Investing in the Future Interplanetary Economy
The 1957 - 1975 Space Race between the US and The Soviet Union has always been framed in history as this competitive, egotistical race between two ideologically conflicting nations; but as the world expanded and advanced, I read about it in retrospect and began to realize that in substance, it was just an early display of technological nationalism. A mirror image of what we see today in the trade and IP conflict between the US and China. If you examined what was beneath the surface, it was a fight for dominance and market share in industries that were still decades away in the making. Since the dawn of time every war known to us has been steered by the underlying desire to colonize space (both digital and terrestrial) and amass infinite resources. Nothing has ever served as a greater indicator of value than what man is willing to fight for. The space race of this decade is no different. From dominant private companies like Blue Origin, Spacex, Scaled Composites, it is a race of competing visions of who will extract the most value from the space economy first. But it begs the question of what stake and seat at the intergalactic table is open for ordinary investors? With all the greatest innovators in the industry being private companies, the primary curiosity I have always had, is how can the layman position himself to win in this exclusive, foreclosed and almost non-existent market?
There are a plethora of ideas, investment vehicles and investment theses detailing how the interplanetary economy will be built and what the optimal strategy is to profit from it. But my confidence lies in a strategy that has no imaginative bounds. If you were to close your eyes and think of what a thriving interplanetary society would look like, you would see the image of an advanced civilization at its optimal development, that has adapted terrestrial industries like mining, agriculture, transportation, tourism, construction, security, communication, and defense into trillion-dollar space empires. And that is where the true value lies… in the interconnected nature of the entire space value chain. The premature timing and lack of opportunity to directly invest in the most premium space companies, should not preclude ordinary investors from building a portfolio and maximizing returns that currently come from the synergistic benefits and network effects of the industry as a whole. The space industry is an intricately woven one, with beneficiaries that extend across the entire value chain, most of which can provide an investor with indirect exposure to even the top private space companies, by virtue of the holding company invested in a private space company, or contracts and partnerships between different companies.
Investing in Possibility
To the short sellers and the pessimists, a thriving interplanetary economy can sound like a pipe dream that is backed by little to stagnant progress in the industry. But let us revisit the dominant mindset of ordinary people and specialists alike in the 1960’s, during the early years leading up to the moon landing. According to data and records kept by NASA, space exploration through Project Mercury and Project Gemini meant sustaining a spacecraft for over 386 000 km; it meant having the necessary infrastructure for launch operations and communication; as well as the capabilities to manufacture efficiently designed spacecraft that could sustain human life over the course of the trip. In Historical Studies in the Societal Impact of Spaceflight, Dick shares a study that found that only 3 of 113 non-NASA scientists believed it was possible to travel to the moon at the time, and public sentiment was no different. And yet, as JFK predicted prior to his passing, that America would place a man on the moon before the end of the decade, in 1969 the monumental event finally took place. I mention this to illuminate how progress is a precursor for probability and profitability, and betting against human ingenuity is a losing game. If the world’s richest man Elon Musk believes the first human landing on Mars will take place in 2026, and renowned astrophysicist Neil DeGrasse Tyson believes the first trillionaire will be in asteroid mining, I think we are closer to radical deep tech breakthroughs in space than we actually think.
The starting point of investing in space is understanding where current progress and future possibilities intersect, as this allows us to identify the relevant segments of the value chain and invest in the companies linked to the most disruptive ideas before they are widely acceptable, and at relatively low entry points and valuations. A few important milestones and notable advancements worth paying attention to include:
The prospecting, exploration, and mining of resources in space is increasingly becoming a possibility because of NASA based grants, venture capital investments and initiatives to support innovation in the industry. In the manifest for the Artemis program, NASA details a 2028 timeline for establishing the first lunar outpost. Some of the mining-adjacent progress is being pioneered by start-ups that are testing out robotic drilling systems such as Honeybee robotics and university scientists testing Mars exploration drones. In addition to this, NASA in its attempts to create a space-based marketplace and commodity pricing for lunar resources, has made offers to purchase samples of rocks from the moon's surface from private companies.
In Robert’s Spaceports of the World, he describes a spaceport as a site for launching spacecraft, by analogy it is the equivalent of what seaports are for ships and what airports are for aircrafts. Spaceport America is the first site of this nature, a $220 million investment by the state of New Mexico, it houses its primary tenant Virgin Galactic, the listed SPAC and space tourism venture. The estimated timeline for commercial flights for the space travel company is 2021.
A mainstream trend in satellite launches, is the expansion of existing rocket players into communications through the launch of their own in-house satellites. like Spacex launching the Starlink constellation, Blue Origin’s anticipated launch of Amazon’s Kuiper broadband constellations and now Virgin Galactic’s prospective satellite launch through its latest SPAC: VGAC, these pose a threat to incumbent satellite operators who fear the vertical integration of big deep tech players and the monopolies they can build in the industry.
In 2018 a team of research scientists from the University of Hawaii and Brown University, worked alongside NASA experts and discovered definitive evidence that water ice exists on the surface of the moon. Researchers have since been working on extracting the water as a resource using purification techniques as well as the possibility of its adaption as rocket propellant to aid in refueling spacecraft.
These developments alongside others that have taken place in the space industry, highlight the relevance of certain segments of the value chain over others. Additionally, they also indicate the importance of space adjacent sectors such as semiconductors, IoT, big data, defense, and aerospace manufacturing, that form an integral part of bringing the technology required to make space exploration possible, to market.
Investing in space through public equities requires a slight deviation from direct investment strategies. With space mining, space travel and space infrastructure still in its infancy, and mostly comprised of private equity, the stocks that fall in this simulated portfolio may not be direct space investments but rather stock that give an investor indirect exposure to the space economy. These stocks would exhibit the characteristics of either tech stock, speculative stock and SPACs, or growth stock. So the investment approach would entail obtaining indirect exposure to the space economy by investing in the relevant segments of the space value chain. According to the OECD Space Forum, there are presently 3 potential space segments that encompass this value chain:
The Upstream Segment
Fundamental and applied research activities, scientific and engineering support activities, material, and components supply, manufacturing of space systems, subsystems and equipment, telemetry, tracking and command stations.
The Downstream Segment
Space operations for terrestrial use such as satellite technology, satellite broadcasting, GNSS enabled devices, communication technology, reliance on satellite technology.
The Space-Related Segment
Space applications, by-products and services of the space economy, spinoffs or technology transfer and data transfer
Below I have simulated a portfolio of the stocks that best fit this value chain and those that are also integral sub-sectors aligned with the space economy. In addition to that I focused on 3 I believe have additional room to run and those that are expanding their revenue models into more disruptive and beneficial space-related revenue streams that will pay off in the long term.
Iridium is a satellite telecommunications company that operates a constellation of 66 active satellites used for worldwide voice and data communication from hand-held phones and other transceiver units. Despite the impact of the pandemic on the space industry, Iridium's share price has appreciated by 77%, with leveraged CFC growth of 1755.33% and an EBITDA growth rate of 205% in 2020. Additionally Iridium managed to grow its subscriber base by 13% when it comes to commercial customers and 8% when it comes to government, which indicates its stability even in the most volatile economic environment. Outside of its appeal as a pure space play, Iridium stands out to me because of the efforts it has made in its expansion into IoT. In 2020 the company launched Iridium Solar Edge and a global maritime distress and safety system service. Iridium Solar edge is a solar-powered remote asset tracking and management device used for vessel monitoring, freight shipper tracking and fisheries management, this product further facilitates its expansion into IoT devices and services and thus further diversifying Iridium's revenue streams.
In 2020 the value of the computer chip industry surpassed that of the oil industry. According to Forbes, the 30 largest semiconductor companies in the world are now worth $2.5 trillion combined. Every modern system, advanced form of machinery and device known to man runs on semiconductors, and Nvidia is the company at the forefront of fueling every future disruption, after overtaking intel as the largest American chipmaker. Nvidia, the inventor of GPUs, is a technology company specializing in both semiconductors and AI. In 2018 researchers at Nvidia's robotics lab developed a new algorithm called 6-DoF GraspNet, that allows robots to grasp arbitrary objects, this is but one of the several projects Nvidia has worked on that has the potential to expand and advance the capabilities of machinery and robots used in space. In the past year, the company's share price has shot up by 109%, with a gross profit margin (TTM) of 64% and an impressive EBITDA margin (TTM) of 34%, Its revenue growth in the past year amounted to 47.50%, which was heavily fueled by its AI wing.
Virgin Galactic is the first commercial space company to list, that specializes in space travel. A highly speculative stock, with a low entry point, the appeal with virgin galactic is in its room to run based on the projected progress the company estimates will take place between 2021-2022. For many people, Virgin Galactic exemplifies what is wrong with the market. It’s a company that has zero revenues with a market cap of $7 billion. But the market has been more accommodating to SPAC stocks and the speculative value attached to them. Whilst the company should remain as a speculative play in one's portfolio, Virgin Galactic does not have to achieve profitability to unlock near-term shareholder value. Because of its first mover advantage, any success Virgin Galactic enjoys in space travel will translate into share price appreciation for its shareholders. Virgin's major products that are in development include the VSS Unity shuttle and the Mach 3 aircraft. The space shuttle could cost up to $250 000 per ticket with an anticipated 2021 launch. With share price appreciation of 105% in the past year, Virgin is a complete speculative play, that doesn't require profitability to create shareholder value, any news in advancements, progress, successful launches and interest by bigger funds into space will drive the stock upwards. It is also important to mention Chamath Palihapitiya, the chairman of Virgin Galactic sold 3.8 million shares of SPCE in December 2020, to help fund several new projects he is working on.
By Milisa N Mabinza