offers comprehensive solutions encompassing spacecraft design, manufacturing, and on-orbit operations. Their services include developing customizable satellite platforms, such as the Photon spacecraft, which can be tailored for various missions ranging from low Earth orbit to interplanetary exploration. Additionally, Rocket Lab provides a suite of satellite components, including star trackers, reaction wheels, radios, and solar power solutions, ensuring end-to-end support for satellite missions.

A notable example of their capabilities is the CAPSTONE mission, where Rocket Lab successfully launched a CubeSat to the Moon in June 2022. This mission tested a new lunar orbit and navigation system, demonstrating Rocket Lab's proficiency in executing complex space missions.

Through strategic acquisitions, such as SolAero Technologies, Rocket Lab has expanded its expertise in satellite solar power production, offering high-efficiency space solar cells, panels, and arrays for various applications. Through strategic acquisitions, such as SolAero Technologies, Rocket Lab has expanded its expertise in satellite solar power production, offering high-efficiency space solar cells, panels, and arrays for various applications.

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How Do They Make Money? 👉 Space Systems + Launch

Rocket Lab generates revenue through two primary streams: Launch Services and Space Systems.

Launch Services: Rocket Lab's Electron rocket is designed to deliver payloads of up to 300 kg to low Earth orbit, catering to commercial, civil, and defense customers. The company offers both dedicated launches and rideshare opportunities, allowing multiple customers to share a single launch, thereby optimizing costs and increasing launch frequency. In the second quarter of 2024, Rocket Lab reported Launch Services revenue of $29.4 million, slightly above their guidance.

Space Systems: Rocket Lab provides end-to-end satellite solutions, including the Photon spacecraft platform, satellite buses, and a range of satellite components such as solar panels, reaction wheels, and star trackers. These offerings serve a diverse clientele, including commercial satellite operators, government agencies, and research institutions. In the same quarter, Space Systems revenue was $77 million, aligning with the company's guidance.

By The Numbers 👉 Key Metrics

Since Rocket Lab’s orders can be lumpy, it’s important to look at their backlog and assess it for continual growth. On a QoQ basis, backlog grew a modest 5%, which shows that although no major contracts moved the needle in a big way, the trend is in the right direction.

Certain companies can be fire-dumpsters for cash. This is why it’s critical to control costs. If we look on a YoY basis, both R&D and G&A declined a YoY basis, showing cost discipline.

However, when we look at operating cash flow, we need to keep an eye on the increase in operating cash flow burn and make sure this doesn’t get out of hand.

When we look to the future - over the near term, it doesn’t look like investment is slowing down over the near term, as increased launched cadence is required for the company to start to get up to scale.

However, when we look in the out years, as the company achieves operating leverage and the cost structure in the industry continues to change, we see a profitability inflection point expected to come in 2026:

Risks 👉 Potential Pitfalls

Launch Failures and Delays: Rocket Lab has experienced launch anomalies, such as the September 2023 Electron rocket failure, which resulted in the loss of a commercial Earth-observing satellite. Such incidents can lead to financial setbacks, erode customer confidence, and cause delays in scheduled missions, impacting revenue and reputation.

Increased Launcher Price Competition: The space launch industry is becoming increasingly competitive, with companies like SpaceX offering aggressive pricing strategies. For instance, SpaceX's Falcon 9 rocket has significantly reduced launch costs, compelling other providers to adjust their pricing models. This heightened competition may pressure Rocket Lab to lower prices, potentially affecting profit margins.

Market Share Gain by New Entrants: The emergence of new players in the small satellite launch market, such as Firefly Aerospace and Relativity Space, introduces additional competition. These companies are developing innovative launch vehicles that could capture market share, posing a threat to Rocket Lab's position in the industry.

Wrapping Up…

The Space economy is undergoing rapid cost reductions that are making commercialization much more viable. Rocket Lab is a publicly traded direct play on this, with attractive unit economics and several upcoming catalysts.

In an area that SpaceX pioneered, Rocket Lab is continuing to innovate, showing that sometimes second mover advantage needs to face less regulatory hurdles.

It’s time to get out of this world!

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The GRIT Alpha Team

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