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An investor’s guide to space, Wall Street’s next trillion-dollar industry - CNBC

NOVEMBER 10, 2019

BY   Michael Sheetz@THESHEETZTWEETZ


KEY POINTS

  • Space tourism venture Virgin Galactic debuts with much fanfare at the New York Stock Exchange last month, with institutional investors taking notice.
  • CNBC simplifies investors’ opportunity in space into four categories: Human spaceflight, national security, satellite communications, and imagery and data analysis.
  • “While [the feedback cycle] might take a bit longer, I do think it will have the same return on your investment as a software company,” Bessemer Venture Partners’ Tess Hatch tells CNBC.

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(This story is part of the Weekend Brief edition of the Evening Brief newsletter. To sign up for CNBC’s Evening Brief, click here.)

The space industry is in the middle of a widespread transformation, as the last decade has seen a number of young companies begin to seek to profit in an area where most of the money was made from military contracts or expensive communications satellites.

The estimated $400 billion space economy is still largely dominated by large aerospace and defense companies, serving government-funded interests. But investors say that’s changing, with Morgan StanleyGoldman SachsBank of America and UBS each issuing frequent research for clients on how the space industry is growing. Wall Street’s consensus is that space will become a multitrillion-dollar economy in the next 10 to 20 years — a view investors today are banking on.

“It’s absolutely a viable industry to invest in, just like software,” Bessemer Venture Partners’ Tess Hatch told CNBC. Hatch has led Bessemer’s investment in several space companies, sitting on the board of Rocket Lab and satellite company Spire Global, among others.

As both aerospace giants and private capital continue to invest billions of dollars in new technologies and opportunities, public investors should know the biggest players in the space business.

This is your guide to investing in space right now, with insight on the top space companies from analysts and investors.

Handout: SpaceX Falcon 9 Block 5 first launch 180515

SpaceX launches the first Block 5 version of its Falcon 9 rocket for the Bangabandhu Satellite-1 mission.

SpaceX

Shannon Saccocia, chief investment officer at Boston Private, told CNBC she recognizes the space industry is largely government-driven at the moment and is looking for more companies to come to market.

“I think that space is more than just a government-funded pursuit; it needs to be more of a privatized venture. My hope is that this will fund some additional social impact,” Saccocia said. “There is a desire for this to be treated more as an opportunity for companies to benefit the social good, rather than something that needs to be protected from a national security perspective, which I still think that space falls into that paradigm.”

There are a number of ways to categorize space companies, as the industry bleeds over into a variety of other sectors. For the purpose of this guide, CNBC simplifies investor opportunities into four categories: Human spaceflight, national security, satellite communications, and imagery and data analysis.

Additionally, each of those categories includes three different types of companies: Public companies that are purely space-focused, public companies with exposure through a significant space subsidiary and private companies that soon may either go public or spin off divisions.

Here’s what you need to know.

Investing in human spaceflight

While Boeing and Lockheed Martin both have legacies in human spaceflight, Virgin Galactic is the first publicly traded company focused on flying people to space as its primary business. Virgin Galactic debuted with much fanfare at the New York Stock Exchange last month, with institutional investors taking notice.

Renaissance Capital’s Matt Kennedy, a specialist in IPO strategy, told CNBC much of the initial excitement around Richard Branson’s venture was “because it was the first publicly traded space tourism company.”

H/O: Virgin Galactic first flight gif SHEETZ 191101

Virgin Galactic’s spacecraft Unity heads to space for the first time.

Virgin Galactic | gif by @thesheetztweetz | CNBC

“This is extremely significant for the space community, as — other than Skybox being acquired by Google and MDA acquiring Digital Globe — this is really the third liquidity event in the space industry and it’s another invitation for investors to invest in the space sector,” Hatch said. “This is just the first step for many, many other larger and more significant space opportunities.”

Virgin Galactic shares similarities with two other space ventures built by billionaires this century: Blue Origin and SpaceX. The former is also developing a rocket for space tourists, while the latter plans to use its massive Starship rocket as a means of traveling from one place to another on Earth quickly, known as point-to-point space travel. Virgin Galactic recently announced an investment from Boeing, as the venture is looking at whether it can mature its space tourism technology and build rockets capable of point-to-point high-speed travel.

“The thing to note about space is that the feedback cycle is a bit longer,” Hatch said. “While that might take a bit longer, I do think it will have the same return on your investment as a software company.”

Neither SpaceX nor Blue Origin plan to go public any time soon. But it would be a mistake to miss the impact the companies of Elon Musk and Jeff Bezos have had on the industry. SpaceX has become the most active U.S. rocket launcher, significantly reducing the cost of launching satellites while also proving it can reuse the most valuable parts of rockets by landing the boosters. SpaceX has also been working on a capsule known as Crew Dragon, aiming to begin launching astronauts to the International Space Station for NASA next year.

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Although Blue Origin has yet to fly people, the company has taken what it’s learned from its space tourism program and applied it to a variety of ambitious spaceflight endeavors: Developing a powerful yet reusable rocket engine, building a massive new rocket and leading a bid to fly cargo and people to the moon for NASA on a lunar lander.

Lockheed Martin joined Blue Origin’s lunar lander initiative and has also been building the Orion capsules for NASA’s deep space missions. NASA has already committed to buying six Orion spacecraft from Lockheed Martin for a minimum of $4.6 billion — and the agency may plunk down even more money in the future.

Boeing, like SpaceX, is developing a capsule to fly NASA astronauts to the space station. Boeing will get as much as $4.2 billion from NASA to build the spacecraft, called Starliner, to end the United States’ dependence on flying with Russia to get people to orbit. Additionally, Boeing is the prime contractor for NASA’s Space Launch System, or SLS, an immense rocket intended to send astronauts to the moon and more. But SLS is several years behind and billions of dollars over budget in development, with a recent White House budget document noting that it will cost more than $2 billion per launch.

Lastly is NanoRacks, a private company that focuses on a variety of human spaceflight opportunities ranging from research to space station habitats. NanoRacks has a wide swath of customers as well, ranging from NASA to the European Space Agency to a number of private U.S. companies.

Investing in national security space

While human spaceflight may be the most esteemed part of the industry, building and launching spacecraft for the U.S. military has long been a consistent line of business for many defense companies. Because of that, other than Aerojet Rocketdyne, the space divisions are only a small part of most public companies in the national security category.

“A lot of them are getting maybe between 5% and 20% or so of their revenues from space-related activities,” said Andrew Chanin, co-founder and CEO of Procure AM, a firm that earlier this year issued a space-focused exchange traded fund, or ETF, called UFO.

Aerojet Rocketdyne focuses on propulsion systems for a variety of military and commercial rockets and spacecraft. The company’s stock has had a solid year, up more than 25% on the back of continued sales growth of its rocket engines. In 2018, billionaire investor Mario Gabelli identified Aerojet Rocketdyne as one of his top stock picks, noting CEO Eileen Drake “has done a fantastic job of running this company.” But last year Aerojet Rocketdyne lost out to Blue Origin when bidding its AR1 engine for United Launch Alliance’s new Vulcan rocket. Despite the missed opportunity, Aerojet Rocketdyne’s most recent quarterly report said it expects to see 2019 as another year of sales growth.

Northrop Grumman last year bought Orbital ATK, one of the top suppliers of solid rocket motors, and renamed the company Northrop Grumman Innovation Systems. Beyond building spacecraft to send cargo to the International Space Station, Northrop’s space unit is also developing its OmegA rocket for a competitive batch of U.S. Air Force launch contracts.

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United Launch Alliance, or ULA, is a joint venture owned by Boeing and Lockheed Martin. Before the arrival of SpaceX as a challenger, ULA was the sole provider of U.S. Air Force launches for several years.

Space is only a minor part of what most companies in this category do, as Chanin explained the barriers to entry are lower for defense giants.

“One of the big pieces, before the government is signed off on a contract, is the background checks and due diligence on the actual companies, making sure that they have the proper safeguards in place,” Chanin said.

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Therefore, on quarterly reports, several companies either don’t break space out as a separate business unit or include it within its aerospace business. Those companies include HoneywellRaytheonL3Harris Technologies and Ball Aerospace — all of which book millions of dollars in space revenues each quarter.

“That said, not every company can specialize in every single space business, and that allows for the opportunities for companies like SpaceX and Blue Origin to make appealing cases for why their company should be considered,” Chanin said.

Sierra Nevada Corporation, or SNC, is another private company that should not be overlooked. As is the case of other defense contractors, space is only a part of what SNC does. But the company has steadily built its space business, with its reusable cargo spacecraft Dream Chaser as one of the most visible parts.

“What we’ve seen recently is the government — not just the U.S. but even abroad — is government’s willingness to work with your newer and even smaller, more start-up, the companies on that scale,” Chanin said.

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The final batch of national security companies comprises several private rocket builders. At the top of the heap is Rocket Lab, a company building and launching small rockets to specific orbits, with nine successful launches under its belt. Then there’s Virgin Orbit, a spinoff of Branson’s Virgin Galactic, which is about to attempt its first rocket launch and uses a modified Boeing 747 jet as its mobile launchpad. Finally, investors should keep an eye on both Firefly Aerospace and Relativity Space — the former is only a few months away from its first launch, and the latter is taking an ambitious, 3D printing approach to transforming the rocket manufacturing process.

Investing in satellite communication

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