Do not say you were not warned.

In June, I highlighted a change in the Pentagon's plans for its Space Based Infrared System (SBIRS) -- a set of massive five-ton early warning missile detection satellites circling the Earth in polar and geostationary orbits -- as posing a risk to the space businesses of both Lockheed Martin (LMT -0.21%) and Northrop Grumman (NOC -0.19%).

Both companies had earlier won multibillion-dollar contracts to build and launch these satellites, but the Pentagon decided to cut its order from Lockheed Martin from three satellites to just two.

That might not sound like a big change, but because these satellites cost so much, it arguably cost the defense giant as much as $4 billion in expected revenues. Even more important was why the Pentagon decided to reduce the size of that order: Small satellites with small price tags are replacing bigger satellites with enormous price tags.

Why small satellites are a big deal for investors

This trend has been nearly a decade in the making. Way back in 2016, I got my first indication of the change taking place, when an interview with Vector Space Systems' then-CEO Jim Cantrell revealed just how cheap small satellites had become. Whereas Lockheed's SBIRS satellites cost roughly $4 billion apiece, Cantrell pointed out that he was building a small rocket that could be launched economically to serve the growing demand for small satellites that cost as little as $25,000 to build.

Admittedly, that was the price to build a bare-bones satellite with limited capabilities -- and a price now nearly 10 years out of date. But in a recent conversation with Firefly Aerospace CEO Jason Kim, I learned that even much more technologically robust satellites (capable of detecting missile launches, for example), and massing up to half a ton rather than a few pounds, can now be built at a cost of between $15 million and $50 million.

That's a far cry from $4 billion.

The trouble with big satellites

Beyond their relatively tiny price tags, small satellites offer another advantage over large satellites: It would be much tougher for an adversary to take out a lot of little satellites than it would be for them to disable a single big one. And with a growing number of hostile nations developing anti-satellite weapons, that is a detail of great significance to the Pentagon: Its most modern missile defense system, the Proliferated Warfighter Space Architecture (PWSA), is specifically designed around the premise of deploying hundreds of small satellites for a cost equivalent to just one big one.

Nor is the Pentagon alone in recognizing the advantages of small satellites. As Reuters reported earlier this month, U.S. ally Australia just canceled a multibillion-dollar single-orbit military satellite project with Lockheed Martin. The Australian Department of Defence specifically stated that it would pursue a multi-orbit system comprising lots of little satellites instead.

The contract in question, valued at $5 billion according to SpaceNews, would have put one single communications satellite in orbit initially, with the potential for the system to eventually be expanded to a constellation of three to five satellites. That could have meant as much as $20 billion in revenue for Lockheed Martin. Based on the 8.9% operating profit margin of Lockheed's space division, that would have generated nearly $1.8 billion in profit.

Now, Lockheed will get none of it.

Hope springs eternal

Or will it? As already noted, in the U.S., the trend is away from deploying small numbers of billion-dollar-plus satellites in favor of launching dozens or hundreds of smaller and cheaper ones. But Lockheed Martin builds small satellites, too.

In fact, after snapping up subcontractor and satellite-builder Terran Orbital for a bargain price in August, Lockheed Martin today is arguably better positioned than ever to bid for the contract on whatever small-satellite communications system Australia wants. Admittedly, Lockheed probably wouldn't get paid as much for this work as it would have been for the large-satellite communications system Australia no longer wants. It would have to sell about 250 small satellites at $20 million a pop to replace the revenue from one lost order for a large $5 billion satellite.

But getting that business would at least lessen the sting of losing the big contract.

Lockheed Martin's biggest worry at this point should be to price its next bid right, lest it lose out to Rocket Lab (RKLB -4.29%) -- a formidable maker of small satellites and small rockets in its own right that happens to be located right next door to Australia in New Zealand.