Market Update - To infinity and beyond – investing in space
To infinity and beyond – investing in space
We’ve now seen two billionaires blast themselves into space: Richard Branson’s company Virgin Galactic undertook a successful manned flight with its VSS Unity space craft on 11th July, beating Amazon’s founder Jeff Bezos by just over a week. However, the Virgin Galactic flight hit an altitude of around 54 miles, well below Bezos’s Blue Origin New Shepard rocket which rose 66 miles up from the Earth’s surface. We will have to wait a bit longer before Elon Musk attempts his stated ambition – a manned mission to Mars.
You can’t be serious
But why the interest in space? Is this a serious venture, or just the latest in billionaire one-upmanship? With Branson, it looks as if he wants to make money out of space tourism – a short and reassuringly expensive joy ride for the rich. The current version of VSS Unity holds four passengers and two pilots. So far, Virgin Atlantic says it has around 600 ticket reservations for future flights, with each costing between $200,000 and $250,000 each. The company believes there’s a market to carry as many as 2 million people on spaceflights and that the market could expand when costs fall. Bezos has his eyes on something more dramatic: he is looking to push heavy industry off Earth and into space, and ultimately colonise the solar system. He’ll certainly want to get something back on his investment. He founded Blue Origin in 2000 and has been funding the company by selling $1 billion in Amazon stock each year.
We already know what Musk’s ambition is, and it’s likely to be some years away. There’s little doubt that his company, SpaceX, is remarkably innovative. It was the first company to launch a payload into orbit, then land its rocket back on Earth. It was also the first to re-launch a used rocket, and first to develop a workable plan for colonizing Mars. The latter venture is the ultimate prize for Musk, who has said his biggest concern is that SpaceX gets: “taken over by investors who just want to maximize the profit of the company and not go to Mars." But Musk has other ways of profiting from space. His Starlite project aims to bring internet access to every inch of the globe by surrounding Earth with thousands of satellites to provide connectivity. Members of the public involved in initial tests have consistently reported speeds faster than 150 megabits per second, faster than SpaceX promised. For Musk, the biggest challenge is making the Starlink kit widely affordable.
The future of space
All three billionaires are the most prominent figures fighting for a share of the space market. According to Morgan Stanley this could be worth more than $1 trillion in annual sales by 2040, tripling in size from current levels. Growth should be led by space tourism, moon landings and satellite broadband Internet. But will space tourism really prove to be a significant piece of the space market? This is crucial for Virgin Galactic. Not only is this its prime business, but it also has competition from both Blue Origin and SpaceX, who plan to offer commercial flights into space next year. Boeing is also understood to be considering entering the market. It seems more likely that the vast bulk of the opportunities will continue to be related to the satellite industry. The market is expected to mushroom as the cost of launching them continues to fall sharply as rocket technology improves, helped by SpaceX’s reusable rockets. Morgan Stanley estimates that satellite broadband will make up 50% of the projected growth of the space economy by 2040, or even 70% in the most bullish scenario.
But what are the investment opportunities for the rest of us? One of the problems is that many space-focused companies, including Blue Origin and SpaceX, are still privately owned. This makes it difficult for retail investors to get exposure to these pioneering companies. Meanwhile, investors in Virgin Galactic have had a bumpy ride recently. Analysts warned that its share price was overcooked ahead of the flight in July. Then, on completion of the successful trip the company announced that it was selling over 10 million shares to raise $500 million. The news saw the stock price crater by 17%, not the result shareholders were looking for. In fact, Virgin Galactic is proving to be a volatile holding this year. That’s not to say that it should be ignored by investors. After all, it has the technology to launch its spaceplane from a mothership, rather than blasting off straight from Earth. Direct investing is understandably risky, and difficult. But there’s always the indirect method. Alphabet (Google’s parent company) owns a 7.5% stake in SpaceX. So, a holding in Alphabet will give you a sliver of exposure to Musk’s company, and you’ll also own a bit of Google, YouTube, the Android operating system, as well as Alphabet’s artificial intelligence unit.
There are a few Exchange-Traded Funds (ETFs) with some space-related holdings. These include Procure Space, Space Exploration and Innovation, and Kensho Final Frontiers. These have been recently eclipsed in terms of assets raised by the newest space fund on the block, Seraphim Space. Unlike the ETFs Seraphim is the first actively managed fund to provide a way for the average investor to gain exposure to the space. The trust floated on 14th July after raising £178.4m, beating its £150m target. The plan is to invest in space-related companies in their growth-stage. This means investing in companies currently in private hands and involved in connectivity, navigation, precision, and other technologies related to the space sector. As with all funds it’s vitally important to know what’s inside them. Most include Virgin Galactic as a significant proportion of their exposure. They also include companies which on first inspection may have a tenuous connection to space, including Amazon, Netflix and Tencent.
The future of space
Despite the publicity-hungry billionaire boys club appearance, space exploration, and exploitation, could prove to be among the most technologically important investment opportunities in years to come. Many of the innovations which came about through earlier space ventures have found practical applications back down on Earth. There’s no reason to believe that we won’t enjoy the benefit of new discoveries in the future but picking the winners and avoiding the losers is always a hard job, even for the most technologically astute investor. It’s one thing to identify a ground-breaking idea, but a very different thing to make money out of it. As always, make sure you diversify and understand the risk potential of any investment, up there or down here.