The rumors were true. The U.S. Space Force is changing how it awards space launch contracts -- and for a certain segment of the space stock market, this is very good news indeed.
For the past six months, rumors have swirled about a major shakeup in the Space Force's National Security Space Launch (NSSL) program. Inaugurated in 2018 with $2.2 billion in government subsidies to design and build a fleet of new space rockets, then expanded in 2020 into a $5.5 billion launch procurement program funding rocket launches through 2027, NSSL is gearing up now to award billions of dollars of new "Phase 3" contracts for government space launch services.
Unlike in previous competitions, however, the new contracts will be divided into two "lanes," one for up-and-coming rocket launch companies like Rocket Lab (RKLB +11.89%), Virgin Orbit (VORB +0.00%), and Blue Origin, and a second for big incumbent space launch providers such as SpaceX, Boeing (BA +5.16%) and Lockheed Martin (LMT +0.92%).
NYSE: LMT
Key Data Points
Lane 1: Calling new space companies
Space Force's emphasis on adding new space companies to its roster of launch providers can perhaps be detected in its decision to first draft a "request for proposals" (RFP) from these kinds of smaller providers.
According to the first draft RFP, "Lane 1" of the NSSL Phase 3 competition will establish an umbrella value for contracts, which will then be awarded on an indefinite delivery, indefinite quantity (IDIQ) basis -- i.e., parceled out among multiple contractors on an as-needed basis. Space Force didn't say exactly how big this umbrella will be (how many millions or billions of dollars it will be worth). It did note, though, that the IDIQ award will run for five years, with the potential to be extended for five more years (a decade-long run in total), and that new defense contractors may be added to its library of contact contenders every year throughout the contract.
This suggests that while Lane 1 will first be populated by smaller rocket companies that already have operational, flight-proven rockets -- such as Rocket Lab and Virgin Orbit, for example -- there's also the potential for companies still fine-tuning their rockets, such as ABL, Blue Origin, Firefly, and others, to join in the fun later on.
Lane 2: Round up the usual suspects
In contrast, Lane 2 is going to feel a lot more familiar. Just as in the last "Phase 2" contest, only two winners will populate Lane 2. And just as in Phase 2, their two contracts will be awarded for a five-year term.
The Lane 2 RFP speaks of "risk reduction" activities, "first-time missions of a specific space vehicle," and potential "new entrant" launch vehicles as well -- all suggestive of a free and open competition in which any space company can bid. Regardless, the fact that SpaceX and United Launch Alliance (the joint venture between Boeing and Lockheed) have vacuumed up national security space launch contracts for the better part of a decade makes it all but certain that these are the companies who will win the (only) two Lane 2 contracts available.
Again, at this early stage in the game, Space Force isn't saying how much Lane 2 will be worth. But if Phase 3 is anything like Phase 2, it's a safe bet the number will stretch well into the billions of dollars.
What happens next
As I say, NSSL Phase 3 is just starting to rev up, with a lot of details still uncertain -- and likely to remain uncertain for some time. Space Force won't even have its two RFPs in final form until the third quarter of this year. Furthermore, Space Force doesn't plan to announce the contract winners until the fourth quarter of 2024.
For investors, though, that's not necessarily a bad thing. With Lane 2's winners essentially a foregone conclusion, the real race, and the real opportunity for investors, lies in Lane 1. And there, procrastination may be the better part of profit. The longer Space Force waits to make its decisions, the longer Rocket Lab has to finish the development of its new Neutron launch vehicle, for example, and the longer Blue Origin has to finish its New Glenn rocket -- improving each company's ability to win a piece of the Lane 1 pie.
And, of course, it won't hurt if Space Force confines SpaceX and ULA to Lane 2, leaving Lane 1 wide open for new space companies to join. Long-term, this new approach that Space Force is pioneering should also help these new space companies find their stride, and grow their businesses, to a size where they can compete head-to-head with SpaceX and ULA in future launch contract contests.
Granted, more competition may ultimately mean lower profit margins for the incumbent space giants SpaceX and ULA. But it will mean lower costs for taxpayers -- and more opportunities for investors to invest in space.
