With $126 billion in market capitalization, Lockheed Martin (LMT 0.77%) is the world's largest publicly traded aerospace company. Within Lockheed, though, the "space" part of "aerospace" did only $12.2 billion in sales last year, making Space the smallest of Lockheed's four main business divisions.

But Space will be increasingly important to Lockheed in future years -- at least if NASA has anything to say about it.

Lockheed Martin is going to the moon

Lockheed Martin made headlines earlier this month when NASA's new Space Launch System (SLS) megarocket blasted off in a blaze of glory, bound for the moon. Sitting atop this 322-foot-tall megarocket sat Lockheed Martin's "Orion" spacecraft, designed to carry astronauts to the moon and back in a series of "Artemis" missions.

NASA will launch more than a dozen SLS rockets over the next decade or so. With an Orion sitting on top of each SLS, this project promises to generate literal billions of dollars in revenue for Lockheed Martin -- but how many billions, exactly? And exactly how important is Project Artemis to Lockheed Martin?

The math on this is a bit complicated, so let's break it down for you.

Lockheed Martin's space math

So far, Lockheed has built two Orion spacecraft for NASA -- one that launched in the wee hours of Nov. 16 and a second that is designated to launch on Artemis II in 2024. Three more Orions were already on order, destined to launch on Artemis missions III through V. And last month, NASA announced it had ordered three new Orion spacecraft from Lockheed, which will launch (respectively) on Artemis missions VI through VIII.  

All of these Orions are now under contract and can be counted on to generate revenue for Lockheed Martin over the next decade (Artemis VIII has a tentative launch date of 2031). But the price of -- and revenue from -- each launch varies widely.  

As Lockheed explains, the $2 billion that NASA will pay for the Artemis VI to VIII Orions represents a "30% cost reduction" from the price of the Artemis III to V Orions -- which in turn cost 50% less than the Artemis I and II Orions. Working backward on the math, this implies:

  • The Orions for Artemis I and II cost $4 billion in total (or $2 billion per spacecraft).
  • The Orions for Artemis III, IV, and V cost $2.9 billion in total (or just under $1 billion per spacecraft).
  • And the Orions for Artemis VI, VII, and VIII, of course, cost $2 billion in total (so about $663 million each).

Now add four more Orions to outfit Artemis missions IX through XII, all of which are envisioned in Lockheed Martin's 12-vehicle indefinite delivery, indefinite quantity contract with NASA. Even with no further price reductions (so $2.6 billion for four more launches), Project Artemis should provide Lockheed Martin with revenues of $4 billion + $2.9 billion + $2 billion + $2.6 billion = $11.5 billion (and a $958 million average cost per Orion).

What it means to investors

$11.5 billion is obviously a big number -- nearly a full year's revenue for Lockheed Martin's entire Space business, all from one single product. And yet, while Orion is certainly a big opportunity for Lockheed Martin, it also poses a risk.

To see why, consider how Lockheed Martin's "Space" operating profit margin has declined over the past decade:

Chart shows Lockheed Martin's profit margins falling from above 12% in 2012 to less than 10% in 2022.

After earning profit margins in the 12%-to-13% range early in the 2010s, Lockheed Martin Space now struggles to put up margins of even 10%. As Lockheed Martin cuts prices on its Orions, this Space operating profit margin could fall even further.

Granted, continued declines are not inevitable. Lockheed believes that its Orion costs will decline over time, enabling it to reduce Orion prices without sacrificing profit margins. As Lockheed Martin Orion program manager Tonya Ladwig explains, while Orions are not reusable per se, parts of early Orions, recovered after they return to Earth, can be refurbished and reused to build future Orions. For example, after the Artemis I Orion completes its mission, Lockheed plans to "reuse select avionics from the Artemis I crew module" to build the Artemis II Orion. By the time Artemis VI rolls around, new Orions could be built entirely from refurbished old Orions!  

That may be how things work out. Cost savings from reuse may push Lockheed's Orion construction costs down far enough to permit respectable profits, even if prices continue to fall. But the concept hasn't been proven in practice yet, and if it turns out not to be workable -- or simply fails to generate all the cost savings Lockheed Martin is counting on -- cheaper Orions could translate into lower profit margins for Lockheed Martin for decades to come.

Caveat investor.