SpaceX's Starlink is a success.

Launched to great fanfare (but a tiny, beta user base) in October 2020, Elon Musk's ambitious system for affordable, high-speed broadband satellite internet has grown to a user base of more than 500,000 subscribers in just over two years.

Created as a means of providing fast internet service to rural customers, Starlink has also proven itself useful to the military. In Ukraine, Starlink satellites in orbit and Starlink terminals on the ground have for several months shored up communications for the Ukrainian army as it fends off attacks from Russia. Now, not everyone is happy about this aspect of Starlink. In May, Musk tweeted that "Starlink has resisted Russian cyberwar jamming & hacking attempts."

But there's an upside to having to fend off cyberattacks, in that it's given SpaceX experience in doing so. And now SpaceX intends to parlay that experience into creating a new, military-grade Starlink service: Starshield.

This is more than just a worry for Russia. Certain investors should be nervous about Starshield as well.

Spy satellite in orbit over Earth.

Image source: Getty Images.

Introducing Starshield

Citing the "high-assurance cryptographic capability" it has developed operating Starlink in Ukraine, as well as the "inter-satellite laser communications" it's been testing in orbit, SpaceX advertises Starshield as a "secured satellite network for government entities." SpaceX introduced the service with a little-hyped amendment to its internet homepage, adding a tab labeled "Starshield" earlier this month.  

There, SpaceX explains that Starshield will focus on three areas: communications -- a natural outgrowth of Starlink -- hosted payloads, and earth observation. What these latter two segments represent is unspecified.

The last one is of particular interest. In communications, SpaceX has developed a commanding lead over rival "space internet" companies such as OneWeb (whose satellite constellation is a fraction of Starlink's size) and Amazon (AMZN 1.60%) -- which has yet to launch a single satellite. Lately, SpaceX has been gaining experience in Earth observation: It won a $149 million contract from the Pentagon back in 2020 to build part of what the Pentagon calls a tracking layer of a new early warning system that will track missile launches for the Space Force.

Who's at risk

Earth observation currently boasts two primary publicly traded incumbent companies, Planet Labs (PL 7.03%) and Maxar Technologies (MAXR). These are the biggest names in privately owned and operated satellites -- Planet Labs in wide-area, low-resolution satellites and Maxar Technologies in targeted-area, high-resolution satellites. Investors in both these companies have reason to worry about SpaceX's entry into Earth observation.

Why? The phrase "Your profit margin is my opportunity" comes to mind.

Before SpaceX came on the scene, United Launch Alliance (a joint venture of Lockheed Martin (LMT 0.27%) and Boeing (BA 0.15%)) was regularly launching large satellites for the U.S. government at prices as high as $400 million per mission. Since SpaceX arrived, offering launch prices as low as $50 million, its rivals' profit margins have eroded. Boeing doesn't clearly break out "space margins," but at Lockheed, for example, operating margins in space, which exceeded 12.8% in 2011, have fallen steadily, barely scratching 9.3% in 2021.

SpaceX next turned its eye to the small-satellite launch market, announcing a small-satellite "rideshare" program in 2019. By 2020, Spaceflight Industries -- at the time the leading player in rideshare -- announced it was exiting the business and selling its Spaceflight Inc. subsidiary to Japan.

And now SpaceX wants to do Earth observation.

Exit stage left

It is no coincidence that within weeks of SpaceX announcing Starshield's intentions, Earth observation company Maxar announced it is exiting the public markets in a private-equity buyout. Assuming this deal goes through, it will leave tiny Planet Labs as the primary high-profile, publicly traded Earth observation stock to compete with SpaceX Starshield -- and Planet Labs may not be up to the task.

From December 2nd, the day before SpaceX's announcement, through December 15th (when Maxar's buyout announcement helped Planet Labs' stock rebound), shares of the Starshield rival lost 15%. Valued today at $1.4 billion, Planet Labs boasts only $175 million in trailing revenues. And according to analysts polled by S&P Global Market Intelligence, Planet Labs is still four years away from non-GAAP profitability. That's a long time for Planet Labs to fend off competition from Starshield before it can rest assured it can fund its own operations.

Granted, SpaceX's success in Earth observation is not assured. Not everything that Elon Musk attempts ultimately works out quite as planned (just ask Twitter), and this new competitive threat could go away. But with the announcement of Starshield, Planet Labs investors now have one more thing to worry about.

I admit: I own some Planet Labs stock myself and I'm worried.