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Wednesday, November 30, 2022

Rocket Lab Copies a Page From the SpaceX Playbook

Five years ago, SpaceX CEO Elon Musk made a startling announcement: His new Starship megarocket, originally designed to carry humans to Mars, might also be used to transport passengers and cargo from point-to-point here on Earth!

Blasting toward orbit at many times the speed of sound, then landing again on a ballistic course, Starship would be able to travel from New York City to Shanghai, China (a 12,000 mile trip, so literally about as far as you can travel one-way on Earth) in just 40 minutes.

SpaceX’s prediction (which it hasn’t yet proven, by the way) quickly caught the attention of the media — and the commercial airlines, who might rightly worry what it means for their business model. It also caught the eye of the U.S. military, however, which began to wonder whether space rockets could provide a means to quickly resupply far-flung military outposts.

Image source: Getty Images.

In no time at all, the Pentagon hit up Congress for $47.9 million to fund a “Rocket Cargo” project. Not coincidentally, in making its request, the Pentagon specified that its project would seek to fund a rocket that could go “anywhere on the Earth in less than one hour, with a 100-ton capacity … with full reusability” — all characteristics of SpaceX’s Starship. But now, the Pentagon is asking for $43.9 million more funding in fiscal 2023 — and if the original $47.9 million contract was clearly aimed at SpaceX, this new request appears to have a different target in mind: Rocket Lab (NASDAQ: RKLB)

On Sept. 6, Rocket Lab announced that it has signed a “Cooperative Research and Development Agreement (CRADA) with the United States Transportation Command (USTRANSCOM).” Utilizing Rocket Lab’s current Electron rocket and its larger (still-under-development) Neutron rocket, the Pentagon wishes to transport cargo around the world, much as SpaceX has promised to do with its Starship.

What’s more, going a step further, the Pentagon may try using cargo-laden Rocket Lab Photon spacecraft as “on-orbit cargo depots,” which will spin round and round the Earth until they’re needed — then drop out of orbit, re-enter the atmosphere, and parachute to Earth. Rocket Lab’s smallish rockets may be particularly well suited to delivering small parcels of supplies to potentially very out-of-the way forward operating bases — the kind lacking the infrastructure to land a 100-ton Starship.

What it means to investors

At present, though, the Pentagon’s Rocket Cargo program is purely experimental. As with the SpaceX program announced last year, the Air Force believes it may offer the potential “to transport critical military cargo an order of magnitude faster than ever before.” But for now, the government just wants to better “understand commercial rocket capabilities for future logistics missions.” As Space News explained after reviewing the news, “the government does not commit to buying anything” further under a CRADA like the Rocket Cargo program.

Thus, at present, the size of this program, and the money at stake, remains relatively small (in United States Defense Department terms — less than $92 million for the research and development work). Furthermore, the monies being discussed are likely to be divided up among at least three participants proving the Rocket Cargo concept — SpaceX, Rocket Lab, and also Blue Origin (which joined late last year).

Still, every little bit helps, and the smaller the company, the more it may help.

Relative to SpaceX and Blue Origin, which are backed by the world’s No. 1 and No. 3 richest humans, respectively, Rocket Lab is a relative upstart in the space industry, depending largely on its $130 million in annual revenues to grow the business. As such, even a relatively small infusion of cash from the U.S. Pentagon — say, one-third of the $92 million up for grabs under the Rocket Cargo program — could make a big difference in accelerating the company toward profitability.

Making the situation even more intriguing for investors: Out of these three space companies, currently Rocket Lab is the only one that is publicly traded such that you can invest in it.

Mind you, investing in Rocket Lab is not for the faint of heart. Despite growing its business nearly three times in size over the last three years, Rocket Lab remains deeply unprofitable today. And most analysts polled by S&P Global Market Intelligence don’t expect Rocket Lab to see its first profitable quarter before 2024 or its first profitable year before 2025. Participation in the Rocket Cargo program may help move that date up a bit, if the concept proves out — or it may not.

But adding a potential $30 million or so to Rocket Lab’s $130 million annual haul certainly will not hurt.

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Rich Smith has positions in Rocket Lab USA, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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