Rocket Lab's Biggest Contract Ever Was Actually Kind of Small

Investors in small rocket company Rocket Lab (RKLB -1.12%) had a fantastic December 2023, but January 2024 has been something of a letdown.

Late last year shares of the manufacturer of Electron small space rockets had some fabulous news to report: It snagged its biggest contract win ever when the U.S. Space Force tapped it to build part of the Pentagon’s new missile defense constellation called “Proliferated Warfighter Space Architecture.” (Yes, “Star Wars” would’ve been a catchier name, but Ronald Reagan already claimed it.) For $515 million, Rocket Lab will build 18 “transport layer” satellites by 2027, then run them for the government through 2030 or 2033.

Abracadabra, presto-change-o, all of a sudden Rocket Lab had been anointed a “prime” defense contractor for the U.S. Space Force.

Rocket Lab’s ups…and downs

This did wonders for Rocket Lab stock, of course, igniting a buying frenzy that drove shares up 30% in the space of one week. And yet the enthusiasm didn’t last. Over the course of January, we’ve already seen Rocket Lab stock fall back 10%.

So where did all the excitement go?

In part, you can blame the Pentagon for investors’ sudden disappointment in Rocket Lab. You can also blame giant defense companies Lockheed Martin (LMT -0.88%) and L3Harris (LHX -1.18%), and also private space company Sierra Space. In January, you see, Space Force revealed that Rocket Lab wasn’t the only company winning new contracts under the PWSA program — and it definitely wasn’t the company winning the most lucrative contracts.

Bing, bang, boom, in a trio of contract awards, Space Force doled out three more 18-satellite contracts to these other space companies, each of which was told to build the exact same number of satellites as Rocket Lab will build — but for much more money. Sierra Space will be paid $740 million for 18 satellites, while publicly traded Lockheed Martin and L3Harris will be paid even more: $890 million and $919 million, respectively.

You see the problem: Rocket Lab appears to have jumped at the chance to do the same work its peers will be doing, yet will be paid as little as 56% as much for the work.

Is that fair to Rocket Lab?

As a shareholder in Rocket Lab myself, I have to admit that this feels a little unfair. And yet it does make some sense. Rocket Lab is, after all, best known for building rockets, not satellites. It makes sense that the Pentagon might have more confidence in more established satellite-builders to build its satellites, and therefore be willing to pay more for their work, at least initially.

In the case of Lockheed Martin, for example, several of its PWSA satellites are already in orbit and presumably performing as specified. This may be why Space Force has awarded Lockheed contracts to build a total of 106 satellites, or 24% of the 438 contracts awarded so far. It’s also worth pointing out that the $2.6 billion that Lockheed has been awarded under this program works out to a price of only $24.5 million per satellite — which is actually less money, per satellite, than the $28.6 million price Rocket Lab will be paid.

Northrop Grumman (NOC 0.08%), the biggest recipient of PWSA contracts to date, will earn even less than that — $21.5 million per satellite across the 130 units it was asked to build.

The fact is, if you want to feel sorry for anyone, feel sorry for privately held York Space Systems. According to a report by CNBC, York has won the second-most contracts of all — 126 — but will be paid barely $10 million per satellite that it builds! Granted, it’s still curious that L3Harris (LHX -1.18%) will receive $1.8 billion to build only 36 satellites. That’s more than three times Rocket Lab’s fee, for only twice as many satellites.

But by and large, it does make sense that more established companies that build satellites in bulk would win more contracts, and win more valuable contracts as their earlier satellites prove their worth. It’s also possible that once Rocket Lab’s first batch of satellites is in orbit and operating, the company will be able to negotiate bigger and more lucrative follow-on contracts as old PWSA satellites age out and need to be replaced.

In the meantime, Rocket Lab investors can take comfort in one thing: Even if other companies are getting more and better PWSA contracts than Rocket Lab, this is still Rocket Lab’s biggest contract ever won. It amounts to more than two full years’ worth of the company’s annual revenue, and should boost profit margins for the space upstart, because this revenue will fall within Rocket Lab’s higher-profit-margin space systems business, which according to data from S&P Global Market Intelligence earns 19% annual gross profit margins — twice what Rocket Lab gets from launching rockets.

It’s not as big a win as we might hope for. But it’s still a win, and we’ll take it.

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