"Nobody would suggest buying airplanes that only fly once & then crash into the ocean. That would be absurd...So why is this madness acceptable for...rockets?" -- Elon Musk
Five years ago, Elon Musk made some startling predictions. Unveiling an upgraded version of the SpaceX Falcon 9 reusable rocket that can fly 10 times in a row without scheduled maintenance -- and that might conceivably fly 100 times before requiring refurbishment -- the CEO of SpaceX predicted that, one day soon, rocket rides to space would come to resemble airplane rides on Earth.
Just as with airplanes, the more often a rocket flies, the cheaper each additional flight becomes, as the cost of building the vehicle gets spread out and paid back over more and more uses. Ultimately, a rocket flight's cost should begin to approach the cost of just the fuel to fly it.
Recall that SpaceX had only just begun launching, landing, and reusing its Falcon 9 reusable rockets three years earlier. By mid-2018, SpaceX -- which has conducted well over 200 spaceflights today -- had only completed a few dozen launches. Yet here Musk was, peering into the future, and seeing rocket launch companies launching as routinely, and as safely, as airlines.
Image source: Getty Images.
And my question about that was this: Is that necessarily a good thing for investors?
Elon Musk versus Warren Buffett
Shifting from one business icon to another, I was reminded of what Warren Buffett used to say about airline stocks: They've "been a death trap for investors" -- Buffett included -- who have "poured their money into airlines...for 100 years with terrible results" as airline after airline went bust, leaving us with fewer than a dozen mainline passenger airlines today.
The Oracle of Omaha then went on to quip: "I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: 'My name is Warren and I'm an aeroholic.' And then they talk me down."
And so I wondered: Might the same thing happen to investors in space stocks?
A short history of space investing
The last couple of years have certainly been rough for space investors. Since Sir Richard Branson ushered in a stock market space race with his 2019 IPO of Virgin Galactic (SPCE 3.15%), multiple space companies have followed in its footsteps. Many suffered terrible results, as de-SPAC'ed space stocks plunged anywhere from 68% (Virgin Galactic) to 84% (BlackSky) to 94% (Spire) from their pre-IPO prices.
In one instance, Virgin Galactic sister company Virgin Orbit lost 100%, filing for bankruptcy protection earlier this year.
And yet, one of the survivors of this space stock pile-up thinks the future may look brighter for companies that make the cut.
Why Rocket Lab CEO Peter Beck thinks things will be alright
I asked Peter Beck, CEO of small rocket launcher Rocket Lab (RKLB 3.29%), what he thought the chances were of rocket companies like his own (with almost 40 launches under its belt, Rocket Lab is approximately where SpaceX was five years ago) turning into commodity stocks. Would moving merchandise and people from Point A to Point B invite cutthroat competitors to slash prices, chew up profit margins, and drag everyone down, as happens from time to time in the airline industry?
"No," says Beck. This is not what the future holds.
"The big difference between an airplane and a rocket comes down to physics," explained Beck. Airplanes are designed with safety margins throughout. They're built with more lift than they need to stay airborne. More power in the engines than they'll ever need. They have more redundant systems throughout the vehicle -- because they can.
Rockets are another matter entirely. Rockets are designed to carry the maximum amount of payload with the minimum weight of rocket. And this is because every additional pound carried -- be it payload or rocket -- costs insane amounts of money to fly into orbit. Each rocket must be perfectly designed for the mission it's assigned, with very little margin for error.
"This need for perfection then becomes a moat around the business." Competitors are limited in the number of corners they can cut in order to underprice incumbents and steal market share in space launch. Because if they do, rockets will crash, and they'll soon be out of business.
Case in point: "Other, better funded companies [than Rocket Lab] have already failed," says Beck. The survivors -- those who figure out how to build rockets perfectly and fly them profitably -- therefore won't encounter the same problems with competition that have plagued the airline industry.
How to make profits in space
Of course, this naturally led to my next question: Exactly where will these profits come from for Rocket Lab?
Neutron will help. Rocket Lab's new medium-lift rocket (8 to 15 tons to LEO -- so 32% less than a SpaceX Falcon 9) is due to make its first flight next year. It will cost about $50 million to $55 million to launch -- as much as 25% cheaper than SpaceX, which charges $67 million. Rocket Lab is still working on Neutron, and Beck notes that designing the rocket to survive the high temperatures of atmospheric reentry, and land accurately on target, will be the trickiest parts of making the rocket reusable like a Falcon 9.
That being said, even after Neutron is ready, Rocket Lab still has a problem.
Big fish in a small pond
SpaceX is the world's most frequent launcher right now, with 100 spaceflights expected to happen this year -- more than six times the goal of No. 2 American space launcher Rocket Lab. Yet even with this fact in its favor, analysts predict space launch will generate only about $2.3 billion in revenue for SpaceX this year, and may not be profitable. That's almost certainly why Elon Musk placed his big bet on Starlink providing the bulk of SpaceX's profits in years to come.
Globally, Beck thinks the entire market for space launch is worth only in the "tens of billions of dollars" per year. So if Rocket Lab is to make money in space, how can it do that?
Neutron could be part of the answer. A bigger rocket can carry bigger satellites (or more small satellites), generating more revenue for Rocket Lab, at potentially bigger profit margins. And as Beck explains, the first step to being a viable business in space is to be a gatekeeper able to launch one's own satellites.
But as of today, Rocket Lab hasn't yet decided on what its next step will be -- what business it will build that will become "Rocket Lab's 'Starlink'".
Rocket Lab's space systems division, which builds not rockets, but satellites, space ships, and parts for both, and which is already outgrowing the company's core rocket launch business, could be the answer.
From 2019 through 2022, Rocket Lab's space launch revenue grew a respectable 25%, according to data from S&P Global Market Intelligence. But the space systems division, responsible for such projects as building satellites for Globalstar to provide communications from space, for Varda to manufacture pharmaceuticals in space, and for NASA to send satellites through space to orbit Mars, grew 7,500%.
That's probably a clue to where Rocket Lab is headed next. As it launches more and more missions for its customers, it should become evident what businesses are the best to be in space. Upon finding that out, Rocket Lab can tailor its business in that direction.
The future for Rocket Lab will be about more than just building and launching rockets. For the time being, however, we're all still waiting to find out what, precisely, Rocket Lab will become.
