Chit Chat Stocks - A Deep Dive Into Rocket Lab Stock With Simon Erickson (RKLB)

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Starting point is 00:00:44 The new bond account only at public.com forward slash chitchat stocks. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is another episode of Chit Chat Stocks, a podcast talking about all things investing, financial markets, any stock you really want, large caps, small caps, whatever. And we have a recurring guest back on today, the leader over at 7investing and for any of the

Starting point is 00:01:40 video watchers, an Arden Saints fan celebrating a 2-0 season. Simon Erickson covering a lot of innovative and disruptive companies over at 7investing. And we have one of the, I'd say, any long-term listeners know that Ryan and I could be a little bit skeptical with some of the innovative companies out there. And we're a little afraid to invest in high-tech stuff just because it's outside of our circle of competence. But this one is one of the most exciting ones out there. And I think the business model is becoming more clear every single day. Full disclosure, it doesn't come without any risks, as we'll talk about throughout the show. But the company is Rocket Lab, trying to become one of the, maybe the second SpaceX,

Starting point is 00:02:24 although I don't know if Simon would agree or disagree with that, end-to-end space company. And we're going to kick things off. They've had a good run to start the year. What has happened with Rocket Lab? And why do you think the stock has gone back above $6 a share? Brett, first of all, it's such a pleasure to be here with you and Ryan again. We've been doing podcasts together for almost five years. And thank you also for the shout out from my Saints, who you can't go without saying,

Starting point is 00:02:49 number one team in the league right now. We knew they were going to beat the Panthers, but they dismantled the Cowboys. I got to take the opportunity to give them a shout out. This is the podcast. I was saying value stock right there. And like you said, undervalued, right? The Saints were an undervalued opportunity at the beginning of the season. Exactly, exactly.

Starting point is 00:03:07 And before we get started, maybe we're going to talk Rocket Lab, as I mentioned. I may well ask that question again. But 7investing, for anyone that doesn't know, what's the type of companies you guys like to cover over there? Yeah, you nailed it. When you said innovation and undervalued, that's kind of the combination that I found my niche in, which is a rare niche, right? When you're talking about innovative companies, it's typically people will pay whatever, price

Starting point is 00:03:30 to sales 40 times X, whatever. It's just going to be all on a PowerPoint of how big the addressable market is. And then the other side of it is undervalued, where you've got people that have got 20 tabs open on a spreadsheet for a DCF, which is typically something that would be very easily to model. But myself, being a person who loves the future, very interested in technical conferences and innovative things that are going on out there, coupled with the finance part of my brain that likes to do the number crunching, I really like companies like Rocket Lab that have found a new market that they're growing into. I've got some great advantages in that. But then also, it doesn't seem like the stock is valued correctly. It's undervalued even at the price that it's selling at. So pretty excited to chat about this one with you guys.

Starting point is 00:04:13 And go Saints. All right. Yeah, that's a great introduction. Great little tease. But let's ask it again. What happened to Rocket Lab in the last year? And why do you think it's shot up back above $6 a share? It's been pure execution, Brad.

Starting point is 00:04:27 And finally, the market is starting to understand that. this is a company that came out in 2021 in the SPAC IPO phase. If you remember, there are a lot of those space stocks, Virgin Galactic, Virgin Orbit, just to name a few, Astra Holdings. It seemed like all these space stocks were going to the moon literally, but they were getting ridiculous valuations to support it too from easy money. And Rocket Lab, in my opinion, kind of got coupled with a lot of that. And that's why the stock fell from $10 SPAC IPO down to about $4 a share, a little bit less than that at its lows. But you see the solid execution. I think that's actually separating it from the pack a lot here. We'll talk a lot about that more around the rest

Starting point is 00:05:06 of the show, but this is not just a company you buy and hold and hope and dream. This is one that's getting some really big contracts and the fundamentals are vastly improving for the business. Yeah. It's hard, I think, as someone who doesn't really track this stuff that closely, to see a space company as anything other than theoretical for public investors. So can you maybe give just a little bit of the thumbnails in terms of what Rocket Lab actually does for anyone that doesn't follow the company? What are the basics of the business? And then we'll dive a little deeper into each segment. So if you wanted to put a satellite into outer space and you didn't have your own spaceport or launchpad to do it, you kind of had to rely on

Starting point is 00:05:52 SpaceX to do it, right? That was the only company that could reliably even put a satellite into outer space. And Elon, not the most customer-friendly guy on the planet, would basically say, yeah, you can ride share with us. You can get on our rocket, you know, if we're going to the orbital plane you need to be in for placement. But if we're not going there, then you just got to wait until the bus is going to stop at the stop that you need to get off at. And so customers, you know, that were small and needed to put a satellite into space or wanted to, would be waiting for like 18 months to two years to even get to where they could even ride or compete for a ride share with SpaceX Falcon rockets. And Rocket Lab from the start said, we're going to

Starting point is 00:06:32 commercialize space. We're going to democratize the space economy. Or you can even go on their website now, Ryan, and book a payload of up to 300 kilograms into space, right? 300 kilograms the size of a vending machine. You say, hey, I want it to be right here. You don't want to put a whole lot of fuel on your satellite, right? That costs weight, that costs money. You want to go exactly where it's going to go. And you say, this is what I want to bring. And this is the spectrum that I've already gotten approved with the FCC. Can you launch it for me? And Rocket Lab comes back with a number between five and $8 million and says, yes, we can. And here's a payload we can carry. And this is when we can bring in weather permitting. That's how it started.

Starting point is 00:07:09 This was a commercial space launcher that if you were a small customer that you had no option before, you could now get into outer space and put your satellite up there. And that is why we call it a lot of times a disruptive company. Disruption is when there was no market for this before, but there was demand that was not being served. That was the first step of the company. If you want, I can elaborate a bit more. You called it correctly when you said it's an end-to-end space company. In addition to companies that would have satellites up to the size of any machine they wanted to put in exactly a certain orbit a lot of them said hey we'd love to do this but we can't make the satellites we don't know how to do that and so rocket lab through several

Starting point is 00:07:51 years of acquisitions was able to make the power components right the solar power components the communications components you could actually communicate with the satellite itself the propulsion so you could actually move it around if you needed to and then a lot of the other things too that were just required for the satellite itself to be operational And so that's what it's kind of calling the satellite division, the space services, I believe is what they're calling it now. But this is now the predominant part of the business is actually manufacturing the components and the satellites themselves for customers. And then the future is going to be exactly what Amazon Web Services did, which is if you can build the infrastructure for cloud computing and offer that in terms of customers pay you for the computing, they pay you for the storage. the natural next step is you make the applications where you have engineers design things

Starting point is 00:08:40 that can use the infrastructure you have and you charge people based on um you know a variety of different ways you know pay as you go space as a service is what rocket lab is going to look like here soon we're going to take care of all the operations keeping the satellite safe insurance in case something hits it you know whatever it might be take that off your customers hands just let them focus on what they want it to do that's where the future of this business is heading it's it's very wild to think this is like so accessible to companies uh i know you and brett have that engineering background but for the layman like myself it just sounds like magic so let's i know there's one big development here that's going on with the company which is the

Starting point is 00:09:20 neutron rocket and before the show i made sure to check out those pictures and it looks like quite the cool uh quite the cool design um maybe talk about what this is how important it is to Rocket Lab as a company and then what progress has been made on it so far? Yeah. So chemical engineering nerds like myself will point out that when you're looking at a subatomic particle, an electron is much smaller than a neutron, just like the electron rocket is much smaller than the neutron rocket. So Peter Beck, the CEO, is having a little bit of fun for the tech heads that appreciate those kinds of things. But the same is true, right? If you carry after 300-kilogram payload with Electron, and then slightly larger here, based on what they've

Starting point is 00:10:04 done recently, you can now carry 8,000 kilograms, almost 25 or 30 times the payload capacity with Neutron. And having gotten there yet, Ryan, it's very hard to do that. You've got to have a completely different engine. You've got to have a much bigger rocket. A whole bunch of things have to happen. It's not like you just tweak some dials and you make a bigger rocket. But you can just imagine that instead of putting one or two satellites into place that are 300 kilograms in payload, if you're able to put 8,000 kilograms into payload, all of a sudden you're putting entire satellite constellations where it's not taking, you know, 20 missions to put everything out there. You can do all of it in one mission, one launch, one rocket, and the payload, you know,

Starting point is 00:10:47 is huge. The economics completely changes and improves not only for Rocket Lab, but also for its customers. And I think maybe to clear up something for the listeners that maybe are new to this company, have any confusion, the Electron is the small one, as Simon mentioned. Neutron is the larger one that's in development. And maybe you can say, tell me if you agree or disagree with this. With the Electron, yes, it's been great that they're the second company besides SpaceX, or I'm not sure if there's other ones out there, but maybe the second one to do you know consistent launches on a monthly or quarterly basis with the electron however with that one they weren't really competing with spacex at all and importantly with neutron this is going

Starting point is 00:11:31 to be more of a head-to-head competition that could get but it's almost i don't know what the other one that spacex has that's the same size but you could get more yeah i guess competition from them and then second is the fact that it's going to see potentially a huge growth in revenue per launch. And then third, I can't remember if this was on their Neutron or long-term plan, you can actually take humans up in the Neutron, at least that's what they're planning for. Yeah. So maybe swim lanes. Think about it this way, Brett. You know, the Olympics, you got the eight swim lanes for the Olympic trials. Down at the bottom is small launch, right? This is Electron. You got a vending machine you got to put up there. SpaceX isn't

Starting point is 00:12:13 doing any of that at all. SpaceX is on the completely opposite side of the pool, so to speak, which is large lift. These are massive, the Falcon, the rockets, things that SpaceX right now is doing it because it's placing its own satellite constellations in place for internet. Elon is already now beaming down internet for Starlink and customers to do that. And most of it is internal. They've done a little bit of ride share, they've done a little bit of commercial stuff, But it's almost all Elon wants to put these up there in space for himself. And he wants to get to Mars, too, right? The goal is to make a bigger and bigger rocket that can carry bigger and bigger payloads.

Starting point is 00:12:48 Because you see his mission, getting human beings on a manned mission to Mars, maybe even colonizing Mars, is very different than democratizing space for commercial customers like Peter Beck and Rocket Lab wants to do. And then in the middle lanes, those middle swim lanes, there's a little bit of overlap, right? You know, Rocket Lab is kind of moving up market where it's carrying larger payloads, maybe up to 8,000 kilos. And SpaceX is agreeing to carry somewhat smaller payloads, just like the Tesla Roadster was the most expensive electric vehicle that then it went in to make the Model S and the Model 3 and everything else. So there's going to be a lot more overlap in the future. It's very interesting to see the only two reliable vendors of launch so far on completely opposite sides when it comes to, you know, what kind of payloads they're carrying, what kind of customers are even working. All right. And for the Neutron, it's in development. It's not launching anything yet. I think they're making pretty good progress on their timeline there, but it's still going to be, I think, at least a year or two, if not longer, before we get to true commercial launches like the Electrons were. What's the timeline here? Because I know this is hurting the company's financials in the short run. I mean, they're spending a ton on R&D, capital expenditures.

Starting point is 00:14:04 And that's what's causing the cash flow and the revenue, at least not the revenue, excuse me, their earnings and cash flow to be negative at the moment. So it's huge if this thing gets launched and regularly launching because that's how we're going to flip to profitability. At least that's my assumption. What is the timeline here and what are you tracking as someone who follows this company closely? Yeah, correct. Brett, we need to be very conservative in this. You know, I think that it's the wrong approach to just be like, oh, yeah, it's going to happen right away. Things like this are really big deals, and it's okay for Rocket Lab to miss its initial expectations.

Starting point is 00:14:39 Right now, summer 2025 is the expected first launch of Neutron. But take that with a little bit of a grain of salt, because they did previously say the end of 2024 was going to be the first launch. That's now been pushed out six more months, and it might get pushed out another six months after that. Like you mentioned, there's a ton of capital expenditures and working capital that's required for this project, right? They're now developing the Archimedes engine, their 3D printed rocket, because it's got to have huge thrust for this thing. They bought a lot of assets from Virgin Orbit when it was basically going bankrupt. They bought a lot of the Southern California assets that they had right there. They've dedicated a Mississippi R&D site that's only focusing on Neutron right now.

Starting point is 00:15:22 They're accelerating the automation of the composite structures that are going to be doing for the casing of this thing. This is expensive. You need really, really technical teams and a lot of money to do stuff like that. But it's also not just disappearing. I mean, you've got probably the best guy in the world at the helm of this company, Peter Beck, whose very motto is do what you say you're going to do, right? He's not going out there and just burning people's capital or lighting a fire. He's developing some world-class capabilities and infrastructure, which includes three launch pads, multiple locations, manufacturing R&D centers. You can see they always post in every quarterly conference call the updates that they're

Starting point is 00:16:06 making on this. And if it even gets one launch in 2025, which is what I'm predicting at half of what their kind of expected revenue per launch is, they're expecting to do $50 million in revenue per launch. I think the first one is going to be half off for the first customer to commit to it. But if they're even doing, you know, call it four launches by 2026, two years out, and then eight launches by 2027, you know, out, this redefines the entire business economics. Reusable 8,000 kilogram payloads for satellite constellations. I mean, that's EBITDA positive. That's something no one else is going to catch them. And they're narrowing the gap on SpaceX where all of a sudden you can start carrying some really, really big customer payloads. Yeah. And I think the exciting thing here is that it's not here yet. It might be here in five or 10 years. You can smell the potential duopoly that could happen where this is such a capital intensive and R&D and really just engineering intensive business that it's hard for someone to catch up from scratch. You mentioned earlier launch, spacecraft, and then services as their three pillars of what they're trying to build over the long term. We've talked about rockets first, so let's hit that one. It's the one that's been around the longest. It's a little bit muddied because you have the electron segment combined with neutron, but neutron's not launching, as we mentioned. We just talked about that's important. how big and profitable can this get? I know the company's got a market cap of I think around $3 billion right now. Revenue is only about $300 million. And you mentioned $50 million

Starting point is 00:17:41 from one launch on Neutron. That could be a huge boost in revenue. I mean, what are you modeling out here? You know, how, from revenue or even profit perspective, what can this generate for Rocket Lab? Well, yeah, this is a great question, right? How big can this actually be versus how big the slideshow is going to show that it's going to be. And Brett, I did put up on 7investing.com, just search Rocket Lab if you want to see my full discounted cash flow. We talked about that a little bit earlier here in this show. Got all the assumptions that I have up in there. But in terms of how is this going and how big can it be, just by the numbers, second quarter revenue up 71% year over year. That's really promising. A billion dollars in backlog. That's really promising.

Starting point is 00:18:27 And now about three quarters of the business is a spacecraft business. You know, not just the launch, but actually the manufacturing side of it. It's a little bit of different economics, right? We said that if you're doing launch, you're charging right now for Electron $5 to $7 million. You're capturing about a 35% gross profit margin, which includes the development of the rocket itself, which is counted as a cost of goods sold for Rocket Lab. So you've got some really heavy costs, but also in the satellite construction, that's a little bit lower margin right now. 25% business, but much bigger contracts. If we can maybe split this into kind of two groups, there's commercial business, and then there's defense business, right? So a lot of Rocket Lab's

Starting point is 00:19:12 kind of PR and presentations is all about democratization of space and commercialization of space. And if you're a business, you can come book right online. And that's great. But right now, the most important customer for Rocket Lab is the United States government, right? The Space Development Agency, the Department of Defense, you know, the military and defense groups that are like, hey, we've got to get stuff into outer space as quickly as possible. And SpaceX is fulfilling some of those missions, but there's some that are smaller payloads that aren't really being served by what Elon even has to offer. And this is not only for the launch part of it, but also the manufacturing part of it, right?

Starting point is 00:19:54 $720 million of backlog, largely from the space development agency right there. They've also got a commercial customer, $143 million contract right now with Global Star and MDA. That's a commercial business. The Haste contract. This is one for hypersonic.

Starting point is 00:20:10 You know, Brad, I know you got some military in your family. I got some in mine too, but there's some scary stuff going on in the world right now, specifically a war going on with Russia and Ukraine. And China is developing some hypersonic ballistic missiles, which means hypersonic five times the speed of sound, right?

Starting point is 00:20:26 You have to have an answer to that. You can't be a sitting duck if there's kind of weaponry in outer space that you need to be able to respond to. And so what does the United States do? What does the Department of Defense do? It says, okay, we need a hypersonic program, and we're going to give those contracts to Rocket Lab. And that's why you saw one contract for the HACE contract in 2023, seven more in 2024 and now already four more logged for 2025 we haven't even finished 2024 yet right so this is something that u.s is basically just saying look we need you to modify the electron rocket it's got to be a larger payload it's got to be able to respond to an incoming threat that we see capabilities that china's developing and testing in south africa right now

Starting point is 00:21:05 um i cannot express enough how important this is to be at this point in time when this is happening right now. And Rocket Lab is the number one prime supplier that's specced in, that has gotten the credibility and is getting the contracts with a very, very lucrative customer with this one. Yeah. And maybe pulling it back to the business or investing perspective, do you think it's just great marketing for these commercial customers to say, for Rocket Lab can say, look, you can go to this competitor that has zero launches. they haven't proven anything, or you can go with us, a trusted partner of the United States military. I think that, that to me smells like, you know, a brand reputation that is starting to

Starting point is 00:21:51 be built among this industry. Do you agree or disagree with that? And it cannot be a separating factor for them over the longterm? 100% agree. I mean, people will say this is not a recurring business, recurring revenue business. I would say, yes, it is. Why? Because if you do one launch, you're going to get that vendor continually for the rest of your business until something happens or something goes wrong? Why do you see Synspective, you know, launching 10 total booked flights that they've already got in line

Starting point is 00:22:15 with Rocket Lab out there? Why does Black Sky keep coming back to them for logistics and imagery, you know, satellites? You know, it's just like you get, Kineas, you know, five booked new launch contracts on board. I mean, if you have a credible vendor that passes and, you know, checks the boxes that you need to see to be a reliable launch partner,

Starting point is 00:22:33 you just keep going right back to them. And then you have them, you know, develop your satellites for you, And then you're going to have them handle all the infrastructure. The question is, how big is the commercial market really going to be? You know, Morgan Stanley says it's worth a trillion dollars by the year 2040. Maybe that's a big number. That's a really big market.

Starting point is 00:22:51 But, you know, the applications today are mostly kind of like Google Earth kind of imagery, kind of stuff from satellite. A lot of people are saying satellite Internet is going to replace broadband, you know, terrestrial fast, you know, fast Internet. But to be seen, but Starlink has certainly validated the early signs of this market. I think there's a lot to it. We're going to move to the next segment here in a bit, which is the spacecraft I want to learn more about. But on the rocket specifically, would you say there's a moat here? Obviously, it's very expensive to do, so that's kind of a barrier to entry. But aside from the recurring revenue, the customers that are already there, is there something that's, other than the money, stopping competitors from merging?

Starting point is 00:23:45 I mean, if you don't do this for a living and love it, this is a terrifying industry to even attempt to try to even get a customer. And then if you actually do get a customer, everything has to go perfect up to the point of launch. And if it doesn't, then the satellite explodes and you lose all of your credibility, right? Look what happened to Virgin Orbit. Look what happened to Astrolabs. Look what happened to all these other companies that raised money in 2021 through the SPAC craze and are now defunct and bankrupt and selling for pennies on the dollar. I don't know how you compete against Rocket Lab.

Starting point is 00:24:17 If you gave me $10 billion right now and said, okay, go compete against Rocket Lab. By the way, you can't have any other people and you can't acquire the companies they've already acquired, I don't think I can do it. Yeah. Makes sense. Okay. Second segment here is the spacecraft segment of the business. What is this and what customers are they actually serving here? So these are contracts, Ryan, that are served generally over like 10-year periods of time, right? And it's not just, I've got a satellite, I'm ready for the launch. I want to book it, you know, a calendar time. It's basically like, okay, we want to create a satellite that's going to do telecommunications, right? It's going to be used for all these little internet of things

Starting point is 00:24:58 devices all over the entire world, right? Or it's going to be a satellite constellations that I want them to be able to receive, you know, internet signal and then broadband, you know, be able to hit this spec of this speed and this latency in this part of the world or something like that, right? And so you kind of get these deals, you know, these $500 million deals, $150 million deals that specify exactly what it's going to look like. Now, the interesting piece is that Rocket Lab kind of recognizes a lot of that before the launch even happens in terms of cash flows. They've got to develop the satellite itself. They've got to kind of get everything specced in. They've got to put a window of launch in place. They've got to have the teams

Starting point is 00:25:36 dedicated to this specific project. And so interesting little known fact is that actually 90% of cash flow comes before the launch with any commercial customer. Only 10% of the cash flow happens at the point of launch, but all of the revenue is recognized at the point of launch. So you and I, as investors, know that that disconnect kind of shows that, you know, when you're collecting money up front, but you're only recognizing revenue when it actually happens. That's generally a good thing. That's high quality revenue. We've already recognized 90% of the cash flow before it. But it's, you know, a lot of it is just the components, if not the satellite itself.

Starting point is 00:26:12 It could be the propulsion systems. It could be, again, like the solar. You know, you've got to power these things. You've got to do the communications with it. Rocket Lab made a lot of acquisitions with the $770 million that are raised in the SPAC IPO to go out and buy other companies that had niche capabilities and just couldn't get to scale. If you were a solar power manufacturer for satellite, it's really hard to get to the point of profitability. You've got some cool IP, you've got some good teams, you've got some manufacturing capabilities.

Starting point is 00:26:41 But something like that is really meant to be a much larger company. That's why they went out and they made so many acquisitions between 2021 and 2024. 2024 here. single week here for stock research on small and micro cap ideas and think you can as well. Try it for yourself. Simply go to joinyellowbrick.com slash chitchat and search a company or ticker you're interested in. You are bound to find a great report on just about any company. That's joinyellowbrick.com slash chitchat. If you want to earn a 6.9% yield for the next four years or more, you need to check out the bond account at public.com. It's a new way to invest in a

Starting point is 00:27:49 diversified portfolio of bonds and receive monthly interest payments. The best part, if you act now, you can potentially lock in a 6.9% yield until 2028. That's the new bond account at public.com forward slash chitchat stocks. Yeah. It seems to me like the key is, you know, if I'm looking at an independent spacecraft company, well, you still got to get this thing launched so you have to turn to someone like spacex or rocket lab the power at least in the negotiating perspective probably sticks with the company that can launch up in the air because that's you know without the launch nothing happens so with rocket lab owning both of these that again seems like a way they could develop a moat over the next 5-10 years one

Starting point is 00:28:34 thing they talk about as the next step and the third pillar is space data and services. I know we don't have much here, so this might be more of a speculative section, but what are the thoughts on, what could they be up to here? What makes sense to you? The FCC, before you can even put a satellite into space, it has to assign you spectrum, right? So it's kind of like a wireless internet provider, right? If you are Verizon, you know, you've only got certain spectrum you can use so you're not interfering and, you know, you and I aren't overlapping calls and we're hearing each other's conversations and things like that. But to put this into kind of perspective, you know, there's somewhere around 15,000 active satellites going around the earth right now. And the FCC has

Starting point is 00:29:20 got a backlog today of more than 38,000 applications for spectrum of people that want to put satellites into outer space. Some of these are big guys, SpaceX, Amazon's doing Project Kuiper. They've already got kind of internal projects and stuff. OneWeb is out of bankruptcy again doing their thing. But a lot of these are even just smaller companies that say, hey, I want to serve rural northern Alaska with broadband internet and satellite. Can you do that for me? And I want to apply for the spectrum court and stuff like that. There's a really lot of demand for even just small companies or companies that can't do it on their own, that have already kind of applied and say they want to do this

Starting point is 00:29:59 and then would turn to Rocket Lab for something like that. And again, if they can't manufacture a satellite or they can't do the launch, you've got to assume that they're probably going to look to Rocket Lab for the operations as well, right? This as a service, like you mentioned, opportunity. And this is the biggest of the three. I don't remember the exact numbers

Starting point is 00:30:18 because I don't have the numbers in front of me, but I think they said something like $50 billion was this restful market for launch. But it was something like, can you help me out, Brett? what was it, $50 billion, $100 billion? It was something along those lines. I can maybe look up one of their IR presentations, but either way, compared to the size of the business today, there's a lot of room for growth. Yeah. It's the much larger market is what Amazon did with web services being something you just pay them to take care of all the infrastructure,

Starting point is 00:30:47 rather than just selling the infrastructure or just using the infrastructure, which is kind of where we stand today. High expensive, you know, capital intensive businesses that are hard to compete against tend to do well as investments. Taiwan Semiconductor, ASML, you know, stuff in the semiconductor industry is very capital intensive. And it's always, you know, you've got a couple that are really far ahead of everybody else. And those duopolies or, you know, So Oligopoly is a very, very limited number of companies that do what those guys do, can be fantastic businesses for decades. That's what I think we're developing here with Rocket Lab. Yeah, I was actually going to mention TSMC as a little bit of analogy here.

Starting point is 00:31:34 You look at someone like SpaceX and they're doing extremely well with Starlink because, well, hey, we're the ones that launch it. We get priority. We get to do what we want here. We have this vertical integration. Do you think Rocket Lab is going more for the TSMC style where they're saying, look, we're not going to compete with you on satellite service, but we're going to be, quote unquote, do the hard stuff for you and we'll have all these design companies and stuff like that? Does that analogy make sense or is it a little bit different with this industry? I think they're both going to win. I don't think it has to be that, you know, Rocket Lab's taking SpaceX contracts away from the Department of Defense. I think the Department of Defense recognizes Rocket Lab's ability to turn around really quickly and put a satellite exactly where they want it, exactly when they want it. And they haven't found that capability yet.

Starting point is 00:32:21 But this whole HACE program we just talked about was designed for hypersonic. More and more, I kind of think that's where they're going, right? These are modified electron rockets that are specifically for this contract, these projects, that has been very profitable for them. Reusability, too. We haven't even talked about reusable rockets, but, you know, Rocket Lab is right on the cusp of being able to fish out its own rockets and then reuse them multiple times. It's already shown that it's done it one time already. But if it can consistently reuse at least most of the rocket itself for multiple missions with commercial or government contracts, and they give a little bit better pricing if you use a reused rocket rather than a completely new one, that improves the entire economics for everybody.

Starting point is 00:33:06 I have a question regarding the balance sheet. I guess more the opportunity here in general. Rocket Lab went public through a SPAC in 2021, which I know there's maybe some investors that are listening and hear that word and they cringe because SPAC has kind of become a bad word in investing. and there's a lot of companies that did not turn out so well from the SPAC. But what do you think a SPAC provided for Rocket Lab in this case? Do you think it was beneficial for them? Do you think they would have been able to get to the size they're currently at without the SPAC? Or I guess, how do you view it? And then maybe just in terms of the balance sheet in general, any concerns about the cash balance or them running out at any point?

Starting point is 00:33:57 Yeah. I mean, let's turn that around and figure out why are people referring to SPAC as the four letter S word now, right? It's because you lit money on fire and you didn't use it responsibly in a way that provided you with an ROI, right? Why did SoftBank fall apart as a holdings company? It invested in things that it thought was going to have a 300 year lifespan to work out. And Masayoshi's son, as smart as he was, wasn't providing an adequate return for his investors, right? Same thing with SPACs. You raise a lot of money, you launch a rocket, it blows up on your very first launch. How much credibility do you have for the second launch, you know? Versus somebody like Rocket Lab, who's already winning massive $100 million deals with commercial

Starting point is 00:34:39 businesses, $500 million deals with accredited space agencies that are supported by the government, and just is building all of these capabilities with three launch pads and an RD center and manufacturing abilities. Oh, and by the way, now it's going to start charging $50 million per launch once Neutron gets in the air. I mean, I'm on board as an investor, just like the SPAC investors were on board. Probably we're a little bit early. I mean, you could have bought shares down at $4 a share rather than $10 at the time of the SPAC, but it used the money wisely. It made acquisitions of the component companies. It bought Solero for the solar power. It bought the propulsion companies. Not only the manufacturing, but the people that have

Starting point is 00:35:22 worked in these industries for 20 or 30 years, it's not like there's just an infinite supply of people that are really technical and good at these things. And they're kind of consolidating behind Rocket Lab right now. So I'm pretty happy. I think that the SPAC was really big. Like we said, raised almost a billion dollars. I think it was $775 million they raised in the SPAC. From what I've seen, Atom Spice has used it very, very wisely in a way that's good for us as shareholders too. Do you think, I know this is kind of hard to answer, but do you think they would still be around still be as successful as they are today if they didn't do this back or maybe just still still around but maybe smaller if they had stayed private yeah no no doubt about

Starting point is 00:36:07 it i mean you know where are you gonna get your money from right if you're doing five million dollar launches seven million dollars like picking up nickels that are you know dropping the couch cushions versus raising 700 million dollars okay that's that's you know 100 launches you would have to do. Basically, more launches than they've done to date in their entire history that they raised from that event. And they did it at a premium too, right? They did exactly what they were supposed to do as a company, which was raised a lot of money at a very, very attractive valuation. And it opened doors for acquisitions, for CapEx, all the things we just discussed. I think it's kind of like accelerating your business three years at one single moment in time.

Starting point is 00:36:43 So hugely important to answer your question. Yeah, they might not have been doing... The SPAC might not have been hey this is a perfect buying opportunity for individual investors as we've talked about on the show plenty of times you know when a company ipos it might be smart to wait a year or two you know let them get their feet under and stuff like that become a public company for a little bit but it seemed very smart from a capital raising perspective they took advantage of this time and they really got you know it takes a lot of money to build a space company and we see now spacex as well they've raised tons and tons of money and they've got to where they are but But that leads to my next question on competition. And correct me if I'm wrong, but I think the only competitor out there is SpaceX that has made legitimate progress in commercial rocket launches. Why do you think Rocket Lab is so much better than everyone else?

Starting point is 00:37:35 oh we can't invest in spacex yet right private company huge valuation really good business you know if you want to invest in the space economy at least in this division of it uh you go with rocket lab it's got a market cap of 3.7 billion dollars spacex is what was the last round 130 billion dollar valuation something really several i think i think 200 200 yeah uh so that's delta right that's 50 times larger uh and they are no doubt the largest and rocket lab knows that and they respect that um but i i think that if you look the other way you know who's really who's really at rocket heels rocket labs heels and you know competing against them i'm not really seeing it there's other vendors that are that are putting stuff into space right there's other even

Starting point is 00:38:24 government-funded launch providers that are putting stuff into space, but I'm not aware of anyone that's at the same kind of level that they are. They're the only, them and SpaceX are the only two that have reliably put satellites into outer space. Blowing a rocket up is not something that's not going to happen, by the way. You know, even Rocket Lab had its first anomaly. It actually had a satellite break and come back down to Earth here recently. I think that's inevitable just because of if you appreciate how many things are going on and how many unknowns there are and you try to you know through six sigma processes and other engineering things do as well as you can to control all of those variables but you can't control everything

Starting point is 00:39:07 all the time and and there's going to be i think even more um you know if not explosions you know things that just don't work uh in launches and even spacex knows the same thing right it was the Starship that's getting launched out here in Texas and it blows up and the crowd starts cheering just because of the scientific progress that got made by them even doing that. It's a learning experience that we haven't really even done before outside of NASA and government launches. And now as we learning more about how to actually reliably, you know,

Starting point is 00:39:39 do all of the engineering and all the technical stuff required to put a rocket into space. It's, it's, that, that is a risk, but I don't consider it as big of a risk. I think there's a lot of people might be considering that. What do you think of the management team overall? And then, I guess, how are they incentivized? I assume Peter Beck is a large shareholder, would be my guess. I haven't looked at the cap table, but I assume he's got all the proper incentives as well. yes that's correct ryan you know him and adam spice i've interviewed him before they're both stand-up guys very serious you know peter beck's kind of got a fun sense of humor but uh he's working long hours every day and he expects the same of his team um you know it's

Starting point is 00:40:23 the same reason that people work for tesla right you don't mind the long hours if you're feel like you're changing the world or doing something that's never been done before and it is very technical too peter beck is not just a guy that's a pansy that's you know talking to the wall street analysts. He's putting on the hard hat. He's getting out there for all the launches and he's an engineer himself. It's a very technical guy. I think they've gained a lot of credibility and they've got a large institutional following as well, which is really good when they want to start raising capital again. And the incentives, yeah. So thumbs up on my opinion on the management team. Yeah. I was going to say with the capital raise, I think this year they did another

Starting point is 00:41:00 convertible note. I think it's a good sign when the capital markets are willing to offer you a convertible note, especially for a company that's going to be burning money for a little bit here. Let me hit a question from Twitter. Always want to hit those for the audience members that want to interact with the show. We appreciate them putting in the work there. The question here is, the company has been doing a great job and things seem to be going well. What are the biggest downsides that investors may be missing with Rocket Lab stock today? essentially what are you worried about here what would cause you to sell your position finchat.io is the complete stock research platform for fundamental investors they have

Starting point is 00:41:42 all the standard financial data on more than a hundred thousand stocks globally but beyond that they have company specific segment and kpi data on 1800 stocks want to see nvidia's data center revenue finchats got it like to track spotify's premium subscribers they've got that too and they just added ETFs to the platform as well. The breadth of FinChat's data is truly one of a kind. We use FinChat every day, and I've personally been using the AI Copilot more and more to summarize earnings calls and conference transcripts. To get 15% off any paid plan, go to FinChat.io slash chitchat. That is FinChat.io slash chitchat. To get 15% off any paid plan today, the link is in the show notes.

Starting point is 00:42:26 uh yeah i mean maybe two things right there's there's a lot depending on neutron i i don't hold them to the exact day and minute of when they say it's going to actually launch but if neutron just keeps getting pushed out from 2024 to 2025 and all of a sudden look at 2027 2028 i mean those are cash flows they're missing out on that the stock is worth less if you're not catching them and it's continually a work in development i think that the really biggest red flag would be if they just abandoned the project. They just say they can't do it technically. I don't think that's the case. I think they will. But if that were to happen, that's a real big red flag. And then maybe a smaller red flag is, you know, is satellite internet going to be as big

Starting point is 00:43:10 as we expect it's going to be? We're in a digital world right now that there's billions of people that are not participating in because they don't have reliable internet. And if you could get away from building that with the ground up and all the towers that, you know, we've gotten used to doing and just use satellite, yes, there's a strong business case to be made for that. But the economics also aren't the same as like what Verizon and AT&T are able to charge here in the United States, you know, in a very rural area of a developing country. And so is that really going to be a $600 billion market? Maybe, maybe not.

Starting point is 00:43:44 If it's not, maybe it doesn't make as much economics to start launching a zillion satellites to serve those markets as we thought it was before. All right, here's the other Twitter question. little bit more fun one. Will the satellite constellation they're building for themselves be used to compete with Starlink or will it be doing something different? No, I think they want to do operations for third parties. You know, I don't think they'll go, they want to do head to head like Starlink's trying to do it all in turn. A different business model in my opinion. All right, Ryan, do you have any other questions?

Starting point is 00:44:15 Can I continue that one a little bit and say there's some cool stuff that they're working on out there right now right like rocket lab just put now a satellite in orbit around the moon first time that's ever been done uh they're they're doing an r&d project where they're actually going to be doing pharmaceutical manufacturing in outer space uh where you don't have to deal with gravity you know for kind of how you're structuring molecules and stuff like this um there's just some neat you know solar power you know outer space solar power where there is no rain and there's no clouds and stuff like that i mean there's some neat scientific stuff that we haven't even considered because of the limitations of what we've known here

Starting point is 00:44:52 on Earth, that Rocket Lab is now encouraging fun and innovative entrepreneurs to go out and try. If you can try something, raise enough money to get something out of space for $5 million, that's a lot easier than having to spend $100 million like it was even just a couple of years ago. The Richard Bransons of the world are very excited about Rocket Lab out there. Yeah. Yeah. And I think the analogy makes sense where the railroads enabled all different types of

Starting point is 00:45:19 business models to build on top of them. Now, this could be railroads for space, a little different, going to be different things, but still opportunities for entrepreneurs to take advantage of. And hey, for Rocket Lab's case, entrepreneurs have money to spend and they can spend $5, $10, and as you said, maybe $50 million per launch plus all the other things on top of them let's maybe hit one of these before we go and i like how you mentioned that they the company sent something to the moon because then we can make our title maybe rocket lab stock literally going to the moon although i'll talk with brian about whether that's too uh clickbaity but that would be a funny one but yeah okay back to the stock what is the potential upside you think

Starting point is 00:46:01 how big can this business get? So that's a dangerous question to frame it, how big, I mean, like if we could put any number we want to, but just in terms of what I valued it at. And again, you know, Brett, you know me, you know that I'm pretty conservative when I'm building a DCF or evaluation. I don't want to just go out there and put a claim out there that's egregious. And then people come back and say, there's no credibility in that. I like to purposely be conservative. But even with conservative assumptions based on Electron launches in 2024, 2025, 2026, they did kind of move that out a little bit here recently.

Starting point is 00:46:36 They kind of pulled it back into the high teens in 2024, and that kind of moved out the timelines to 2025. But even if we're just kind of like steady state, even getting up to 35 launches a year, you know, at steady state, whether that happens in 2026 or 2028, whatever it is, if we're at like 30, 35 launches from the three launch pads they have for Electron. And then if we even get Neutron up to eight launches a year, almost one a month, that there's going to be a customer big enough to want to put 8,000 kgs into space, right? And you keep growing the space system side of this business too, which is the contracts with the government, you're manufacturing things,

Starting point is 00:47:11 you're still capturing a 25% gross margin, which I don't think is that aggressive. I think you could charge more, but they just like to have these kinds of customers on board. And I scaled up, you know, based on the headcount, based on how much you're spending on R&D, scaled up all the CapEx. You're spending a ton of money on CapEx right now, but I think that levels off three or four years out once you've got these sites in place. And we say, okay, what's the free cash flow worth to this business, to the equity holders, to us as stockholders? Conservative assumptions, but still respecting the hockey stick, you know, that this is a point of inflection, you know, versus where we were even five years ago in terms of launches going to space and the FCC 38,000 under review for Spectrum. For me, the most likely fair value per share for Rocket Lab stock

Starting point is 00:47:55 is $24 a share. And we're at what? $6 right now? So I think the stock quadruples when there's a little bit of respect given to Neutron getting off the pad and showing that Peter Beck again does what he said he's going to do, is able to get $50 million from customers that want to launch large to medium payloads in outer space all right ryan you have uh anything else before we go yeah i actually have two questions so one's a little unrelated here but let's say a launch does go poorly something happens and whatever in the worst case scenario it blows up do you know like does rocket lab just eat that whole cost is there some sort of an insurance policy there like how What is, like, the companies, the commercial or whoever they're surveying, like, what happens for them?

Starting point is 00:48:43 Typically, they reschedule. They just say, you know, like, for the last one, they did a complete root cause analysis and said, okay, this was the anomaly. There was a voltage drop in a vacuum that they figured out exactly what happened and why the satellite blew up and the rocket, you know, failed. And then they said, hey, here's the full analysis we did. This is exactly what went wrong. We put an action correction for it. We would like to reschedule this. with you. You customer don't have to pay more. You still paid for your launch and we didn't launch

Starting point is 00:49:09 it, but all of the previous work still applies. We're going to rebuild the rocket. We're going to put your satellite right back up there exactly when we can, as soon as we can. And we've got a corrective action plan. So we figured it out. So no, you don't lose a customer. You do eat the fixed costs that you failed on the mission and you have to pay for that. Makes sense. Okay. Okay. And then the second question, this is more, I guess, personal investing philosophy, but how do you go around position sizing something like this, where obviously all the upside in the world, if things go right, but like you said, right at the start, very execution-based, a lot can also go wrong. So how do you look at a position like this?

Starting point is 00:49:51 That's a good question. I do want to put up with this framework. Investing is very personal. So don't just do as I do or follow my lead into anything like this. But for me personally, what I tend to do is I don't even look at valuations or market caps in terms of position sizing, which sounds crazy, right? Rocket Lab is only a $4 billion company or thereabouts right now. You know, that to most people would be a high risk, speculative, small allocation investment. But for all of the things we talked about on this show, hard to compete with them, excellent management team, excellent institutional following, has got potential to grow into

Starting point is 00:50:29 a very large market, has got a lot of credibility they've built. As a long-term investor, that tends to be the kinds of things I look for, regardless of what the market cap tells me, regardless of what the revenue looks like in the previous five years. I would be very comfortable making Rocket Lab a larger position size. And I have. And I have personally in my own accounts. I don't always do that because it is speculative. The risks are there, but again, when you're long-term investing, you want to hold a position three or five years. I worry less about current valuations, current price of sales, market cap today versus what do I think is really going to happen five years out? What's the track record of their credibility of doing what they say they're

Starting point is 00:51:12 going to do? Who's in charge? What's the incentives? What's the contracts look like? Like, I mean, they've already got a billion dollars in backlog, you know, locked in. That says something. You know, revenue is growing 71% a year. And now three quarters of it is based on the design and the manufacturing of the spacecraft rather than just launching other people's stuff into space. I mean, they're getting farther ahead of their competition every year. So I think to answer your question, which is, you know, how do I think about investing in a company like this? It's less about metrics and multiples and valuation, more about, like, what are they building?

Starting point is 00:51:44 What do I think is going to happen next five years? All right, we got to let you go. I know you're coming up on time here, but for anyone that wants to check out 7investing, and we'll have the links in the show notes, where can they find that? What do you guys offer? 7investing.com. You can spell it out or put the number 7investing. We make long term investment ideas, new recommendation each month, five best buys every month. In fact, I'm publishing those tomorrow, Brad. I don't know when this podcast is going to publish, but on 17th of September, my five best buys from more than 200 companies we've done diligence on. There's a lot of publicly traded ideas out there, more than 4,000 publicly available stocks

Starting point is 00:52:23 on the NYSE and the NASDAQ. We've looked at over 200 of what we consider to be the ones worth looking at. And then every month, I just say, based on right now, everything that we're seeing, what's the top five to consider? And then we hand those out and you say, is Rocket Lab right for you? Is one of the other companies right for you? Investing is still a personal thing, which is why we're not managing anybody's money. We're just coming up with our very, very best ideas every month at 7investing.com. All right, beautiful. Let me hit the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this

Starting point is 00:53:00 podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, Simon, for joining us once again. A fascinating company in Rocket Lab, and we'll see everyone next time. Thanks for watching!

Chit Chat Stocks - A Deep Dive Into Rocket Lab Stock With Simon Erickson (RKLB)

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