Two years ago, the U.S. Space Force awarded roughly $1 billion in annual rocket launch "procurement" contracts to America's two biggest space companies, SpaceX and United Launch Alliance, a joint venture of Boeing (BA 0.01%) and Lockheed Martin (LMT 0.01%). Now, the Space Force is gearing up to hand out even more money -- and it's time for investors to start betting who will win it.
As SpaceNews reported last week, the Space Force is drawing up a request for proposals from defense contractors, and plans to award its next big contract (dubbed "Launch Procurement Phase 3") in 2024. But hints dropped at the recent Air, Space & Cyber conference in National Harbor, Md., suggest that the next award could differ substantially from the last one.
In 2020, Space Force contracted with SpaceX and United Launch Alliance to launch roughly 25 space missions from fiscal 2022 through fiscal 2027 -- five years of contracts totaling about $5.5 billion in combined value. But with the rapid rise of new space companies entering the market -- primarily through SPAC mergers conducted during the pandemic -- the Space Force now has a lot more potential contractors to choose from, and can tailor its contract awards to the sizes and capabilities of those companies.
Big opportunities for small space companies
Case in point? Consider the small rocket companies such as Rocket Lab (RKLB -0.56%) and Virgin Orbit (VORB) that have come public in the last few years. Both of those specialize in launching satellite payloads measured in kilograms, not tons. One option Space Force is considering is to award a sort of umbrella contract -- known as a "task order" contract -- in which it would define an overall amount of money it plans to spend on a number of projects, and qualify multiple contractors to bid on individual tasks.
For example, Space Force might award $5.5 billion for launches, in general, from 2028 through 2033. Then, over time, it would parcel out that money among small launchers such as Rocket Lab and Virgin Orbit to launch small satellites on short notice, while tapping players such as SpaceX and United Launch Alliance to launch large satellites (or large constellations of small satellites) on a more defined, established schedule.
New opportunities for old space companies
Or consider the possibilities for a company like Northrop Grumman (NOC 0.10%). In 2020, Northrop was shut out of the Space Force's "Phase 2" launch award (as was Blue Origin), a result that led to the eventual shutdown of Northrop's planned "OmegA" large rocket project.
Now, if Phase 3 were conducted like Phase 2 was, this would be bad news for Northrop -- because OmegA is history, and the company's new Antares 330 rocket is still in development. But according to SpaceNews, there's a chance that in Phase 3, Space Force might poll contractors for their ability to perform "in-space transport" work. That might include refueling satellites in orbit, or using "space tugs" to move satellites from one orbit to another, as well as launch work.
Such an evolution from the basic "launch services" paradigm could be quite beneficial to a company like Northrop, which currently has not one but two space tugs (the official name is "mission extension vehicle," or MEV) in orbit performing in-space transport work for commercial satellite companies -- and would presumably be thrilled to do even more such work for the government.
While there are other companies interested in doing similar work -- Lockheed Martin for one, tiny Momentus for another, and Rocket Lab for a third -- Northrop Grumman currently has the lead in this nascent market. It's also extending that lead through the development of new "mission extension pods" -- vehicles that can service multiple satellites on a single mission.
Don't cry for SpaceX or United Launch Alliance
But what about the incumbent space launch providers? Personally, I see the anticipated changes to Phase 3 benefiting smaller players such as Rocket Lab, Virgin Orbit, and Northrop much more than their larger, more established brethren such as Boeing and Lockheed. For one thing, the smaller companies are operating off of a much smaller base of revenues, such that it won't take a lot of new revenue to "move the needle" in their businesses. For another, revenues shifted to small space companies from large space companies would seem to necessarily benefit the former at the expense of the latter.
But consider, too, that even if small companies start nibbling on large companies' space revenue "pie," that might not hurt the large companies if the size of the pie continues to grow. And the pie is growing. Between its government work and its commercial customers, SpaceX is already launching rockets at a rate of more than one a week. And according to Space Force Chief of Space Operations Gen. John Raymond, the pace of launches in the U.S. is only accelerating -- to the point that "in the next few years ... numbers will soar to approximately 300 launches a year."
Fact is, there's more than enough work to go around, and as competition between SpaceX and United Launch Alliance -- and among those two, the small rocket launchers, and the in-orbit service companies -- makes access to space ever cheaper, business is only going to get better. That's actually pretty great news for SpaceX and United Launch Alliance, and for investors in other space stocks as well.
