On Friday, April 8, 2016, at 4:52 p.m. EDT, SpaceX landed a Falcon 9 rocket aboard the Autonomous Spaceport Drone Ship (ASDS) Of Course I Still Love You off the Florida coast. In so doing, Elon Musk & Co. performed a feat never before accomplished in human history -- not just returning a rocket from orbital flight to Earth intact (SpaceX did that way back in December), but returning it to hit a moving target.
The engineering wizardry needed to accomplish this mission boggles the mind. But for investors, what really grabs our interest is the financial wizardry that will follow.
Yesterday, we discussed the Falcon 9 relanding (and how SpaceX will follow up on it) in some depth. We covered SpaceX's history of failed landings, culminating in last week's success, and what SpaceX plans to do next to build on its success and make reusable rocket launches routine. Today, we're going to delve even further into the details of what this accomplishment will mean for SpaceX as a company, and what it will mean for companies like Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT), which must compete against that company.
So let's begin at the beginning. According to SpaceX's published list of launch prices...
...an average Falcon 9 launch currently costs $61.2 million. (The new Falcon Heavy, which will make its maiden voyage later this year, will cost a bit more.) That's already half the best price that Boeing and Lockheed Martin charge for a launch over at United Launch Alliance. It's cheaper, too, than the $77 million that Airbus' (NASDAQOTH:EADSY) joint venture Airbus Safran Launchers will charge for its new Ariane 6 rocket.
Already, SpaceX is a formidable competitor, and one its foes will be hard-pressed to beat on price.
The transition period
Beating SpaceX on price, a job that already looks mathematically impossible, will get harder in a month or two, when SpaceX plans to relaunch its recovered Falcon 9 rocket on a second mission to space. According to SpaceX COO Gwynne Shotwell, SpaceX could offer as much as a 30% discount on a mission utilizing the pre-owned rocket. This would cut the price tag to perhaps $40 million (thus undercutting Airbusand Ariane by nearly 50%).
After even a few such successful launches of reusable rockets, SpaceX's rocket salesmen could really put the hurt on the competition.
Of course, the endgame for SpaceX is to practice, practice, and continue practicing landing rockets on drone barges until it reaches a point where successful ocean landings become routine. That's where the economics really get interesting.
Elon Musk argues that reusability will yield "a hundred-fold cost reduction in marginal costs." That only refers to the cost of the first-stage Falcon 9 rocket. It does not mean that the total cost of a launch will drop from $60 million to $600,000 -- but it still leaves a lot of room for cost-cutting (and price wars).
According to Shotwell, each Falcon 9 launch costs "$1 million or less" in fuel. Changing the oil and rotating the tires on a recovered rocket costs perhaps $3 million more. Then you add the overhead of running a space launch business (maintaining the launch pad, making payroll, paying the electric bill), and the cost of replacing Falcon's second stage and its cargo capsule -- neither of which are currently recoverable. It all adds up.
But how low could costs go? According to data from S&P Global Market Intelligence, Lockheed Martin earns about a 12.6% operating profit margin on its space systems business. Boeing, which lumps "network" operations in with space operations in its network and space systems division, earns less than 10% on that business. Lockheed Martin and Boeing make these margins by charging space-launch rates twice what SpaceX charges, and also benefit from a $1 billion-a-year "retainer" that the government pays their United Launch Alliance joint venture.
SpaceX, meanwhile, is said to be profitable at launch costs half of what ULA charges. Now, SpaceX is privately held, and doesn't disclose exact data on its profitability. But if we assume profit margins roughly equal to what United Launch Alliance enjoys -- say, 10% -- at its current price point, plus the ability to cut prices 30% and still remain profitable, a realization begins to dawn:
Theoretically, once it gets reusability down to a science, SpaceX could soon have as much as 40% worth of operating profit margin to play with. That's a bigger profit margin than either Apple or Alphabet enjoy. With margins like those, SpaceX would have the option of maintaining its prices -- already the cheapest on Earth -- and reaping gargantuan profits. Or SpaceX could lower its prices, pass savings along to its customers, and crush its competition at a whim. Or anything in between, and not necessarily in that order.
For anyone hoping that SpaceX will one day go public, SpaceX stock just got a lot more attractive.