Rocket Lab’s $6b Nasdaq listing: Three potential problems

Rocket Lab is gearing up for its US$4.1 billion ($5.7b) Nasdaq listing during the second quarter, through which it will raise US$750m – much of it earmarked to fund a larger medium-lift rocket, the Neutron, due to blast off in 2024.

Rocket Lab founder and chief executive Peter Beck this week revealed details of the giant new rocket and said it was an exciting time for the company.

“We’ve been on this path for a while, and it’s great to finally bring Rocket Lab to the public.”

But like anything to do with space, there are plenty of uncertainties out there.

Here are three potential fishooks to the company’s future growth plans.

1. The satellite launch industry is overcrowded

In a survey of the industry last month, the Wall Street Journal counted a “glut” of more than 100 small satellite launch ventures, fuelled by a “bubble” of US$15.7b of venture capital.

The good news: There are a whole lot of satellites to launch now, and more on the way. Some 1200 satellites reached orbit last year, with more than 10,000 expected over the next decade. In comparison, about 400 small commercial satellites launched between 2015 and 2018, it said.

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The bad news: That’s not nearly enough to sustain the current number of contenders, say experts canvassed by WSJ. “Only a few will survive,” it says.

Happily, for Rocket Lab, the Journal named it as one of three promising contenders in the crowded field, along with Sir Richard Branson’s Virgin Orbit (not to be confused with his space-tourism startup, Virgin Galactic) and Astra Space, financed by US tech and telco billionaire Craig McCaw.

On Tuesday, Beck’s response was: Others are raising funds and tooling around with prototypes, while his company’s 18m tall Electron has had 18 launches since 2017, ferrying 97 small satellites into space.

“There’s only been one other company [Virgin Orbit] that’s had one successful test flight,” Beck said.

“We’ve always been the first mover and we like being a first mover, and continue to be the first mover into this new medium class, which we think ultimately is where the market is going to go.”

2. Going head-to-head with Elon

The first Electron launches took 150kg payloads into low-Earth orbit. Recently, it’s upped the ante to 300kg. But the 40m tall Neutron will be able to handle a manifest of close to eight tonnes (8000kg).

That will put Rocket Lab – the reigning champ of featherweight launches – into the welter-weigh class currently dominated by Elon Musk’s SpaceX (in terms of private launches; Russia and China’s space agencies staged the two busiest space launchers overall last year, followed by SpaceX in third, Rocket Lab in fourth, the EU in fifth and Japan sixth).

A Rocket Lab investor presentation published this week called its pending Neutron rocket a “direct alternative to SpaceX’s Falcon 9”.

It’s not quite an even fight in terms of sheer grunt, given the 70m Falcon 9’s weight advantage. Musk’s rocket can heft some 28 tonnes into space, while its fatter sibling, the Falcon Heavy (a Falcon 9 fattened with extra boosters) can lift 64 tonnes.

But both the Neutron and the Falcon can pull the same trick: launching a whole constellation of satellites at once.

Rocket Lab’s investor presentation says such constellation businesses will account for 83 per cent of all satellite launches by 2028.

The presentation implies there will be enough business for Rocket Lab and SpaceX.

Citing “Wall Street research”, it sees the total addressable space market growing from US$350b today (US$10b from satellite launches; US$20b from “space systems” such as Rocket Lab’s Photon – or its “satellite bus” that will ferry a Nasa satellite to lunar orbit later this year; and US$320b from the slightly more nebulous “space applications” which runs from Earth-imaging and broadband from space to “significant untapped potential for value-added services including data management & analytics to support end-customer insights”.

By 2030, it sees the total market quadrupling to US$1.4 trillion.

Against the background of that sort of industry growth, Rocket Lab projects it will become ebitda and cashflow-positive in 2024.

Potential investors were told that after a break-even 2023, operating earnings would climb steadily each year to hit US$505m by 2027.

Revenue, projected to be US$69m ($90m) this year, is forecast to steadily rise to US$1.57b by 2027.

But despite the rapidly expanding market, going head to head with the larger SpaceX (which recently raised US$850m at a US$74b private equity valuation) won’t be easy.

Elon Musk’s company has flown more than seven times as many missions; its founder and CEO is not beholden to any listed shareholders; and he’s quick on the draw on social media – something that’s at once frivolous and market-moving.

On Tuesday, Musk took a light-hearted jab at Neutron (“Looks familiar”) before going on to congratulate Rocket Lab on its pending debut on the Nasdaq.

In future, it’s possible the SpaceX founder will get his claws out.

If he does, the relatively mild-mannered Beck will have to decide if and how to engage in the battle for the hearts and minds of institutional and retail investors.

And there are soft-spots, such as Rocket Lab so far falling far short of Beck’s launch-frequency predictions (in December 2018, he predicted a launch a week by 2020. His company went on to miss its revised launch per fortnight target for 2020).

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To some degree, Rocket Lab should be sheltered by being on the top tier. Big customers, including Nasa, which has awarded contracts to SpaceX, Astra and Rocket Lab, know its best to nurture several players to foster innovation and competition.

And while Beck is kindlier and gentler in nature, his company also takes customers in a warmer embrace. With technologies including its Photon, the CEO says Rocket Lab is the only fully-integrated space transportation company. It can design a satellite for a customer, if need be, and take care of everything related to getting it to orbit – allowing the client to focus purely on an Earth-imaging camera or whatever type of technology they’re trying to get into space.

And only Rocket Lab has launchpads both north and south of the equator. Some US government clients have demanded a Virginia launch, Beck says. But for many, the empty, less regulated NZ skies offer a cheaper and easier path to orbit.

3. More American, more military

Kiwis’ hearts swelled earlier this week as Beck described Neutron’s potential to ferry cargo – including people – to the International Space Station, or even the Moon or Mars.

But the first point about the Neutron in the investor presentation is that it will be “Tailored for commercial and DoD [US Department of Defence] constellation launches.”

And one of the pillars of Rocket Lab’s bullish revenue forecast is that the US Department of Defence is “focused on space infrastructure”.

As a young company, Rocket Lab received breakthrough funding from the US military research wing Darpa. The first launch from its new launchpad in Virginia (and its first on US soil) will be for the US Air Force – a frequent client, along with US military surveillance agencies.

The Neutron will first blast off from the US. LaunchComplex 1 in Mahia is too small to accommodate it – although Beck said later launches from NZ are possible, and that the majority of his company’s staff (currently on a hiring drive toward around 700) will remain based in NZ – even if Rocket Lab moved its corporate headquarters, and most ofits engine manufacturing, to California after Lockheed Martin arrived as a major investor in 2015.

Beck has always emphasised that Rocket Lab launches dual-use, research-based satellites for the US military, with manifests approved by NZ’s space agency. But could a new rocket “tailored to the DoD” provoke any PR problems for the soon-to-be-public company?

On Tuesday, Beck got a taste of possible PR flak to come when he was asked, “Is there any payload you wouldn’t carry?”

“We’ve been very clear from the beginning that weapons are an absolute no-go for us,” Beck said, adding that all Rocket Lab cargo is approved by both the NZ Space Agency and regulators in the US. Will that be enough for big investment funds coming under increasing ethical investment pressure.

So far, at least, it’s been clear skies on that front with both NZ’s ACC and the Australian Government’s Future Fund onboard as Rocket Lab investors ahead of its Nasdaq listing later this year. ACC has not said how much it chipped in, but it bought in during 2017 when Rocket Lab had a US$1b valuation – meaning the Crown insurer’s investment wing is in line to quadruple its money.

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