Rocket Lab Wins Share of a $46 Billion Defense Contract. How Big a Share? Well...

It's been two weeks now since Rocket Lab (NASDAQ: RKLB) announced the big news that it was included in a $46 billion (headline value) contract "to provide hypersonic test launch capability with its HASTE launch vehicle ... for the United States and the United Kingdom." For a tiny space company that did just $436 million in business over the last 12 months, you would expect that kinda news to have a big effect on the stock price. And it did.

Just perhaps not quite as big an effect as you would expect.

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$46 billion contract, 15% gain

Over the two weeks since the contract was announced, Rocket Lab's stock price has jumped about 15%, most of which came on the day immediately following the announcement. It's a substantial advance for the space stock-turned-defense contractor, but perhaps not as big as a $46 billion contract win would ordinarily imply.

And why not?

Well, when you read the fine print of the deal, you will see important bits like:

"Rocket Lab has been selected by the U.S. Air Force to participate within its Enterprise-Wide Agile Acquisition Contract (EWAAC), a $46 billion indefinite delivery-indefinite quantity (IDIQ) contract designed for the rapid acquisition of innovative technologies, engineering services, and technical solutions."

So right off the bat, we see here that the $46 billion value isn't set in stone. It's dependent upon a sufficient number of task orders being awarded, and for sufficient numbers of dollars per order, under the larger IDIQ umbrella contract. Moreover, Rocket Lab is only one of many companies that will "participate" in this umbrella contract.

In fact, if you dig a little deeper and search for details on EWAAC, what you'll discover is that a total of 297 separate vendors will be bidding to perform work on the EWAAC contract. Rocket Lab is only one of these companies. So if, hypothetically, each participant wins a proportional amount of work, Rocket Lab's own share of the funds might be as little as $155 million.

And if you search a little more, you may discover that EWAAC is expected to run through 2031. That makes this a seven-year contract; divided into $155 million, this implies that Rocket Lab's share of the work could in fact be as little as $22 million per year.

Details, caveats, and provisos

Now don't get me wrong. That $22 million is still a very respectable number, representing roughly 6% of the revenue Rocket Lab currently makes in a year. And there's every reason to believe that a leading company in the space industry like Rocket Lab, currently the second most prolific rocket launcher in America (after SpaceX) might win a disproportionate amount of the funds on offer under EWAAC.

It's just that that's not guaranteed to happen.

It's also worth noting that other participants in EWAAC have even more market heft to throw around than does Rocket Lab, and are correspondingly just as likely, or even more likely, to win disproportionately large shares of the funds on offer. Among the aerospace and defense stocks that Rocket Lab will be competing with are such giants as Boeing (NYSE: BA), L3 Technologies (NYSE: LHX), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), and RTX (NYSE: RTX).

Image source: Getty Images.

Is Rocket Lab stock a buy?

So good news and bad news for Rocket Lab, and there's even more good news to tell. In addition to its work on EWAAC, Rocket Lab announced last month that it will be participating in the United Kingdom's Hypersonic Technologies & Capability Development Framework (HTCDF). Smaller in size than EWAAC, HTCDF also poses less competition for Rocket Lab, as only about 90 companies are expected to be competing in this one. HTCDF is, however, also a much smaller program, valued at just $1.3 billion.

Divided 90 ways, that makes it worth less than $14.5 million per participant, assuming the monies end up divided equally, and not weighted to favor U.K.-based contractors such as BAE Systems (OTC: BAES.Y). And spread over a seven-year contract, the likelihood is that this is probably only about a $2 million-per-year program for the winners.

Anyway, that right there basically sums up the worst-case scenario for Rocket Lab: $22 million plus $2 million means the company can reasonably expect to add $24 million to its annual revenue stream across these two hypersonic weapons contracts.

It's better than nothing, I suppose, but despite the size of the headline numbers, I don't think it's necessarily going to move the needle for Rocket Lab, or accelerate its growth rate dramatically.

And unless Rocket Lab ends up winning far more contract value than average on these contracts, I don't think a 6% improvement in annual revenue necessarily makes Rocket Lab stock a better buy than it was before the contracts were awarded.

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Rich Smith has positions in Rocket Lab USA. The Motley Fool has positions in and recommends L3Harris Technologies. The Motley Fool recommends BAE Systems, Lockheed Martin, RTX, and Rocket Lab USA. The Motley Fool has a disclosure policy.