While the markets tread water this week, an upturn that began as a stealth rally in mid-February has delivered over 12% for Wall Street in just over a month, bringing the DJIA and S&P 500 into positive territory for 2016. The rise could be heavily attributed to oil’s 50% move and accommodative monetary policies worldwide, given earnings expectations continue to be revised lower, now at -8% YoY for Q1’16 (FactSet data). Alongside, the emerging markets index (EEM) is up 4% YTD, and the DJ Transportation Index is also up over 20% from its lows. While things may look ok for now, it’s also worth highlighting that value is outperforming growth YTD; numerous analysts have suggested that a successful baton transfer is critical for continuing the bull market after the outperformance of growth since the depths of the recession.
In my opinion, some underperformance is fine, because growth isn’t going anywhere given the phenomenal disruption happening in numerous industries – aptly dubbed the Industrial Revolution 4.0 across cyber-physical systems led by the cloud, the IoT, data analytics, robotics, etc., which are all projected to provide a double-digit CAGR in the coming decade. Today, we’re highlighting another field to watch, and that’s space – an ‘industry’, if you will, that may be set to skyrocket for another leap for humankind (literally) in the coming years. Here’s my take on why it has so much potential:
Overview: Space, by itself, is an extremely broad concept. Essentially, we’re looking at everything above 62 miles from the Earth’s sea level – a boundary known as the Karman line. While space exploits over the previous fifty years seemed highly government-driven, the past decade has seen a new wave of collaboration in the industry, with numerous private firms driving innovation, excitement and opportunities along with the public sector. To be sure, NASA’s budget isn’t going anywhere – the $19.3 billion for 2016 is 7% higher YoY, with projects ranging up to 2035 and beyond. The European Space Agency’s budget, meanwhile, increased by 18% this year, and China, Russia and India all have extremely ambitious plans with their own programs. The US dominates overall space spending, with NASA’s $19.3 billion nearly 3x that of the ESA. What’s nice is that NASA’s budget is unlikely to be threatened – as per estimates by Scott Hubbard, a professor at Stanford and ex-NASA director, for every dollar spent on the space program, the US receives nearly 8x in economic benefits, along with a massive stimulus in kids’ interest for the STEM subjects. Scott Kelly’s return after 340 days in space two weeks ago was heavily covered by the media, and per The Economist, over 18,300 people have applied for NASA’s next astronaut class, nearly 3x that of 2012. So, all promising signs for the industry, given where talent, resources and capital go, big things tend to happen.
From a market perspective, the global space industry was approximately $322 billion in size in 2014, per the Satellite Industry Association’s 2015 annual report. While the 10-year CAGR was a robust 8.5%, I believe the next decade could deliver an even higher number, with specific sectors having the potential to shine given today’s emphasis on connectivity, technology and information. Here are some sectors to think about:
Earth Observation & Communication: The satellite sector comprises the majority of the space industry, with over $203 billion in revenues and a 9% 10-year CAGR; there’s over 1,250 of them zooming around above us as we speak. Within the sector, we have Earth observation at $1.6 billion; consumer services, including TV, radio and broadband form essentially the rest of the market, with over $100 billion in revenues. In my opinion, Earth observation is a key field to watch. With Silicon Valley’s advent into space, companies such as Planet Labs and Spire Global now have over 130 shoe-box-size satellites taking images by the second, and distributing them to clients including governments, corporations, and researchers. Imagine knowing where oil tankers are docked, which crop fields are water-starved, and what manufacturing locations are showing lights on for an additional shift. Such information would be priceless for investment purposes; importantly, it could enormously aid broader market efficiency and information transparency. As Wall Street races for the next edge, this field has serious potential given the extent of information mining possible; for reference, the International Space Station orbits the entire planet over 15 times each day – that’s a whole lot of data generated per minute. Alongside, commercial broadband via satellites has existed for a while; it saw a 6% rise in revenue over the past year, per SIA data. However, the costs remain prohibitive and a mass-adoption, in my opinion, is difficult in the short term unless there is some major breakthrough. Enter ideas such as Project Loon – a Google X venture which involves space balloons orbiting at the edge of our stratosphere and beaming down Wi-Fi to remote regions, by partnering and sharing spectrum with telecommunication firms. Currently, less than 40% of the world’s population has internet access, per data from their website; the balloons essentially connect those without access to the global internet back on land. A little closer to Earth, airlines including Delta are now offering trans-ocean Wi-Fi services via satellite as well. To summarize, the essential market need – and ‘moat’, if you will – of satellites and their corresponding services remains unparalleled. The potential for data generation and connectivity is massive – and barely tapped as of today.
Travel: Commercial aviation continues to grow at a healthy 1.5% rate above global GDP growth, per Morningstar data. But what about space? So far, less than six hundred people have traveled out there. Essentially in a vacuum, an average satellite orbits the Earth at a speed of around 18,000 miles an hour. Meanwhile, to reach orbit, NASA’s STS Space Shuttle, for example, needed around nine minutes. Doing the math, is it completely unrealistic to think that space could actually be a viable method for shuttling between cities on Earth itself? Think about the Hyperloop; Musk’s 57-page paper reveals what is essentially a frictionless tube, with air pressure aimed at being one-sixth of that of Mar’s atmosphere to reduce the drag. By all means, implementing such a principle ex-tubes is a while away – especially in space. However, given the media attention that the leisure segment of space travel is generating, it may be worth thinking about short-haul commercial applications as the natural next step. The Virgin Group’s Virgin Galactic, Jeff Bezos’ Blue Origin and others have very real plans to bring people to space in the coming years, at around a manageable $250,000; Arizona’s World View Enterprises plans to send travelers through capsules to over 100,000 feet above Earth, for approximately $75,000. The TAM of consumers would certainly be substantial for such prices. While these remain discretionary activities lasting for some hours, ventures for travel on the commercial front are very likely; Elon Musk has gone as far as to establish the goal of colonizing Mars in the next 15 years. However difficult such plans may seem, if Richard Branson, Jeff Bezos, and Elon Musk are thinking on similar lines, it’s worth paying serious attention. Importantly, elongated spans in space would need all sorts of solutions for potential bone loss, vision impairment, radiation exposure, and other health risks, as identified by NASA; this, in turn, opens the door to all sorts of new technologies and innovation from firms focused on the next frontier. More on them below.
Exploration & Research: Next, let’s tackle the research sector. We began by outlining the key role of national space organizations in exploring space. However, note that SpaceX was the first player to deliver a private cargo load to the International Space Station via its spaceship – the Dragon – back in 2008. There’s an entire fleet of firms which are key providers for such technologies; satellite manufacturing is a $15.9 billion industry, while ground equipment and launches are around $58 billion and $16 billion respectively (SIA data). And then, of course, there’s collaboration adding value; Planet Labs, for example, makes its doves hitch a ride with outbound launches by other firms rather than blasting off on its own. Last week, according to an article by the WSJ, an industry trade group of aerospace firms and government officials were in Washington to discuss a worldwide standard for navigation – essentially a global network of satellites operated by different nations. Safer and more precise skies via government and private sector collaboration…what more could one ask for? And then, there’s asteroid mining – an incredibly fascinating field, and one dubbed to be, in theory, around $100 trillion in size, per TechCrunch; firms such as Planetary Resources, backed by investors including Larry Page, and Deep Space Industries are uniquely focused on deriving value via precious metals from space rocks, while refueling using asteroid water – all by just 2025. Meanwhile, we have NASA’s Voyager 1 and 2 spacecraft, which lifted off in 1977 and still continue to transmit radio signals from the boundaries of the solar system. The information gained through such continuing missions is just enormous. We conclude by highlighting the reusable rocket – among the most important subjects for the future of the industry, and one so powerful that it has been dubbed the ‘holy grail’ of space travel, per space.com. Essentially, previous shuttle missions – which had to deal with expensive single-use equipment – costed anywhere around $1 billion; launches needed well over $100 million. However, 2015 saw major breakthroughs in reusable rockets, with the success of Blue Origin’s New Shepard followed by SpaceX’s Falcon 9; the latter’s launch costed only around $60 million, per DefenseNews. Elon Musk has estimated that reusable rocket launch systems could reduce the cost of spaceflight by a factor of 100. That’s a serious game changer. With such initiatives and rapid progress, one can only imagine the potential the private sector can realize through research and exploration in the coming years.
The Players: And now, the investment perspective. We begin with the usual innovation suspects. Jeff Bezos’ vision is phenomenal, and although Blue Origin is private and not, per say, owned by Amazon (AMZN), one could reason that Amazon will gain in one way or the other through such ventures by its CEO. With over $107 billion in revenues last year, there’s plenty of cash for Amazon to fund future innovation, including space ventures, if Blue Origin takes off. Alongside, we have Alphabet (GOOG) with its Project Loon – probably with other space ventures in Google X that we don’t even know about. Alphabet remains another solid bet for future growth in diversified fields, including space; the firm remains the among the most feared competitors for CEOs of practically all industries, while only trading at 19x forward earnings. Facebook (FB), meanwhile, is involved with space through its Free Basics mission, in which it has collaborated with Eutelsat for renting satellites to bring the internet to parts of Africa. Although Facebook has a $320 billion market cap, it trades for only 30x forward earnings with a 3-year revenue growth rate of 52%; it has every incentive to build on its massive social platform through space with the mission to connect everyone. Eutelsat (ETL.PA), itself, is a 20-year old French company with a $6.6 billion market cap and an operating margin of 44%, already providing broadcast and media services through 37 satellites; one could expect it to come closer on Wall Street’s radar if such partnerships work out. ViaSat (VSAT) is another interesting space play. As a $1.4 billion provider of wireless applications and services for satellites, private networks and governments, its focus on commercial aeronautical Wi-Fi and long-ended government contracts makes it interesting given an environment of increasing surveillance and the need for a decent connection while traveling. While the competition is fierce in this space, its contracts make it worth thinking about.
In to the rocket sphere, while SpaceX is a private firm, Orbital ATK (OA) is a $5 billion competitor that develops aerospace technologies and products; it recently signed an 8-year contract with NASA to supply the International Space Station, and has stated the ability to recycle old satellites as well; trading at 14x forward earnings, Jeff Moser of Wells Fargo recommended it a couple of weeks ago in Barron’s, citing reliable earnings and low volatility. Aerojet Rocketdyne (AJRD) is a rocket and propulsion manufacturer; per its 2015 annual report, the total contract backlog grew over 20%, and the firm is working on the Orion propulsion system to carry people farther into space and for longer spans, significantly outperforming the technology that carried the Apollo missions.
On the Earth observation front, DigitalGlobe (DG) is an interesting firm with a market cap of approximately $1 billion; according to CNBC contributor Constance Gutke, it recently won contracts with Yahoo and Apple, and already operates five satellites with Google; Planet Labs and Spire Global, its competitors, are still private. Intelsat SA (I) is another general space play given its involvement across the whole spectrum through services and consulting. It has lost nearly 80% of its stock value over the past year, but its forays into broadband connectivity and recent collaboration with Gogo (GOGO) are worth watching for value.
Among the large caps, we have Boeing (BA), Airbus (AIR), Kratos Defence (KTOS), and others involved with space. Boeing is working on its own CST-100 spaceship, with the ability to carry up to seven astronauts; it also got over $4 billion worth of NASA funding last year. Lockheed Martin (LMT) has a stated focus on deep-space exploration. Last year, it bought Astrotech Space Operations, a satellite launch and services company. Honeywell (HON), Rockwell Collins (COL) and others are on the technology side. Healthcare and biotechnology firms including Amgen (AMGN) and Regenetech, which is private, could also benefit given their ventures with NASA. While interstellar returns from these firms aren’t likely given their diversified revenue streams, the risk is also lower. As usual, it’s not worth going all-in on any of the firms above given the early stages of the industry, but these are among the key players to think about as space gains more and more importance on Wall Street.
What it means for you: Space never seemed so close. What makes it ever so fascinating is the immense level of collaboration between the private and public sector, as well as between national governments. Think about Scott Kelly’s return, in which he – a NASA astronaut – landed in Kazakhstan, or how the US and Russia have been collaborating for seats on Soyuz missions; the International Space Station, by itself, is a wildly successful venture involving over a dozen nations. Space truly seems to display an industry where market competitors and public entities work together on pursuing common interests – a very heartening thought amid the negativity and polarization on so many global topics these days. Today, it represents a fascinating investment frontier; the beauty is that even four decades after landing a man on the moon and the first spacewalk, the industry can still be considered embryonic considering the massive potential it offers. Wall Street should gear up, as space is amazingly placed to deliver returns that are out of this world – for both investors and humankind – in the years to come.
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