By William Gavin and Barbara Kollmeyer

The red-hot space sector was feeling some heat on Friday, cooling from some of the spectacular gains seen in May

An image grab obtained on May 29 from UGC video content on the X page of @JConcilus and shared on social media shows Blue Origin's New Glenn rocket exploding during a test flight on May 28 in Cape Canaveral, Fla.

The red-hot space sector was feeling some heat on Friday after the dramatic explosion of a Blue Origin rocket, with shares of AST SpaceMobile having their worst day in more than two years.

Adding to the gloom was a Bloomberg report that SpaceX (SPCX) is now targeting a valuation of $1.8 trillion, down from $2 trillion. The space sector has been on a tear since Elon Musk's company officially filed to go public last week.

What's more, a rocket being tested by Jeff Bezos's Blue Origin dramatically exploded on a launchpad at Cape Canaveral, Fla., late Thursday, lighting up the skies for miles around Florida's Space Coast.

That follows last week's partially successful first test of SpaceX's third-generation Starship megarocket, which showed the vehicle deploying 20 dummy Starlink satellites. But the vehicle suffered a few issues during the flight and ended the test with an explosive splashdown in the Indian Ocean. The Federal Aviation Administration is requiring an investigation before Starship can be launched again.

Space-sector stocks rose on Tuesday, the first trading day following the SpaceX test, but were dropping fast on Friday. The difference, explained Micah Walter-Range, the president of space consulting firm Caelus Partners, is that SpaceX had already achieved its goals before Starship's incident.

Blue Origin, on the other hand, was conducting a standard static fire test that appears to have resulted in a lot of damage. Still, Walter-Range said Friday's market action was an "overreaction."

Shares of satellite-to-mobile connectivity company AST SpaceMobile (ASTS) fell as much as 21% on Friday, before losses were pared back to nearly 15% at the close. The stock, which closed at a record high of $133.09 a share Thursday, was still up by about 53.5% in May, according to FactSet data.

Launch- and satellite-systems provider Rocket Lab (RKLB) saw its shares fall 3% Friday, while space-exploration company Intuitive Machines' stock (LUNR) ended the day with a 4% decline. Shares of launch provider Firefly Aerospace (FLY) dropped 6%, and space-infrastructure provider Redwire's stock (RDW) fell 5%.

Aerospace manufacturer Karman's shares (KRMN) dropped more than 12% Friday, partly due to the Blue Origin mishap. Meanwhile, satellite company Planet Labs' stock (PL) fell nearly 13% on Friday before those losses were almost entirely clawed back by the close.

Shares of the Procure Space ETF UFO were down 3.6% at Friday's close. That comes after the ETF recently crossed a milestone of $1 billion in assets under management as investor interest in space has increased. May is set to be the ETF's best month since November 2024, according to Dow Jones Market Data.

"If people were looking to sell, OK, here's a negative headline for sure," said ProcureAM CEO Andrew Chanin. "But this is far from a structural contagion of any sort for the overall space economy."

See more: Jeff Bezos says Elon Musk's timeline for data centers in space is 'probably not right'

Blue Origin has emerged as one of the few rivals to SpaceX with its New Glenn, a partially reusable 322-foot rocket. Thursday's incident puts a damper on Blue Origin's recent string of successes, including its largely successful New Glenn launches. Just days ago, the company won a fresh contract from NASA to deliver payloads to the moon no earlier than this fall.

In a post on X, Bezos said that all personnel were "accounted for and safe," and that Blue Origin is working to figure out what went wrong with the launch. NASA Administrator Jared Isaacman said in a statement that the agency will support the investigation.

"Spaceflight is unforgiving, and developing new heavy-lift launch capability is extraordinarily difficult," Isaacman said.

The incident adds to the uncertainty surrounding the few early rivals to SpaceX's Starlink. Both Amazon (AMZN), which Bezos founded, and AST are relying on New Glenn to launch their satellites to low-Earth orbit. Each has planned to begin commercial service as soon as this year.

AST SpaceMobile did not immediately return a request for comment.

Less than 48 hours before the mishap, Blue Origin said it would launch 48 Amazon LEO satellites during its fourth New Glenn mission. The third mission had carried an AST BlueBird satellite, which was incorrectly deployed and later deorbited.

Amazon said that it has at least three launches scheduled for the next few weeks, including one that could kick off as soon as Friday with the United Launch Alliance's Atlas V rocket. Amazon said it also expects ULA's Vulcan rocket to soon become available after it was grounded earlier this year.

AST President Scott Wisniewski said on an earnings call earlier this month that his firm is "optimistic" about Blue Origin and its return to the launch pad after the third New Glenn mission. He also noted that his company has contracted some launches with SpaceX, which plans to send a few BlueBird satellites to orbit in June.

For Amazon, the Blue Origin debacle adds to a lengthy list of issues stemming from its launch partners. It's contracted at least 24 launches with New Glenn - more than it has purchased from all but one launch provider, ULA, according to a regulatory filing.

In January, Amazon asked the Federal Communications Commission to extend its deadline to deploy half of its planned satellite constellation by July 30. Amazon cited, in part, delays associated with partners ULA, Blue Origin and Arianespace for it falling behind on its plans.

Tim Farrar, a satellite-communications consultant, on X said that AST's commercial service could be pushed back to a 2028 launch as a result of the Blue Origin incident. However, William Blair's Louie DiPalma said in a note to clients that carriers and investors will likely forgive AST for the delays if its service "proves exceptional." Still, DiPalma doesn't recommend investors buy the stock, as he rates it at a market-perform rating.

Farrar also estimated that, assuming it takes Blue Origin around 15 months to repair its launch pad, Amazon could be delayed on plans to launch some 300 satellites or more.

Recovering from Thursday's incident will likely be costly. Bezos said last week that Blue Origin is considering bringing on other investors for the first time. Bezos has been footing the bill for the company since he founded it in 2000, mostly by selling Amazon stock.

"It's a good time, actually, to start thinking about the future and bring on some other outside investors," he told CNBC.

The mishap isn't great news for SpaceX either. "SpaceX needs some form of competition. They don't want antitrust problems," noted Pierre Ferragu, an analyst at New Street Research who covers a range of companies, including Musk's Tesla (TSLA).

See more: How the Globalstar purchase could turn Amazon's Leo into a satellite powerhouse.

-William Gavin -Barbara Kollmeyer

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Space stocks tumble after a Blue Origin rocket explodes and SpaceX's valuation gets a reality check