Edited by Brian Birnbaum and an update of my original RocketLab and AST Spacemobile deep dives.
The launch of Flatellite positions RocketLab to exponentiate its operating leverage.
It also positions RocketLab to take a crack at AST’s business - but I don’t think it will be easy.
As of Q4 2024 RocketLab’s operating leverage and launch frequency increased in tandem. In 2024 RocketLab launched 16 rockets, a 60% increase over 2023. Further, RocketLab is now launching five rockets per quarter versus three in Q3 2024. In the graph below you can see how, meanwhile, TTM profit margin has continued ticking up, enabling them to amortize their cost base across more launches.
CFO Adam Spice explained the causation between launch cadence and margins in the latest earnings call:
And as we've talked about many times before across various conferences and venues, this business is a scale business, right. The more you can absorb those standing costs across a greater number of units, your economics get much better.
And that's actually what we see playing out over the coming quarters is as we continue to scale the launch cadence, the margins benefit significantly is you just get to absorb those relatively static fixed costs over a greater number of units.
As RocketLab continues to increase launch cadence, it’s now on a path to profitability. This will likely happen quicker with the launch of Neutron, their mid-sized rocket, since three Neutron launches are expected to match the entire yearly revenue from Electron launches at the current cadence. Additionally, RocketLab’s latest move positions them to increase operating leverage exponentially.
RocketLab recently introduced their new low-cost, mass-producible satellite called Flatellite. It has a stackable design that allegedly maximizes satellites launched per mission. Flatellite allows RocketLab to operate their own constellations, thereby owning the entire value chain required to deliver space data services.
With every launch, RocketLab will be able to deploy a number of Flatellites. Once in space, these satellites can then deliver data services for years, which promises to greatly improve revenue per launch and unit economics. CFO Adam Spice illustrated the size of the opportunity towards the end of the Q&A section the last earnings call:
Yeah, well, I think given the overall much larger size of the opportunity on the application side, I would expect that to fundamentally change that overall mix, right?
I think that just the, if we kind of look at, and we've talked to, we've articulated the total addressable market opportunity in each segment, launch we articulated, it's roughly a $10 billion TAM.
And then the applications is perhaps an order of magnitude of that.
Together with the evolution of its launch platform and its space system capabilities, Flatellite positions RocketLab to become the AWS of space data services. I believe the probability of RocketLab capitalizing on this opportunity is high, as they continue to exhibit signs of world class process power. Every mission they take on seems to push the boundaries of human capability in space. You can;’t help but notice the progress–across every component of their launch and space systems business segments.
For example, RocketLab’s space systems team is helping NASA land a mission on the Moon. Powered by RocketLab’s solar panels, it took just 45 days for NASA’s device to reach the Moon.
Two of the five launches this quarter were HASTE missions, which come with higher ASPs (average selling prices). HASTE missions, which stand for “Hypersonic Accelerator Suborbital Test Electron,” use a modified version of the Electron rocket to support hypersonic research and testing.
The ultimate testament to RocketLab’s process power is the steady rise of gross margins. They prove RocketLab has the ability to get things done while commanding pricing power.
RocketLab seems to be the only space provider with missions scheduled this year across small, medium, and hypersonic suborbital test launches. They’re winning across the board, which in my view continues to point to extraordinary organizational capabilities. I believe this competence enables them to continue increasing launch cadence, achieve profitability, and bring Flatellite to life to capture a much bigger prize.
Flatellite puts RocketLab in the same neighborhood asAST Spacemobile, although I believe the latter has no real competition. With this move RocketLab becomes a competitor in the space telecommunications market, as depicted below. AST Spacemobile become a specialized player in RocketLab’s vertically integrated infrastructure, which covers both launch and space telecommunications. The question is, is AST’s technology complicated enough to fend off disruption from RocketLab?
For now my view is that AST will likely remain hard to disrupt. Doing so requires mastering leading-edge tech, navigating complex regulatory requirements, and building relationships with telecom providers. Disrupting AST is not a matter of launching many cheap satellites, but deploying satellites that are able to beam broadband directly to smartphones and similar devices without modifying their hardware.
In order to disrupt AST, RocketLab would have to get deep into the phased array technology that enables AST’s satellites to communicate directly with smartphones. RocketLab’s vertical integration gives them an advantageous position to attempt to do that–but it still requires a prodigious specialization. It’s unclear whether RocketLab has been working toward this aim or if they’d be starting from scratch.
Disruption seems unlikely for now, with the odds decreasing over time as AST’s satellites grow bigger, more powerful, and thus harder to replicate. AST’s block 2 satellites are expected to wield 10X the power and 3X the size. As AST continues to progress in this direction, it’ll minimize the number of satellites it has to launch and it will be harder to outcompete them in terms of cost.
To illustrate how minimizing the number of satellites could offset RocketLab’s launch advantage, it helps to reason at the limit. Suppose RocketLab does figure out AST’s phased array technology. At the limit, AST is able to service all smartphones with just 10 satellites while RocketLab would need to launch many more. In such a scenario, the ability to launch many satellites is effectively neutralized.
Mathematically, it would come down to whether RocketLab is able to launch and operate many D2D satellites for a lower cost than AST. Considering the deep specialization required to bring phased array technology to the market while navigating regulations and closing telecom deals–the odds are not quite in favor of a disruption. The same mental model applies to potential competition with SpaceX. The latter has the launch and satellite capabilities too, but it doesn’t have the specialised tech required to enable D2D communications like AST.
While anything could happen, this scenario reminds me of Spotify vs Amazon and Apple. Specialization enabled Spotify to thrive despite operating on Apple’s hardware and Amazon’s effectively infinite resources. For now I tend to believe that AST is in a position to thrive despite renting the infrastructure of vertically integrated competitors.
Lastly, though the increased launch cadence and upcoming Neutron platform do put RocketLab on a path to profitability, cash reserves are trending down, as seen in the graph below. RocketLab has been consuming $20-40M in cash per quarter over the TTM. And although cash consumption came in at $2.4M in Q4 2024 due to increased space systems payments collection, it’s expected to double from last year’s levels as RocketLab intensifies investment to raise Neutron.
Thus, despite notable progress, RocketLab continues to deplete its cash reserves. Much like AST, it remains a risky investment with no clear timeline for turning cash-flow positive. Regardless, I remain impressed with the execution of both companies, and I believe both are tracking to become platforms with vast high-margin end applications. I continue to track both companies quarterly.
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Interesring,are they competitor with spacex?