The Rocket Lab Arbitrage?

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Now, let's dive in to today's main event...

The Rocket Lab Arbitrage?

Company reports, Bloomberg | 10.10.22

**Disclaimer: This is not investment advice. As always, do your own research. **

SpaceX is valued at $127B post-money, as of its last funding round.

Rocket Lab ($RKLB), arguably the next closest new space launch competitor, is valued at $2.0B (market cap as of 10/10). In other words, SpaceX is nearly 64x more valuable than the #2 player, despite Rocket Lab operating the second most frequently launched US rocket.

To level-set, Rocket Lab recently passed its annual launch record (it's launched eight Electrons YTD). SpaceX beat its annual record in July with the 32nd launch of the Falcon 9, its signature workhorse. The launch juggernaut continues to smash its own records in reusability, reflight, and turnaround times.

I tweeted a similar chart to the one above a few months ago. Not surprisingly, the SpaceX crew came out in full force with a few obvious comments to explain the valuation gap: SpaceX's far greater upmass, Starlink's share of the valuation, Falcon 9 reusability, superior margins, Elon's plans to go to Mars, and the corresponding TAM (total adressable market).

For what it's worth, I don't doubt or dispute that these factors and others explain the valuation gap. SpaceX should be one of the most valuable aerospace companies in the world. But should the gap between SpaceX and Rocket Lab be ~$125B? Let's see.

For the purposes of this thought exercise, I won't argue whether $127B for SpaceX is the right price. Despite the terrible macro backdrop, SpaceX stock is trading at a premium to the $127B valuation. Anecdotally, we've heard rumors of secondary shares swapping hands at nearly $200B. For that reason, let's assume the last round was priced correctly.

There's very little public data on SpaceX's revenue streams, so attempting to conduct a thorough analysis of SpaceX's valuation and then building a relative framework for Rocket Lab has its inherent issues.

Instead, we'll try to think through this somewhat simply and logically. The first step is to guesstimate what slice of SpaceX's $127B price is attributable to launch. Before Starlink, SpaceX's entire valuation was launch. But after broadband connectivity became part of the narrative, it very quickly became the key investor story. Back in 2018, Morgan Stanley attributed SpaceX's launch business to just 2% of the entire valuation, with Starlink making up the remaining 98%. That proved to be extreme, as the bank's 2020 assessment increased the attribution of launch to 13% of the valuation.

SpaceX rendering of the Starship launch vehicle.

Since then, SpaceX has dominated the global launch market and is well on its way to revolutionizing launch economics again with Starship. The next-gen launcher will be critical for Starlink V2 deployment, future crewed missions to the Moon, and of course, SpaceX's plans for interplanetary colonization.

Simply put, as the backbone of the company's future infrastructure buildout and the key driver of the next magnitude of cost reduction for the entire space industry, launch should be a much more significant part of SpaceX's valuation. For our purposes, I've assumed it to be 30% of the company's total valuation, or $38B.

Payload Data | 10.10.22

Rocket Lab is making good on its pledge to become an end-to-end space company, which includes designing and building spacecraft. The company expanded its "Space Systems" verticals via a variety of strategic M&A deals.

Because Rocket Lab's vision extends beyond launch, we will have to make an assumption on the launch segment of the company's valuation. This year, the company's launch business (i.e. its Electron rocket) will generate ~$78M, or 35% of the total revenue. Next year, that consensus launch revenue is estimated to be ~$114M. The long-term (5yr) revenue split between Launch and Space Systems is estimated to be roughly be 65%/35%. Space Systems will always be a critical part of the business model, but it's clear that the future growth will come from the company's launch initiatives (Electron reusability & Neutron launch vehicle). For that reason, we've assumed 70% of the company's valuation, or $1.4B, to be attributable to launch.

The last piece of this will be to estimate SpaceX's launch revenue. The company is on track to launch the Falcon 9 roughly 60 times this year. 50% of those launches will be Starlink, or non-revenue generating missions. The other 50% (~30 launches) will be revenue generating missions split between commercial, crewed, and government.

SpaceX capabilities and services PDF

Image: SpaceX

The Falcon 9 list price is $67M and the Crew Dragon list price is $55M per seat. To calculate non-crewed missions, we assume an average of $50M of revenue per launch (27) slightly lower than the headline $67M price tag. There were a few government launches, which often generate higher revenue than the list price. On the other hand, Transporter rideshare missions have a lower price and the Falcon 9 is often launched under capacity. As a result, $50M should reflect a directionally accurate average price. Crewed revenue is more straightforward: 12 seats (Crew-4, Ax-1, and Crew-5) were launched in 2022 at $55M each.

Add it all up and we get:

  • Un-crewed revenue: $1.35B

  • Crewed revenue: $660M

  • Total: $2B

2023 will have a similar breakdown to 2022, given the Starlink schedule, plus the added benefit of a few Falcon Heavy missions. Assuming 10% growth for next year, we get to ~$2.2B of SpaceX launch revenue for next year.

  • As an aside, SpaceX COO Gwynne Shotwell has stated that long-term launch revenue should ultimately reach $10B.

We now have all of the pieces we need:

  • Launch Valuation: SpaceX @ $32B & Rocket Lab @ $1.4B

  • Launch Revenue Est. (2023): SpaceX @ $2.5B & Rocket Lab @ $114M (100% Electron revenue)

This implies a forward-looking SpaceX revenue multiple (attributable to launch) of 17x. Applying that multiple to Rocket Lab's 2023 launch revenue (Electron) estimate gets us to $2B in launch valuation.

In other words, Rocket Lab's price today implies zero credit for any future revenue and growth from the next-gen Neutron, despite the segment of the market it should capture, along with the expected pricing power. Even if we change our assumption around SpaceX's launch business down to 25% of its total valuation, that implies a 14.4x multiple, which still gets us to $1.6B launch valuation for Rocket Lab. Again, this just accounts for Electron revenue.

Company reports, Bloomberg | 10.10.22

In general, the public markets have been a very rough place of late for new space companies. Payload's Space SPAC Index (market cap-weighted) is down 47.5% YTD. Rocket Lab should command a premium valuation, but the stock sell-off (-62% YTD) presents a very noteworthy risk/reward for a company with a proven track record. Rocket Lab is executing on its business model and roadmap, while generating real revenue and presenting a clear growth profile.

Let's dig into that.

Electron Profitability

Electron is becoming a much more profitable launch vehicle. The vehicle has successfully reached orbit 28 times. Rocket Lab management presented a path towards higher profitability for the Electron in its latest Investor Day. The company expects Electron's launch cadence to increase from an average of 1x/month to 2x/month by the end of 2024. In total, various avenues of efficiency gains will lead to ~42% in total savings:

  • ~33% cost savings from operational improvements. 25% from operating leverage of increased launch volume and 8% from greater absorption of fixed launch range costs

  • 61% cost savings from first-stage reusability (Rocket Lab will reuse 50% of its boosters) - the first stage represents 65% of the total Electron build cost

Rocket Lab has focused on vertical integration (~90% of build in-house) and controlling the development process from design to orbit across three global sites.

Neutron Developments

Rocket Lab's rendering of Neutron.

Neutron is Rocket Lab's medium-lift launch vehicle, capable of launching up to 15,000 kg to LEO (vs Electron's current 320 kg capacity). Neutron will be designed for reusability, with an 8,000 kg to LEO capacity when returning to the pad and 13,000 kg for downrange landing on an ocean barge. Beyond just cargo, Rocket Lab will be able to significantly expand its TAM via a crewed space flight option. Neutron will be designed to be outfitted with a crew capsule as its fairing.

RKLB Investor Day Presentation

RKLB is flexing its execution muscles in Neutron development:

  • Engine technology: Neutron's engines will be designed as oxidizer-rich, closed-cycle (a complex version of the more traditional open gas generator cycle), which NASA hasn't actually ever developed. Only the Russians have had significant success with closed-cycle.

  • Reusability: The first stage (and two-panel fairing) of Neutron will be reusable. The boosters will land back on Earth, similar to SpaceX. Neutron's fairing will remain connected to the first stage through its flight, but will open in space to release the second stage and payload. The innovative design will reduce the greater fairing refurbishment costs associated with seawater. Neutron's reusability designs could mean 70%+ cost recovery for the vehicle.

  • Launch and test facility: Rocket Lab has already broken ground on Neutron's Wallops Island, VA production plant. Engine testing will take place at NASA Stennis Space Center's A3 Test Complex, with exclusive use of its 1M sq. ft area for a decade (with an option to flex to 20 years).

Although the Neutron is considerably smaller than SpaceX's Falcon 9 (16,000 kg / 22,800 kg expendable), the payload capacity should be more than enough to capture a significant share of satellite deployment missions. Given the expected shortfall in launch supply over the next decade (delays in new launcher programs, geopolitical issues, Amazon's massive Kuiper block buy, and the mass proliferation of constellations), we expect Neutron to be priced fairly high ($50M+).

Space Systems

Beyond launch, Rocket Lab is expanding into a Space Systems division, a vertically integrated capability which includes designing, manufacturing, and operating satellites-as-a-service, high-volume manufacturing satellite components for megaconstellations, and general expansion of capabilities in space (lunar/deep space exploration). The Space Systems division can ultimately grow to a 50%+ margin business given the existing margin profile across the various sub-verticals (optical sensors, reaction wheels, solar panels, radios, separation systems, Photon, software, and engineering consulting).

Historically, a number of these suppliers struggled on the fundraising side and could never grow quickly and efficiently. Rocket Lab is now well-positioned to ultimately control the supply chain for critical satellite components and leverage that to amass more market share. According to management, 38+% of addressable launches globally in 2021 featured technology created by companies that are now part of Rocket Lab.

Investor Day

Rocket Lab management recently hosted an Investor Day to provide updates on vehicle development and offer insight into the company's longer term visions. See my recap here:

Management highlighted the company's proven track record and increasing focus on profitability. We encourage anyone interested in the company to spend time on the company's presentation and develop your own opinion on the future direction of the business.

But as always, please feel free to reach out to us directly with any questions or simply to continue the debate.

Rocket Lab's launch site in New Zealand’s Mahia Peninsula.

Largest Space VC Deals (September 2022)

Source: Pitchbook | 10.10.22

That's all for today, and I'll see you all back here in a month. As always, feel free to write directly to me with feedback, constructive criticism, or suggestions for future pieces.