VORB - Rocket Lab Vs. SpaceX: Buy 2nd Place For 98% Less

• The market cap of Rocket Lab is roughly $2B, while SpaceX commands a valuation of $125B on the private market (about 60x higher).
• No doubt SpaceX is the leader, miles ahead in the space race. However in distant 2nd place is Rocket Lab, even beating out Bezo’s Blue Origin.
• When it comes to defense contractors, the government prefers oligopolies, not monopolies. The dominance of SpaceX for manned travel and low earth orbit won’t last forever.
• Rocket Lab’s Neutron vs. SpaceX’s Falcon 9 rocket is a closer race than you may think.
• If they can continue on their current trajectory, Rocket Lab offers an asymmetric risk/reward at current valuation.

Saying that Rocket Lab ( RKLB ) and Virgin Galactic ( SPCE ) are both space companies is like saying a Lamborghini and a Model T are both cars. Technically true, but it fails to distinguish their profound differences.

More specifically, I’m talking about getting to "space" vs. orbit. This is how Elon Musk describes it:

One of the toughest things that’s really hard to explain to people is orbit versus space. Getting to space is easy. Getting into orbit is hard. It’s 100 times harder to get to orbit than to get to what you’d call, in quotes, "space." Which is, say, the Karman line at 100 kilometers, which is an arbitrary point at which the atmosphere is fairly thin.

He then goes on to describe how, correctly so, that arbitrary point was chosen so X-15 test pilots from the 1960s could get their astronaut wings. It wasn’t really based on any scientific metric. That altitude is far too low to orbit satellites, as the atmosphere is too thick.

Antigravity you ask? Nope. Virgin Galactic’s weightlessness is caused by the aircraft’s the rapid descent , similar to Boeing’s ( BA ) so-called Vomit-Comet, which is essentially a run-of-the-mill narrow-body airliner that does rapid descents, so the occupants can train for space (it’s also used for making movies).

Yes, the definition of space is a total scam.

While there are many so-called space companies providing or aspiring to provide launch services, there are very few who reach orbit.

SpaceX ( SPACE ) needs no introduction.

Astra Space ( ASTR ) has reached orbit twice now and was actually the fastest company to ever do so. They did it in 4 years. SpaceX took 7. Their approach has drawbacks which I’ll discuss in a moment.

Virgin Orbit ( VORB ), which is not to be confused with Virgin Galactic, did so in 13 years. Their system is antiquated; they fly a 747 as high as they can and basically shoot the rocket off the plane. This only shaves about 7 miles off the rocket’s needed altitude climb.

Jeff Bezos' Blue Origin ( BORGN ) is still sub-orbital.

Then there’s Rocket Lab. Okay so they took 12 years, not the fastest. But their feat will still impress you once you meet the man who made it happen.

Meet Peter Beck

Like Elon Musk, Peter Beck – the founder of Rocket Lab – doesn’t have the academic pedigree one would expect. Elon only has bachelor's degrees in economics and physics, not aerospace engineering. Peter is even more unconventional, as he is a rocket scientist with no college degree whatsoever!

In 1995, he worked as a tool-and-die-maker apprentice at Fisher & Paykel. He used his employer’s workshop to tinker on the side with rockets, making everything from rocket bikes to jet packs. From there he was able to purvey his career into product design and engineering, raking up a cornucopia of knowledge on smart materials, composites, and propulsion systems.

This New Zealand native then founded Rocket Lab in 2006. He secured a crucial seed investment from the aptly named Mark Rocket, a fellow New Zealander who had made his riches online. Within just 3 years, the company successfully reached the Karman line of space with their multi-stage rocket, ?tea-1. So yeah, the next time someone tells you college is a necessity, tell them about this guy who got to space in 3 years with just a high school education.

The Electron rocket

After the ?tea-1 came the Electron orbital rocket, designed to deliver payloads – specifically small satellites – weighing up to 150 kg (330 lbs). Its max altitude of up to 500 km (310 mi) is sun-synchronous orbit ((SSO)). The first attempted flight was in 2017 and while it was deemed a failure due to a telemetry malfunction, it did reach “space” with an altitude of 224 km (139 mi).

Iterations after failures and successes led to what they use today; the 18 m (59 ft) tall carbon composite rocket. It has 2 stages + kick stage, a wet mass of 13,000 kg (28,660 lbs), liquid oxygen and kerosene propellants, and can deliver a payload of up to 300 kg (661 lbs) to low earth orbit ((LEO)).

The Rutherford engine powering the Electron is the world’s first 3D-printed, electric pump-fed rocket engine. It's also the only orbital-class small rocket with a reusable first stage.

With 27 launches to date and 147 satellites successfully deployed, Electron has become the 2nd most reliable rocket in the private sector.

The Neutron rocket

Although Peter Beck said he would never make boosters reusable, he had a change of heart in 2021 and ate his hat because of it – stemming from the age-old idiom in which one promises to eat their headdress if something happens they said wouldn’t. Obviously a PR stunt, though a great one at that, given the ROI it delivered in free press coverage.

At 40 m (131 ft) in height and a staggering 7 m (23 ft) diameter, the Neutron is a medium-lift rocket designed for deploying mega-constellations, human spaceflight, and deep space missions. Consisting of two booster stagers, the first is entirely reusable, including its fairing (nose cone). Its first flight is planned for 2024. If successful, it will be able to deliver 13,000 kg (28,660 lb) to LEO. That is 43 times the payload capacity of Electron.

While I’ve owned some RKLB since day one, it was this pivot to reusability which also made me switch camps – from Astra to Rocket Lab.

You see Astra embraces the disposable approach, by making quick-n-dirty rockets which use a portable launch pad. Between the old Rocket Lab vs. Astra, I believed the latter had a better business model when it came to cheap LEO launches using disposable rockets. However I wasn’t excited about either, as I knew their disposable approaches would not be competitive long term. Now that Rocket Lab has pivoted, it changes the game and pits them directly against SpaceX. I am still rooting for Astra but from the sidelines.

Rocket Lab Neutron vs. SpaceX Falcon 9

If they succeed, you could make the argument that Neutron will be superior to Falcon 9. Being made of carbon composite, it is lighter weight than the metals used to construct Falcon 9 which in turn, will likely lead to greater fuel efficiency.

More important than fuel efficiency is the payload fairing (nose cone). The fairing on the Falcon 9 costs about $6M. In 2017 Musk said :

Imagine if you had $6 million in cash in a pallet flying through the air, and it was going to smash into the ocean. Would you try to recover that? Yes, yes you would.

So far SpaceX has had several dozen launches where they have successfully captured and re-used at least one-half of the payload fairing. Parachutes deploy during descent and they were recovered in the ocean by boats with huge nets.

As you can guess, trying to position the boat perfectly to capture one of these objects falling from space is no easy task. That's why SpaceX retired the net capture practice in 2021. When it splashes down in the ocean now, it is still recovered, but the corrosion of the salt and impact means more damage and refurbishment is needed.

The Rocket Lab Neutron emulates my all-time favorite animal, the hippopotamus. Perhaps not a real life hippo, but it’s looks quite similar to the Hungry, Hungry Hippo game. Yes, even the company themselves officially describes it as such in their press releases.

The fairing opens in four parts. The upper stage, which is released from it, is not re-used. At least not now. However based on Peter Beck’s language, they may eventually try to make that re-usable, too.

They won't have to catch these fairings separately in the sea. By keeping them attached to the rockets' first stage, it means all of the re-used components are returned to the launch site in one piece.

If they can pull this off, which admittedly is a big if, then it should be a more efficient operation versus SpaceX’s Falcon 9. This is what Peter Beck told SpaceNews :

We’ve really optimized the vehicle from day one to be reusable. Every decision is based around that.

That includes the goal of being able to relaunch a Neutron within 24 hours:

Not because I intend to relaunch the vehicle every 24 hours, but it drives all of the design decisions.

Now if you look over the official projected stats for Neutron, it looks like the latest iteration of Falcon 9 is superior:

If you’re not familiar, New Glenn is Blue Origin’s. The Neutron ranks between the first version of Falcon 9 and the current in terms of payload and mass. But don't assume these metrics won't improve.

Falcon 9 went from initially being able to carry only 10.5 tons to LEO. Now it's 22.8. Beck has said he set the bar low because they will start with a low-performance engine, which is easier to build. More powerful engines involve higher pressure. That means they're more prone to exploding and need more service. It would not be unreasonable to expect Neutron's payload capacity to eventually beat Falcon 9.

Neutron’s Archimedes engines use methane. That's superior to the Falcon 9's Merlin engines, which use kerosene for every stage. Aside from being easier to clean and maintain, methane offers performance benefits, particularly on the 2nd stage.

During the 2nd stage, Neutron will have a better specific impulse (320 vs 282 seconds). In Plain English, this means it might be easier for Neutron to reach higher orbits.

There is a drawback though.

The reason Falcon 9 is tall and skinny is so that it can be transported on roads. The Neutron is nearly twice as wide, which means it must be fabricated in close proximity to the launch site.

The advantage of fabricating it close by and not having to transport by road is that the rocket will always be upright. As such, it won't need to be as strong, since it won't ever be rested on its side.

Another advantage of the wider body is that it creates greater air resistance during return. Falcon 9 doesn't and that's why it requires fins. Those are somewhat fragile and susceptible to damage.

Now this whole comparison has been about the pros and cons of Falcon 9 vs. Neutron. SpaceX’s next rocket, Starship, is massive in both size and efficiency. It will be able to deliver 150,000 kg to LEO. That’s 10x more than Neutron’s starting capacity.

Though bigger is not necessarily better for most satellite deliveries, given they go to varying orbits. What Starship is best suited for is large satellite constellation deployment, as well as carrying cargo and people beyond Earth – i.e. Mars. Neutron isn’t meant for this, though it may very well achieve passenger capability for the ISS and lunar missions.

Another SPAC scam?

Nope.

They did go public via a SPAC in 2021 via Vector Acquisition Corporation. They are losing money. However unlike many of these vaporware SPACs, Rocket Lab is a real business which generates significant revenue; $40-50M per quarter recently and by the end of this year, they should be at a TTM north of $200M. No doubt they could have garnered underwriting for an IPO, but you can’t blame them for following the fashion trend of 2020-2021.

As far as losses, they’re not far from breakeven. For Q2 earnings, expected to be released August 11, they have guided for GAAP Gross Margins between 11% to 13% and an adjusted EBITDA loss of $3.5 to $5.5M. I am always skeptical of “adjusted” as companies often ignore share-based compensation (as if it’s not recurring?!) but in the case of Rocket Lab, at least you can take comfort in the $600M cash on hand as of last quarter.

As with most SPACs, their share price has crashed back down to earth. Unlike most, I don't think it's justified.

As far as how long the cash should last, in theory it should be a few years. Their current ratio is 4.3. This is even taking into account the development of Neutron. SpaceX spent about $300M to develop Falcon 9 v1.0, in non-inflation adjusted dollars. Of course, you raise funds when you can, not when you need too. Just because they might have up to 4 years of runway, don't expect them to wait that long until the next dilutive capital raise.

Fortunately, they have real and growing revenue. Hopefully, this will minimize the amount of future dilutive financings.

Only some of their revenue comes from launch services. The latest example is the August 2nd launch for the National Reconnaissance Office. They also did one on July 12th.

Most revenue comes from other space-related products and services (above categories 1, 2, 3, 4, and 6). A prominent example of this is their Photon satellite bus which delivered CAPSTONE into a trajectory toward the moon just a few weeks ago.

Total addressable market

Jokes of $20 million toilets aside, historically we (the US) have spent very little on space. The Mercury, Gemini, and Apollo projects cost $25 billion at the time. The Space Shuttle program was $200B and the International Space Station was $50B. From when NASA was founded in 1958 until present, it has been estimated that only about $1 trillion in current inflation-adjusted dollars has been spent.

I say only because that cumulative amount spans over 60 years. Compare that to our funding of Ukraine; within the first 3 months of the war, the US has given $54B , which is more than what their normalized GDP would have been YTD if the war never happened. At that rate, by the end of this year, we will have given to Ukraine what equates to being more than 1/10th of the entire amount we’ve spent on NASA over a 64 year period.

The good news for space investors is that despite our dismal spending in the past, the future looks bright. Politicians may not put much funding into science. However as history as shown, with our proxy war in Ukraine being the latest example, there always seems to be big money for the military-industrial complex.

China is said to be building space-based weapons and within several years, they will put people on the moon . Jointly with Russia, they have grand plans for a lunar base . A rivalry with both China and Russia, in combination with the newly created United States Space Force ((USSF)), all but guarantees massive defense spending on space.

As to the more purist pursuits of NASA, those too will face a boon. To recap, they retired the Space Shuttle Program in 2011. Since then, they’ve been paying Russia up to $81 million per astronaut, per ride, to travel to the ISS aboard a Russian rocket. Well over $3 billion was spent on this.

Thankfully, beginning in 2020, we have another option; buying seats from SpaceX. Although it will not initially be used for such, Rocket Lab’s Neutron was designed with human spaceflight in mind. Not for taking people to Mars, more like the ISS and perhaps lunar missions. If they succeed, it will likely be the superior 2nd player. Almost certainly better than Lockheed Martin’s ( LMT ) and Boeing’s United Launch Alliance ((ULA)). Their approach is with old-fashioned, one-time use rockets (Delta IV Heavy, Atlas V, and similar).

The bad news is that, when it comes to small launch demand, Electron and Neutron are expected to have a TAM of only $10B by 2030.

Again, I say only because this is a small TAM, relative to the large number of competitors. SpaceX and Rocket Lab have accomplished the most to date but there are well-funded startups which may only be a couple years behind in achieving orbital flights on a regular basis.

Founded in 2015, Los Angeles-based Relativity Space has raised $1.3B to date. That’s more than Rocket Lab. Their Terran R, which is in development, will carry a 20 kb payload, pitting it directly against Falcon 9 and Neutron.

Their pitch is that it's an entirely 3D printed rocket, which to me has always sounded like a bit of a gimmick. However if it delivers on their promise of 100x fewer parts and being fully reusable, then it could become the cheapest provider out there on a cost-per-launch basis.

Then again, remember what Musk said about achieving orbit. They haven't even reached space yet, let alone orbit. Their first attempt should be later this year.

Firefly Aerospace is another early stage contender. Based in Austin and founded in 2015, they have a checkered history. Firefly Space Systems went bankrupt and was liquidated in 2017. Those assets was re-birthed as Firefly Aerospace. While they haven’t yet reached orbit, they do have an actual built rocket; Alpha. They tried launching it last year and it blew up 2.5 minutes into flight.

While the above names get the most press coverage, there are several startups overseas with real potential. A few are Orbex Space (German/Danish), ISAR Aerospace (German), and Rocket Factory Augsburg (German). India and South Korea have public sector space programs which offer launch services.

You have all of these players competing for a small launch TAM which is estimated to only be $10B by 2030. So why is SpaceX already valued at $125B and Rocket Lab at $2B? Because of other opportunities…

Space-based communications, such as SpaceX's Starlink ( STRLK ) and AST SpaceMobile ( ASTS ), infrastructure, and exploration are where the real money will be. Or at least, that’s what investors hope will come to fruition. If these other segments don’t take off, then the valuations of public and private launch providers make zero sense.

On a related note, I recommend you read my piece on AST SpaceMobile .

In short, when it comes to Rocket Lab’s potential, you can paint whatever picture you want, depending on what projections you want to cherry pick. Ultimately I think you should ignore the projections because let’s face it, TAMs for new things like this are just made-up numbers. Rarely, if ever, do they come to fruition. More often, they’re just used to rationalize bubblicious valuations.

Rather than delude yourself with all this TAM nonsense, focus on more broad questions and outlooks.

Are you bullish on space? Do you believe Peter Beck and his company have what it takes to become a major player in the future of space? If so, is today’s valuation worth the gamble?

I think you know my answers to all of the above.

For further details see:

Rocket Lab Vs. SpaceX: Buy 2nd Place For 98% Less