Curious About Investing in Rockets? Rocket Lab vs AstraCurious About Investing in Rockets? Rocket Lab vs Astra
Morgan Stanley estimates that the global space industry can generate more than $1 trillion in revenue by 2040, up from $350 billion today (source). This dramatic increase will be driven primarily by satellite launches, satellite internet, earth observation, space exploration, and space tourism. Nothing will accelerate this growth in space revenues more than cheaper and easier access to space.
Rocket launching used to exclusively be in the domain of national governments, largely due to the prohibitively high costs in developing and launching rockets, as well as the sparse demand for launches. Over the past couple decades, development costs have plummeted while launch demand has skyrocketed (pun intended). This resulted in a surge in creation of many private sector launch companies aiming to bridge the hundreds-of-miles gap between Terra Firma and The Final Frontier.
The leader of the pack is undoubtedly SpaceX, which has not only become the world's cheapest and most reliable launch provider, but is making rapid progress in more and more ambitious space projects like larger and larger rockets (Falcon 1 to Falcon 9 to Falcon Heavy to Starship), reusing rockets by landing a rocket's used first stage on a barge, and Starlink, a constellation of 30,000 satellites providing broadband internet to anywhere in the globe.
Alas, SpaceX is a private company and nigh impossible for the average retail investor to invest in. But all is not lost, as a large cohort of space companies have recently gone public, including a few rocket companies. This article focuses on two of these companies, Astra and Rocket Lab, which are both pure play rocket companies.
The Business Case for Rockets
At the most basic level, rocket companies make money from rocket launches. Launch demand used to come solely from the public sector. Governments and their respective militaries need to get payloads in orbit for research, Earth observation, and intelligence/counterintelligence purposes. As launch costs have plummeted, the demand for launches from the private sector has risen dramatically and has eclipsed government demand.
In the medium term, rocket companies can continue to benefit from meeting an ever-increasing launch demand while margins are still high... but rocket launches are ultimately a commodity and margins shrink over time in commodity markets. With so many rocket companies springing up in the private sector, and rapid innovation in launch technology, downward pricing pressure increases quickly. For example, United Launch Alliance had to slash the price for Atlas V missions from roughly $187 million to $100 million in the last few years due to intense competition from SpaceX. The cost for Atlas V launches never came close to the Falcon 9's launch price of $62 million.
Over time, the rocket launch market will become similar to the airline market where margins are thin, competition is cutthroat, and the only way to survive is through volume.
So what is a better long term business case for rocket companies beyond just launching rockets? These companies can find markets that are less commoditized, have a greater affinity for moat-building, and with a more reliable revenue stream in "space services". Space services include businesses like satellite broadband Internet (Morgan Stanley estimates an annual revenue of up to $400 billion by 2040), space manufacturing, and space debris clean-up. Rocket companies can leverage their launch expertise and cheap internal pricing to quickly develop, perfect, and sell these services.
Rocket Lab ($RKLB)
Rocket Lab went public late last year through a SPAC. It's one of the most exciting rocket launch companies next to SpaceX with an impressive record of successful launches since 2018 via its Electron rocket.
Rocket Lab was founded in New Zealand in 2006 by New Zealand aerospace engineer Peter Beck. The company first reached space in 2009 with its Ātea-1 sounding rocket. Rocket Lab has gradually moved its operations from New Zealand to the US. In 2013, its HQ was moved to California and in 2019, a second launch complex was established in Virginia's Mid-Atlantic Regional Spaceport. The first launch complex is in New Zealand.
Launch (Electron and Neutron Rockets)
It's incredibly hard to get a rocket into orbit for the first time and even harder for a rocket company to have a track record of consistently succeeding. Rocket Lab has achieved such a track record with its Electron rocket, having made 22 successful launches since 2018 with only 3 failures (source).
The Electron is classified by NASA as a small-lift rocket. It can lift a 200 kg payload to a 500 km altitude (under 1000 km is considered Low Earth Orbit) or 300 kg payload to lower orbits. The cost of each launch is in absolute terms low, at $7.5 million, but is expensive next to SpaceX's offerings when normalized by mass:
- Electron: $25,000 per kg ($7.5 million per launch, 300 kg to LEO) (source)
- Falcon 9 (SpaceX): $2,720 per kg ($62 million per launch, 22,800 kg to LEO) (source)
- Falcon Heavy (SpaceX): $2,350 per kg ($150 million per launch, 63,800 kg to LEO) (source)
However, despite a significantly higher cost per kg, the Electron fits an underserved niche for launches with small payloads that need fast delivery. The Falcon 9 and Falcon Heavy can only launch economically if their large capacity is filled and if any part of the payload is delayed, the entire launch can be delayed. Electrons, on the other hand, with their small payload and ease of construction, can launch much more frequently.
To reduce the cost of Electron launches, Rocket Lab wants to reuse the rocket's first stage by having a helicopter catch the used rocket component in the air as it descends. Compared to SpaceX's method of landing the rocket's first stage on a drone barge, in-air recovery by helicopter is cheaper but its safety and reliability is unknown. After several successful "proof of concept" missions, the company is confident a real helicopter recovery can be attempted next year (source).
Rocket Lab is also working on a new rocket called Neutron that's a medium-lift rocket (up 15,000 kg to LEO), also with a reusable first stage. Although still smaller than the Falcon 9, Neutron is powerful enough to start sending the same types of payloads as the Falcon 9 to space.
As mentioned above, rocket companies can't just rely on launching rockets as a long term business plan given how quickly launches are expected to be commoditized. As such, Rocket Lab has a grander vision of being a full vertically integrated space services company that can not only cheaply and reliably put things in space, but can also manufacture spacecraft, satellites, and provide systems that manage the lifecycle of satellites while in orbit.
To this end, Rocket Lab has recently made several strategic acquisitions to bolster what it calls its "space systems" business:
- Planetary Systems Corporation: a company that builds hardware that attaches satellites to rockets and releases them in space
- Advanced Solutions: a company the develops software for flying spacecraft and for mission simulation and testing
- Sinclair Interplanetary: a company that designs and manufactures satellite components
Finally, Rocket Lab has developed its own satellite bus called Photon that can deliver customer payloads to a specific spot in orbit and/or act as a standalone satellite. It's the perfect example of the optimizations and cost savings that can be had from a full vertically integrated service, as a Photon gracefully acts as the upper stage of Electron and enables full utilization of the rocket's fairing (source). Photon is in operation right now and space manufacturing startup Varda Space Industries plans to use Photons to deliver and support its space manufacturing and reentry modules (source).
With its debut as a public company via SPAC, Rocket Lab has more than enough capital to achieve its short and medium term goals of developing the Neutron rocket and expanding its space systems business (according to CEO Peter Beck in the recent quarterly earnings call). The SPAC deal infused Rocket Lab with $777 million in cash and it has $792 million in cash on its balance sheet (2021 Q3 Form 10-Q).
How does one value a public company that has little revenue ($29.5 million in H1 2021 and a backlog of $141.4 million)) and so much of its business in development? Well one can use SpaceX as a leading indicator. In 2020, SpaceX generated $1.2 billion in revenue (source) and is valued at $100 billion (83 times revenue). This shows that space companies can fetch very high revenue multiples.
It turns out, assuming Rocket Lab's full year revenue is $59 million ($29.5 million * 2), then its current market cap of $5.84 billion results in a 99x revenue multiple, which is similar to SpaceX. A reasonable revenue projection model can thus use a revenue multiple of something in the range of 75-100x to project the company's market cap as it grows its revenue. Rocket Lab expects launch revenue to grow to $915 million by 2027 (source). Assuming a 75x revenue multiple, this would result in a $70 billion market cap, which is about 12 times its current valuation.
Like Rocket Lab, Astra went public last year via SPAC. It's a relatively young company, having been founded by Chris Kemp (ex-NASA executive) and Adam London (aerospace engineer and former founder of Ventions, a space propulsion startup) in 2016.
Despite its youth, Astra had made significant progress in rocket development and reached orbit for the first time with its LV0007 rocket in November. This makes Astra the fastest company to reach orbit with a privately developed liquid-fueled rocket (five years and one month). The next fastest company to do so is SpaceX, which reached orbit with the Falcon 1 six years and four months after its founding (source).
Launch (Mini Rockets Launched Anywhere, Anytime)
If SpaceX is building the Boeing 747 of rockets, then Rocket Lab is building the Bombardier private jet of rockets and Astra is building the Cessna hobbyist plane of rockets.
Astra's rockets are small, even smaller than Rocket Lab's Electron. They can carry a payload of up to 150 kg to an altitude of 500 km. Astra hopes that with mini rockets, it can carve a niche in the launch business by allowing customers to launch from anywhere on Earth to anywhere in space, at any time (source). It also wants to drastically reduce the cost of launches, targeting a per-launch cost of $2.5 million (source). To put this number in perspective, an Electron launch costs $7 million. Astra hopes that its low-cost mini rockets will eventually be launching at a daily cadence.
To reach this lofty goal, Astra is focused on optimizing its manufacturing process and also wants to cut down the number of people required in mission control to just two.
Astra, however, is still in proof-of-concept mode and has a mountain of work to do to establish a track record of successful launches. Although there is much to celebrate with LV0007's success, it comes after a series of failed launches and the company needs to prove to potential customers that LV0007 isn't just a lucky break.
To the company's credit, Astra already has a slew of launch contracts under its belt, including one with NASA for storm observation and one with the Space Force. In fact, according to Chris Kemp, Astra has more than 50 launches in its backlog (source).
Satellite Constellation and Space Systems
Like any reasonable rocket company, Astra wants to expand its business beyond launching rockets, and it has taken pages out of the books of both Rocket Lab and SpaceX. For one, Astra plans to build a satellite constellation to provide broadband Internet across the globe, directly competing with Starlink. It also wants to be a vertically integrated launch company like Rocket Lab and is getting ready to build its own version of the Photon satellite bus. To this end, Astra recently acquired Apollo Fusion, a company that builds electric spacecraft engines.
However, it's still too early to put any weight on Astra's space services ambitions... the company's main priority is to establish a track record of successful launches.
Just like Rocket Labs, Astra's public debut infused it with a significant amount of capital. $500 million to be exact. The recent quarterly earnings report showed that the company has $378 million in cash on its balance sheet.
This should be enough cash for Astra to continue developing its rocket technology and build a track record of success. However, it's probably not enough to make significant progress in its other endeavors and Astra will likely need another round of funding within the next two years, probably through stock dilution.
Having made a mere $1.4 million in revenue this year, Astra is essentially a pre-revenue company. This means that most valuation methods don't apply to Astra, but we can still try.
If we apply a 100x revenue multiple to Astra, which currently has a $2.37 billion market cap, then the market expects about $20 million in revenue next year. Assuming each launch costs $5 million, Astra would need to make four successful launches for paying customers next year.
Can Rocket Lab and Astra Win?
Rocket Lab and Astra face intense competition from the industry incumbent SpaceX, which has a huge headstart, massive funding, and as a small added bonus, doesn't have to deal with the overhead of being a public company (extra reporting requirements and extra regulatory oversight). However, underdogs do not always lose and with skilled business planning and efficient execution, both companies can carve their own niches in the ever-growing and eventually massive space industry.
At the onset of World War II in the Pacific theatre, the Japanese A6M Zero fighter plane significantly outperformed the American F4F Wildcat. However, Navy pilot John Thach developed a defensive maneuver (eventually called the Thach weave) that drastically reduced the Zero's advantages in combat. If a Zero pursued one Wildcat, the pilot and his wingman would immediately turn towards each other, cross paths, fan out, then repeat. Each time they crossed paths, the pursuing Zero would fall into the crosshairs of the wingman and be forced to disengage. Despite the Zero's better performance characteristics, a little bit of ingenuity on the part of the underdog helped the Wildcat overcome its weaknesses.
Rocket Lab and Astra's Thach weave is to capture a niche in the launch business that SpaceX is not focused on. At the moment, this appears to be light-to-medium rockets. In addition, the space services industry is so nascent that there's ample room for multiple companies to grab market share.
As for the competition between Rocket Lab and Astra, both companies are competing in the same space (full vertically integrated space company specializing in light-to-medium rockets) and there seems to be little room for differentiation. Unfortunately for Astra, it's significantly behind Rocket Lab in technology, experience, and capital.
If I had to choose one over the other to invest in, I would choose Rocket Lab. The company has already established a long string of successful launches with its Electron rocket, has an operational satellite bus (Photon), and has about $400 million more cash than Astra.
That said, the best case scenario would be for Rocket Lab and Astra to merge. SpaceX is such a dominant force in the space industry that it makes no sense to compete amongst each other for a smaller piece of the pie when they can join forces to compete against SpaceX.