Chit Chat Stocks - Rocket Lab (Ticker: RKLB) Not So Deep Dive

Episode Date: May 16, 2023

Rocket Lab (RKLB) is a space technology company that specializes in rocket launches and satellite development, and recently announced plans to develop a reusable rocket, while also partnering with private companies and government agencies for space missions. At the end of the month, we will publish an Arch Capital episode that will cover the company: Dropbox. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Rocket Lab. Enjoy the show! ****************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (1:53) Industry | (13:10) Management & Ownership | (20:23) Earnings | (23:50) Balance Sheet | (28:05) Valuation | (30:36) Our Analysis | (31:47) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome into Chit Chat Money. My name is Brett Schaefer, and I'm joined by my co-host, Ryan Henderson. Today is our Tuesday not-so-deep-dive episode where we analyze one

stock covering its business model, ownership, financials, future growth opportunities, how the business works, what we think could happen in the future, basically everything you would need to know to get up to speed on a company before thinking about investing. After listening to this episode, we hope you have a better perspective on the company we are covering. And today, we are covering Rocket Lab, which I'll let Ryan get into. But first, let me say, because we've had some comments or emails or DMs or whatever and saying, hey, you're sharing your screen, you're showing the show notes you have here, you're showing your Word document. How do I get access to that? Well,

You get easy access to that for free by subscribing to our newsletter along with each Tuesday Not So Deep Day episode. We'll share our show notes and charts to go along with each episode. So if you would like that, get a more comprehensive overview on the company, please do that. The link is in the show notes or search on Substack Chit Chat Money. It'll pop up. It's free. It's easy. All right, let's get right into it. Ryan, first section what does Rocket Lab do?

Yeah, this was a little bit of a project for me considering that I don't spend a whole lot of time looking at space based businesses I know some people regular listeners might

not maybe they've tuned into this episode for a little bit just to kind of hear about it or whatever and they think we're just going to omit it But I will say this is more of an established business than a lot of the other space economy, I'm throwing space economy in air quotes here, companies, because a lot of them are more business plans and not actual businesses. There's some real substance to Rocket Lab. So Rocket Lab does call themselves or wants to be an end-to-end space company. Their primary business is placing customers' satellites into orbit.

So to kind of lay out an example, let's say the Department of Defense would like to put a satellite into orbit and the entire payload will weigh 250 kilograms. The DoD can contact Rocket Lab and ask them to be their launch provider. um they can provide a number of services beyond the launch which i'll talk about in a second but basically they'll get paid on average 7.7 million dollars to launch that satellite into space put it into orbit and there's also some of the features or components on the satellite um can be supplied by rocket lab but basically that's the gist of the business they have two um launch complexes Actually, they have three now, if I'm not mistaken. But the two that they've launched off of are in New Zealand and then one in Virginia.

Rocket Lab, I guess they break their business into the launch services, as I mentioned, and space systems. So let's focus on the launch services first. Rocket Lab has a small, I'm putting small in air quotes, rocket vehicle. It's 18 meters tall, weighs 29,000 pounds. that's deemed small because of the payload it can carry relative to something like the Falcon Heavy or most of SpaceX's rockets. It's called the Electron. The Electron can carry up to 300-kilogram payloads from either of its launch complexes. In fact, it has now successfully completed 32 missions since inception. There was one failure that they've had so far, so 32 out of

33. As I mentioned earlier, on average, one of these launches cost customers $7.7 million. And in most cases, the rocket isn't recoverable and Rocket Lab has to build a new one for the next launch, which means the cost of revenue is quite high. However, last year launch services as a whole only accounted for 29% of Rocket Lab's actual revenue. So really the majority of their business is driven by this space system segment and so this is on top of the actual rocket launch service rocket lab will design and build a number of spacecraft components and systems that are required to kind of put the satellite into orbit and and make it run smoothly um this includes the photon space capsule which brett was kind of explaining to me before the show uh this is the

part that detaches and actually puts the payload or or whatever is being carried into the proper place it's what the payload rides up on and that that's what the yeah it gets detached from the rocket so it's a separate thing they sell it's a part of the mission and it'll have the satellite within it you know it's it's like if there was a human that's where they'd be sitting in although you know we don't have uh on the electron flights they do not have any humans then they also sell things like uh solar panels uh thrusters they even supply on-orbit constellation management services so um they're trying to as i said be an end-to-end launch service company essentially um getting people to space and allowing them to operate their satellites efficiently uh here's a quote

from their 10k that basically describes the the space system segment it says we provide spacecraft solutions for government and commercial customers, ranging from selling individual spacecraft components for use by customers in constructing their own spacecraft to complete spacecraft design, manufacture, and on-orbit operations. This segment as a whole accounts for the bulk of revenue at 71%. Basically, they're running at a loss right now, still trying to, I think, establish a profitable business and they've historically been gross margin negative so um although hey 2022 nope nine percent so moving in the right direction it's costed them historically and since they were

founded in 2007 it's cost them more to uh fly these rockets than they've been paid by customers um or create and fly these rockets but now they're getting to the point where they're starting to see some gross margin expansion. So it's certainly a positive if you're an investor in this company. And then on top of... Yeah, go ahead, Brett. Oh, yeah. Before we go to history, I'll have just a few follow on for context. Sure. So they're obviously executing on their current launches. They're launching sometimes once every two weeks. So there's a much quicker turnaround time. They're kind of ramping up production. But on top of that, they're also in the process of designing a second vehicle called the Neutron. This would be more than

twice as tall and potentially carry up to 15,000 kilograms into lower earth orbit. So potentially much higher revenue per flight, which would be, I think, a huge operating income expander for the business. I don't remember if they have a date on when they expect that to be finished, but it's been in kind of design and production for a while. Yeah, and I think the first launch is supposed to be 2024. But again, that has been, you know, it can with these sort of big projects be pushed around. Just for context, in 2022, since Ryan mentioned, they've done 32 total launches. In 2022, they've done nine.

Their long-term target is 30 a year. So they're still far away. And we'll talk about how it's very important for their margins to get that cadence up. And then second, with the space systems, Ryan talked about them selling or using those for their own launches. They'll also sell the space systems and all those components, you know, maybe the photon capsule or all the other stuff, the solar arrays we kind of mentioned as the example, but they have many other products to other companies, not just for the Electron launches. Although with the Electron launch, it's kind of nicer for a contract to win a contract when you say, okay, we can really do everything on a launch. You only have to deal with one company. Exactly.

History, Rocket Lab was founded in 2007 by Peter Beck. Beck was, he's been a rocket enthusiast and kind of a tinkerer for a long time. He, kind of reading about him, he sounds like he's been an engineer at heart for a while. He never went to college. He was very eager to get into the engineering space. He moved to the U.S. After skipping college, he moved to the U.S. looking for engineering internships. This was unsuccessful.

He tells some funny stories about being escorted off company premises because he was showing them that he'd built this superpower bicycle when he was back in New Zealand. And they're like, okay, that's great, but you're not supposed to be here. And he didn't end up getting an internship. So instead he actually, while he was there, he saw the opportunity or he was studying, he saw the opportunity for a lower cost, smaller launch vehicle to kind of put those payloads into lower earth orbit. And he basically just started the company with that design or that business plan in mind. There was no, I mean, they had no product. It was kind of by himself and he set out to raise money. Go ahead, Brett.

Whoops, I was muted. It wasn't like he was 20 years old immediately after the internship, but it was the idea that got sparked there, right? Because it said, I believe in his bio in the proxy statement that he worked at another job for like 10 years or something like that before he started this one. So rest assured, this isn't a 28-year-old running a rocket company. No. Yeah, it is not. But he struggled to find funding, unsurprisingly. Initially, when they set out to raise money, the goal was to raise $5 million for essentially an idea and an expensive idea at that. So it was hard to raise $5 million to begin with, but to do it for a rocket company was very difficult. he ended up uh getting to know a guy named mark rocket that is not a joke that's his actual name um and i don't know if he changed his last name to rocket but he mark rocket apparently helped him get connected and raise that initial five million dollars he was also a part of that seed round and then with that seed money rocket lab was able to demonstrate that the idea was actually sound they were named the first private company in the southern hemisphere to reach space after 2009 launch. This basically put them on the map and helped raise follow-on funding. A year later,

they were awarded a US contract to basically come up with what they do today or some version of it, which is a low-cost space launcher. They had several funding rounds throughout the 2010s. This was an extremely well-funded company. I think some of the popular ones that people are probably familiar with include Coastal Ventures, Bessemer Venture Partners. There's probably some New Zealand, the government invested in the company as well. And then in 2021, Rocket Lab merged with Vector Acquisition Corp to go public via SPAC. Through the SPAC, they were valued at $4.8 billion and it helped them raise net cash of $700 million. So props to them on the timing there. I think a lot of companies did, so I guess

not surprising, but they've since used a decent chunk of that cash to acquire a number of other companies and kind of integrate them into the space systems. And it's been mostly like components businesses, but basically the business is burning cash. But there's, I think, a theoretical path to profitability here down the road, but a lot of it hinges on them improving their flight operations and having success with that neutron rocket. Yeah, we'll talk about the financials. They are moving in the right direction, but there's still future progress that needs to be made over the last few years. And yes, second, before we move on to industry, God bless the SPAC market, the SPAC bubble for bringing so

many companies to the public markets that we can talk about. Let's talk about industry and competition. So they outline various addressable markets for their businesses. As you might guess, as a SPAC company, they're very TAM happy, total addressable market happy. I'll link the slideshow in the newsletter that goes through from their investor day in 2022. I would say if you're interested in this company, that is a good read. It's about 90 slides. It goes through a lot of details, maybe even more than you need, but they outline their financial goals there. Management thinks there's approximately a $20 billion opportunity in rocket launches and $44 billion in space systems.

So remember, the space systems are satellites, solar arrays, components, radio, software, more, the capsules, all that good stuff. And then there's $20 billion. The rocket launches are the actual launches. That's the only thing that's there. These are the businesses they operate in today, and they expect, as every space company does for this business, these market opportunities to just grow and grow and grow this decade.

For reference, their total revenue in 2022 is $211 million, so they're much lower than a lot of the other companies like Lockheed Martin, SpaceX, Boeing. They're a very small player. However, management thinks there is a huge opportunity to go after in what they call the space application market, which they say has a projected $320 billion total addressable market. These include things like satellite internet from companies like SpaceX and Amazon. Nothing material has come down the line, though. I remember them talking on a, I believe it was the investor day where they said, we've been in talks with companies about what these space applications could be. I personally do not know what they are except for the satellite internet stuff.

And I do not think the satellite internet on its own is going to be a $300, $400 billion market. So TBD on that one, but they're very optimistic and maybe watch out for some new product launches Because they say that once they get the launching and the space systems really honed in, these are the things they're going to try to upsell as a partnership with some of these other companies, like an Amazon Kuiper for that satellite internet. And SpaceX is going to do it themselves. By 2030- You don't think Blue Origin will do it for them? Kuiper actually had a contract with ABL, I believe, which is not Blue Origin.

I think Blue Origin is somewhat of a joke. So we'll see if Amazon actually chooses them fully for the launch capabilities. But I would guess if Amazon wasn't connected to Blue Origin because of Jeff Bezos, they would 100% be choosing Rocket Lab. Because they're clearly, which I'll outline here later, the number two player besides SpaceX in this market by far for private launches. Okay, by 2030, they believe the total industry addressable market, which combines all these segments, will be $1 trillion. dollars. The question I have here, does that seem reasonable to you? Because to be honest, seems ridiculous and maybe someday it'll hit there, but it's almost like, I think if you said in 2010, after a good SpaceX launch and someone said, hey, the market will be $500

billion in 2023, and you'd be like, yeah, 13 years down the line, we take a little exponential growth here. It'll be a huge business. I think these are just way too optimistic for near-term uh growth i'm sure you agree with me ryan yeah i mean there's ham numbers and it's potential tam no one knows what it's going to be so it's kind of a crapshoot yeah 100 all right competitors in the launch space are like we mentioned spacex but i would make a note here that spacex competes more with what the neutron rocket is going to be like ryan mentioned the electron rocket with a 300 kilogram payload that was kind of the market opportunity that no one is going after, that Electron dominates,

or excuse me, that Rocket Lab dominates. And besides SpaceX, there are not really anyone else out there for private launches, especially US-based or US kind of close allies. I mean, there's Russia, there's China, but since these are defense and national security concerns stuff, everything's kind of geographically or politically not, you know, you stay with your home market. There are a lot of startups like Astra, Relativity, Virgin Orbit, but they look really destined to fold here because they can't seem to get anywhere near to Rocket Lab's launch cadence. I think Virgin Orbit just went bankrupt.

I believe so too. I saw that it had a Q in front of its stock ticker, but let me share for the screen here. I'll describe it. It's a very easy chart to describe. We look at successful orbits, and this is actually a little bit old. if we had the 32 in there that Ryan mentioned. If we have successful orbital launches from all these startups,

we have Rocket Lab at their latest update was 27. And now it's actually updated to 32 and probably actually closer. I mean, it's going to keep climbing higher. And then we have Virgin Orbit at four, Astra at two. I believe that's called Firefly at zero and Relativity at zero.

So they dominate the market. They're the only one that's had any sort of consistent cadence with these launches. So there's not, I mean, the competition's pretty weak unless SpaceX decides to go for a smaller rocket, which it doesn't look like they're going in. Then if we look at space systems, the competition is a much, say, stronger.

But there's a lot of the defense contractors like Lockheed Martin, Raytheon, Boeing, which will hit up next week. then a lot of other startups that like rocket lab um and the companies they acquired are going after the space systems markets much more established as much i wouldn't say it's easy to do these aren't easy things to do but it's a lot easier than consistently launching a rocket without it blowing up and it's a much more competitive market it takes less capital intensity but rocket lab like i mentioned before believes that the launch part of their you know solution and

the integrated solution that combines the launch services with these space systems products will give them an advantage in winning contracts i think the evidence so far shows that they are probably correct but again it's very very early in their business life cycle and i will see if that can become a long-term competitive advantage and i guess the key we'll talk about later is make sure none of your rockets blow up um all right anything else there ryan before move on to management no i guess it makes sense that it would be nice to if you're a company that isn't if you're a company that wants to launch a satellite and that's not your core business to be able to go to one customer to one supplier contractor whatever it is and say can you do all

this for us it would be very nice to have it all kind of throttled down to one yeah and also you're going to go to the proven provider if you ryan were going to say i need to launch something into space and the size is going to be this 300 kilogram payload, you're going to go to Rocket Lab, even though if they charge you a bit more, because what are you going to go to Astra and go on their third launch? Version Orbit. Something's got to take them out of bankruptcy. Yeah. Okay. Well, Richard Branson, we'll see how big that pocketbook is. But back to Rocket Lab, I'll let management ownership pretty quick here. I mean, like Ryan mentioned, the founder, CEO, and chairman of the board is Peter Beck. He's very in control here. Although I would say

important to note, no dual class share structure here. So I guess that's a positive for anyone that is wondering, sometimes these can get messy and there might be whenever an activist that steps in at some point. He started the company in 2006, raised a ton of money for this vision of an integrated launch company. He is also the lead technical officer. He led the design of the Electron Rocket, which again is the small load rocket. So he is really a technical founder and not necessarily managerial only, although it seems like so far they've done fairly well managing their finances

compared to a lot of other of these startups. And he's had around 15 years of experience in engineering before starting this company, like we talked about before. But it has been his dream, it seems like, his whole life. Although after watching that recent Succession episode and reading up about some of this stuff, I wonder how much of that is a bit of a manufactured story for the press,

but either way, seems passionate about the products. I mean, he was the founder and the idea was his, it sounds like. The other thing that I like is he was not this super wealthy individual that just started this out of his own pocketbook and could just funnel cash to any losses they might have. I think he even said this in an interview where it's like, we didn't have money, so we were actually forced to think. And they had to be pretty lean with how they spent. Yeah, exactly. And since Ryan mentioned they are lean, the company is in a heavy startup phase, $150 million in cash burn in 2022 on only $211 million in revenue. I think it's important to look at the executive and board compensation composition because I think the cash burn, the cash bent on executives is going to be important here to kind of see whether they're serious about getting this as a lean startup. Total cash compensation among executives and the board was only $2.36 million in 2022, which I think is quite nice. The only gripe, though, is that Beck paid himself close to $750,000 in cash last year. I believe it was in cash when he already owned so much of the company. He has about 11% ownership. So that was the only downside. But overall, their cash comp is not bad. But if you look at the stock comp, they are getting aggressive. I think in this case, it's probably fine because you'd rather have them use stock just because you want to manage that cash burn as best as possible and still keep employees and everyone incentivized. But if you are underwriting an investment here, you probably want to include some heavy

future dilution, maybe 4% or 5% a year, maybe a little lower, even if the stock performs well. I think that has to be considered here when you're making your stock pick. If we look at total stock comp among just the executive teams in the board, it was $18.8 million in 2022. So pretty heavy here. If we look at their ownership table, still got a lot of VCs in there. Like I mentioned, Beck, 11%.

Coastal Ventures still at 16%. percent. Bessemer is still at 12 percent. Future Funds is still at 6 percent. So a heavy VC-focused here. And they're still sticking with the company after it went through its SPAC investment. But I think that'll be important to watch, maybe how this ownership structure changes. Ryan, let's move to earnings. I think it's a very important one here. I'll have some interesting charts outlining the differences. And the one I wanted to highlight for the newsletter, I think Ryan I'll talk about here is the expense management and all the expenses as a percentage of revenue. So why don't you get into that? Yeah, they've been doing a fairly

good job improving over the years. I also, I went and found what they guided for in their SPAC documents. Oh, yeah. I have that chart. Yeah, yeah. Um, so they guided to $176 million in revenue for 2022 when, when they first went public via SPAC this year in 2022, they beat that with $211 million in revenue. So they did acquire, they acquired a lot of companies, so they kind of cheated to get there, but they probably would have been fairly successful with, I mean, maybe, you not would have, maybe they wouldn't have hit that hurdle, but they grew 237%. They are getting more demand from customers for the launch capabilities. So there is, at least it's grown compared to some

of the SPACs that projected like 500% growth and then declined. So you can be maybe nitpicky with whether or not it's organic or inorganic, but it has, that is the one thing that they passed. They did pass the revenue hurdle that they initially guided for. However, the profitability, they missed both on the adjusted EBITDA, free cash flow, however you want to look at it. They, I mean, they're burning more than they expected. So I will say this since, so in 2020, gross margins were minus 34%. Today, 2022 gross margins are 9%, good improvement.

Operating income margins have gone from negative 156% to negative 64%. And free cash flow has gone from negative 150% to minus 70%. So they're still burning cash. In fact, this last year, they burned through basically $150 million in free cash flow. It's a CapEx intensive business. On top of rockets being expensive to build, it requires a lot of capital to like- Well, that's what it is. Yeah.

Yeah, and then, I mean, they're top talent. They're expensive to pay. You have to also build out the ability to build the rockets, which requires a lot of CapEx. And yeah, you have to have the launch area. Yeah, so it's R&D plus capital intensive. One thing I want to mention here. Oh, am I just forgetting it now?

You spurred the idea there. Ah, I forgot it. Oh, wait, wait, no, no. So the margins expanded, but they did mention, and I think investors, if you're following this, need to look and see if over the next year or so this happens. They said when they acquired the solar array company, they had a backlog of very low margin revenue that they're going to change. So that gross margin, they think, for the solar array, which again is like solar arrays that go in space, stuff in orbit, is going to improve. And second, they have a big contract with someone called MDA Global Star. I think they might be two different companies or two different agencies for a giant $150

million contract that starts in the second half of this year. And they said that's going to be a boost to revenue as well and hopefully lead to some more operating leverage. So again, these next few quarters, keep tracking to see if that progress shows up because when you look at these early stage companies, you want to look at, like Brian mentioned with those SPAC numbers, what do they say they're going to do and did they do it? And that's actually one of their slogans. What did, like, did we say what we're going to do, which I thought was quite nice that they kind of hold themselves accountable on that.

Yeah, it's the most real of the space businesses in the public markets that I've seen. I mean, there's no way around it. They're burning a lot of cash. It's going to have to improve probably in the next two or three years for this to be a viable business, which I guess leads me to the balance sheet. They've got basically $450 million in cash. $400 million of it is short term. There's like $50 million in sort of longer dated treasuries and corporate debt securities, but basically $450 million in cash, let's call it. the debt, they've got $100 million in a term loan from Hercules Capital. This loan is due in June of 2024 and it's variable rate. And it could be paid down early, but there'd be an early payment penalty. And it's also pretty high rate. I just remember looking at this, it was like 8.15%

plus the prime rate minus three and a quarter. It was very weird, way too complicated, but basically it's high rate. However, they have so much cash right now on hand that's earning interest that their net interest expense was only $685,000. So that would be an annualized rate of less than 3% interest net. However, as the cash goes away, they're not going to benefit as much from the interest income and the interest expense will start to show up more. So expect that interest rate to trend up over time. Over the last 12 months, they've burned through, like I said, $150 million in cash. At this rate, you've basically got two to three years of cash burn. So they're probably going to have to raise more capital. Previously, they've done mostly

through equity issuances and by paying employees in stock. However, they also raised that term loan. So I think it's certainly possible that it could be either way, either equity issuance or debt offering, just expect them to raise capital probably at some point in the next year or two, if they don't start to see improvements in the cash burn. I would bet that if they successfully launched the neutron rocket in the next two or three years, they're going to raise off of that. Yeah. And they also have, I forgot to mention this, but basically half a billion dollar backlog. I wasn't sure how much was set in the next 12 months, but they tout that figure, which it's grown. I mean, it's more than doubled over the last year.

So there's certainly high demand for these services. It's a matter of whether or not they're able to expand and service all that demand. Exactly, because I think the key is there's a lot of demand for these type of things, but can they consistently get the launches up to that 30-year rate? Let me move to valuation. Market cap as of recording, $1.96 billion. If you add back the $100 million in debt, I didn't subtract any of the cash because that's pretty much all going to get burned. You have an enterprise value of just over $2 billion. I really don't have any valuation metrics to share. I could use a very high price to gross profit, but I really want to just look at it. Can they hit their targets and then price in some share

dilution. So maybe at today's price, you want to price in some dilution, they have a market cap or EV, excuse me, of 2.5 billion, maybe even three if you want to get conservative. If they can hit their targets of let's say $2 billion in revenue within five years, which will outline why that actually could be the, you know, that might seem aggressive versus the 200 million now, but we'll outline with the neutron rocket how that actually could happen. And then hit 50% gross margins, which gives them about a billion dollars in gross profit to reinvest back into the business i think the stock is probably much higher it's probably three four x higher the question is which i think we'll talk about maybe later in the highlights and lowlights

is how likely is that is it that they safely get to this destination all right anecdotal evidence ryan we're not a company buying rockets but what do you think well and this may more management what did you think of the management yeah we're going to spend eight million dollars for some if we need one of those satellites to detect like inventory problems at some auto dealer or something. And don't the big funds buy satellites or something? That's actually one of the space applications is the analytics services will use the satellite imaging

for inventory. And I'm sure some of the big funds pay a pretty penny. If our budget ever gets bigger. Yeah, we'll just waste it on that, right? Yeah, yeah, exactly. Instead of earning it as profit. Couple more chitchat money listeners and maybe we'll be a Rocket Lab customer.

No, obviously no customer experience, but I do find myself rooting for the company. There are a number of businesses that I've looked at in the space economy where I'm just consistently rolling my eyes. It feels like a pet project, kind of fun experiment for rich people where they end up, I don't know, kind of stealing from shareholders. And the promises are like, a hundred X efficiency on engineering. Once we rapidly deploy, we can deploy one a day of these things and then they never actually do anything no i mean this company like rocket labs you know they are having successful missions on a regular basis so the i think kudos to them i like peter

beck someone that i feel like i'm rooting for but deep down i just don't i don't know if this will ever really be profitable i also something that's talked about and this can be my future growth opportunity is basically expanding the gross margins um are you going to if it gets competitive are you going to have to push those cost savings through to the customer like if you're able to reduce the costs required to ship something are you going to end up passing that through the customer if you're the only service provider no but that might limit some of the gross margins i I mean, it's probably, is there a chance that it's a race to zero? Like, do they try to reduce the cost of a flight to space?

If that's competitive, that's difficult for them. But if they're able to make it through kind of a recession and be profitable, I would be surprised if there's a whole lot of space companies doing what they're doing. Yeah, I'm kind of on the side where, and this is part of my anecdotal evidence as well, I have the same one, don't need to mention it, like the founder, seemed good, seemed like kind of the Elon Musk, but not a jerk and not running 10 companies at the same time, which is, you know, just unreasonable.

You know, I do worry, like you mentioned, that they're not really trying to generate value for shareholders, that they may be, you know, focused as a mission to get these space, you know, get to space and do that, which is great. But again, as a shareholder, you got to think with a different hat on. But I do think having the technological

competitive advantage and the brand competitive advantage of if they've launched 100 successful electrons in a row versus someone else who hasn't really done any, you're probably going to be able to pass on some of that pricing to the customer because of that reliability. And I also think there's not going to be a need for dozens and dozens of rocket launching companies. I mean, why would the United States or really the world even, you know, I mean, I guess geopolitically, China might have its own little orbit there, but you know, why would the United States and its allies have dozens of rocket launching

companies? It seems like you're only going to have a few. You think it ends more like a, like a Boeing? A hundred percent, a hundred percent. And it, or even like a railroad,

but even different because like a railroad, you don't have 12 tracks going to one city. You have one track or a couple, right. And, or a couple from one from each direction. You don't need not, you don't need 12 rocket launching companies.

And I think there's going to be really a race to, even if there's a race to the bottom and it's low margin, if you've proven it with your brand or not, it's okay. Your brand is going to be strong because you're a reliable launching company. That is a huge advantage, I think, over any startup because who would go with the startup? You're going to be able to price out or you're going to be able to sell at a way higher price if you're reliable, I think. But it's still TBD. That's just a theory for me.

All right. But Ryan, what's your future growth opportunity? You kind of teased it out here. Yeah, a higher recovery rate for their rockets. So Electron has been successfully recovering, or they have successfully recovered from the ocean a number of times, their Electron has been. And Electron is just that rocket for a reminder

of the small payload, one that they launch on a regular basis. So it's been successfully recovered from the ocean a number of times, and they are apparently developing a system to recover the booster directly from the air via a helicopter i saw like a little clip of this and it's pretty cool i think it's been done once before kind of tested and they did it semi-successfully i think i ended up like falling into the water but they did latch onto it um and just kind of for visual to try to paint a picture of what this is like the it slows down.

They've built a system where the rocket can slow down when it's falling back to the earth. And then a parachute shoots out and this helicopter comes in once it gets lower to the earth and they're able to link onto it and potentially save it from massive damage. So if they're able to do that,

I don't know the exact financial impacts, but I would think it is much cheaper to repurpose a recovered rocket than build a new one from scratch. So that and cost of goods sold is their primary expense. I mean, it costs a ton of money to build the rockets and then launch them. So if they were to do that, that would drastically increase the gross margins for this business and give them more money to invest in Neutron and all the other research and development tools and the CapEx. Yeah, they're not just for any reference for listeners.

They're not reusing a lot of the stuff right now just because they're in the early stage. I don't think they needed to, unlike, you know, SpaceX has been kind of pushing that a lot, I guess, as their main competitor. But if we look at their margins, yes, if they can reuse a lot of these parts that cost a few million bucks to build, they did talk about reusing the engine as well. You know, it's pretty obvious how that's going to help their profitability. My future growth opportunity is going to be the one we hinted at. That's going to be the big, you know, what if here for this company, at least in the launch part. And that is getting the neutron rocket operational. Thank you for investing or thinking of investing in Rocket Lab.

The development process for the neutron rocket is vital, really, the company to reach consistent positive cash flow. The neutron rocket is going to have 50x the payload of the electron rocket. And estimates say that it could generate around $60 million in revenue per flight versus well below $10 million for a typical electron flight. So just do the math there. If they can do 10 neutron flights a year, that's $600 million just from the launch. And then they're also going to have the space system stuff on top of that. So this could really lead to a revenue inflection for Rocket Lab once this becomes operational. But one, it is like we talked about before, it is very capital and then research intensive to build.

So, for example, you know, like, I don't know, just think about it. It's huge. They have stuff in their investor day, like how big the rocket is. And I just would think about like how I would, like if I was an investor and I had to watch the first launch of this thing, I don't know what I'd be thinking. But again, I do anything else there to add, Ryan, before I'm going to share the screen and show the total addressable market once they expand from to the bigger payloads. I think they get paid or they get awarded money from the U.S. government for meeting certain development or progress points with the neutron rocket. Do you know about that? They got some already, but again, like, yeah, they might get more. I don't know the details on that, but again, they have to make sure it gets working.

And here's the chart they showed during the investor day. It shows basically their serviceable addressable market for launch, which again, is just the launching of the rockets like Electron and Neutron in 2023, 2022, 2021. They have it well below $10 billion, but they say once they get operational for this 50 kilogram or excuse me, 15,000 kilogram payload potential for the Neutron rocket compared to the 300 kilogram on the Electron rocket, their addressable market, which again, would having them competing with SpaceX and kind of being the second company there would be well over $10 billion a year and pushing close to $50 billion by 2030, which again, we'll see on those

numbers, but it would be quite exciting for the company if they can consistently launch the Neutron, but it's going to take a couple of years. What do you think the odds are this just becomes like a government contractor where it becomes, what's it called? Cost plus? Maybe. I don't know how much the government wants them to succeed but I could see yeah you could definitely see SpaceX and Rocket Lab and then maybe some of the other ones becoming dominant as

defense contractors for the government for these don't know if that's a good investment thesis though I'm not sure that's one of my highlights is that if you have a reliable low cost launcher

and they're doing a lot of work for the government they have been there is some incentive for the u.s government to keep them alive because you don't want for one i mean the reliability is huge right you want like an established company that's done this um you don't want to have to go and do it with a startup after this company's gone and made so much progress yeah i mean they're going to they're going to venus mars and the moon again with no people, but yeah, they're going to all three of those. Maybe they help them out in some sort of a financial pinch. I don't really know, but I guess I'll hit the rest of my highlights.

They have a successful offering, so they're ahead of a lot of other companies. They're also, I mean, this is really a big one, is the increasing demand for satellite launches. Today, there are apparently around 7,000 active satellites orbiting the Earth. I think there were around 2,000-something two years ago, three years ago. Clearly, there's more demand to get satellites up there. I saw from our friend Simon Erickson, he wrote, the Federal Communications Committee now faces an overwhelming 38,000 more applications for spectrum approval for satellite-based broadband internet. I imagine not all of those will get approval, but it, I think indicates the demand for launching satellites and doing so at low

cost. That means, and that that's, that's in demand for rocket lab. So the opportunity is certainly there low lights for me though. This, I mean, I don't know. It's a super high risk investment. It feels kind of, and I am a little hesitant to say this because they've done so much better managing a public company than a lot of the other space economy companies. But it feels like if you're a shareholder here, you're kind of a donor. You're donating to these missions and footing the bill as opposed to investing to get your cash back over time. Now, you could if this is very

profitable and successful. But at the time, right now, if they do another equity offering, or they're paying their employees in stock-based compensation, it feels like you're essentially just donating for research. Yeah, a bit, a bit, yeah. I mean, it could be like that. They're going to reinvest

for a very long time. So, yeah, it's very early stage and that's it. My highlights, I think the success of the Electron launch program has been very good. They've been a bit slow

on upgrading the cadence. They use COVID as an excuse, but we really need to see that cadence bump up. And I think it bodes well for their move into larger launch vehicles because they've been so consistent.

You know, bigger-bodied rockets are going to be generally harder to, you know, operate safely. You've just got more, yeah, more energy. And, yeah, but I think it bodes well versus basically anyone except, you know, excluding SpaceX, who's been a lot more of an incumbent here. Second one is the acquisitions into space systems. Seem like the, you know, smart room right now

gives them room to build up their launch programs, which is going to take many years. However, these do seem like very low margin businesses at the moment. I wonder if they bought some low quality revenue, just a concern. And I think also a highlight is the competitors out here, especially within small launch, especially again, excluding SpaceX, are either flailing startups that are going to go away or bureaucratic incumbents. I think that gives them a fantastic operating environment

as long as they can run with good unit economics, have good relationships, stay operational without blowing stuff up. And then I think launch, like I mentioned before, I don't have to go through it again, is going to turn into an oligopolistic market because of just the dynamics of the industry. Lowlights, I've never seen evidence

that a rocket company can be profitable. So it's never happened, so why should I expect... You know, maybe SpaceX is profitable. We don't know yet. But, you know, why should I expect RocketLoud to be profitable? That's just the big concern. And then the fact that you are betting on the launch of the Neutron program, I think is very risky, right?

You know, what if the first launch blows up? What if they can't get a reliability working? If their first launch of the Neutron blows up or they can't really get it going, their brand would be maybe I use Tarnished but maybe not Tarnished but pretty close if that thing blows up I don't know

I wonder how SpaceX is going to do after they had their recent blow up but it's just got to be a concern yeah and I think a lot of the theoretical operating leverage rests on that

being successful Yeah, because that's where a lot of their R&D is going. It's where a lot of their CapEx is going to go. They already established a couple of years ago that this is going to be their big bet on moving away and expanding the company's revenue. All right, what is your bull case as we wrap up here, Ryan? I don't know. The bold case is that they are launching more rockets on a regular basis, that the Neutron program works out, it's operational, they totally amplify their revenue per flight, they have a higher recovery rate, which reduces the cost of goods sold. Everything goes right. um i think in order to get to any sort of business viability like break-even operations wise you probably got to get 20 to 30 gross margins on a much higher revenue base um the demand is there but i don't know it's just like you're betting that they solve this pretty complex engineering problem that most people uh or i don't think it's been quite solved by anyone other than SpaceX, right?

Or is SpaceX not? There's not of what? Of being able to launch on a regular basis a rocket the size of the Neutron and have it place payloads? No, I think, no, they have. They have.

I think the Neutron is similar to one of the Falcon ones, but I'm not exactly sure. But TBD on whether SpaceX is profitable, I'm guessing they are, at least with that unit, but who knows? Yeah.

All right. Mine is going to be kind of the same. And bull and bear cases, it's kind of a mirror image of each other. I think there are a few key questions you need to ask and be confident in if you're going to be a bull here. One, can the ElectroArm program get to 30 launches or more a year with no failures? I think that one, yeah, I think they could get there or close within a couple of years.

It seems like they're going to launch up to six per quarter by the end of this year. But again, really track that. That is a key thing to track is how many launches they're doing, because that's the only way they're going to achieve operating leverage. Second, can the neutron program get up and running? We already talked about that. And then third, will the space systems segment continue growing and expanding margins? Or on the bear case here, did Rocket Lab just buy some low quality revenue with its SPAC

money? And then my bear case is going to be all these three questions I had here, you can't answer them with like, no, no, no. Yeah, I think that summarizes mine pretty much as well. I mean, there's obviously risks to all those. if you if you put on your rose-colored glasses oh hunter beggar baby this this could be a really rewarding investment and the opportunity the revenue opportunity for the business is huge yeah i mean if you're like if you're sitting there like oh i wish i if you're one of those

people like which i know there are a lot out there like i wish i could invest in spacex well you can invest in spacex if at 150 billion dollar valuation maybe if you have access to it or you invest in Rocket Lab at a $2 billion valuation, this is your chance if you really want to take that high risk bet. Yeah. I think if I were to make a really, I guess this gets into our more or less interested, but if I were to make a really high risk speculative investment on a huge market like the space economy, this is probably the number one. Yeah, 100%. Yeah. But that's not how I invest, so I'm less interested. Yeah. I'm in the same boat. Yeah. We invest similar. I don't like on a higher level, unproven capital intensive businesses. Very, very risky. I think

you need to prove years of the positive unit economics first for me, and especially no failures operationally for probably five or 10 years. So a long, long time, but I'll be tracking this one. And yeah, I can see a world where this is definitely a hunter beggar. I mean, it's low you know, low probability, but could be a big reward. If I was making a basket and I invested in kind of the traditional Motley Fool style of 30 to 40 companies in your portfolio, make them small bets, all high risk, but then some of them kind of as a VC style turn out, you know, well, this would definitely make the cut. The problem is I can only seem to find like five of those at a time. So I can never actually implement that strategy. Anything else before we wrap up, Brian?

No, I think that's it. All right. Next week, we're going to hit the opposite end of the spectrum, sort of, with the defense, but also combo defense and aerospace and airline industry, which is Boeing. So that'll be fun. Very, very interesting company. Before we go, if you like this episode, give us a review on Spotify or Apple Podcast. It's the best way to support the show. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.