The New Space Race

Glamour yachts are so yesterday. If you want to be a self-respecting billionaire these days then you need to be in the new space race. Once the sole domain of nation states, space now bears the names of Branson, Musk and Bezos. While all of them are flaunting their billions to expand the human experience, as investors, it’s worth paying attention to the nuance. Some will have real, long term commercial upside, while other ventures, it seems, will be very good ways to simultaneously expand ego and lose money.

The only way our economy can grow beyond serving a large population is by expanding human endeavour. To grow, we must bring new things into the market sphere, literally invent them, and find markets these things can serve. Now that data has been commodified, the latest in these greenfields for tech giants is the Low Earth Orbit Economy.

The Low Earth Orbit Economy

It was inconceivable at the turn of the century that Space could be the domain of Non-Government Enterprise. But the emergent Low Orbit Economy (LEO) has created a dramatic shift. Defined as a range of 200-1600 km above earth the LEO has become a quasi-open market with NASA itself requesting proposals from industry partners who can demonstrate advanced capability within this realm. The market exists, is growing, but lacks the ‘visibility’ of traditional business. But it is worth keeping an eye on.

The simplest way to look at this market is to break it up into these two segments:

1. Space Tourism
2. Space Hauling & Infrastructure.

I’ll leave the more ambitious and long term sub-categories of becoming a multi-planetary species and asteroid mining for another day.

Space Tourism

Not only is the total addressable market (TAM) minute, it requires a massive capital investment and has the added risk of a catastrophic technology failure. And when the tech fails here, you don’t just lose money, you lose customers, literally and figuratively. The numbers tell the story. In the history of space flight, the fatality rate is 3.2 per cent. For reference, air travel is 0.0000006 per cent.

Let’s take the example of Richard Branson’s Virgin Galactic. It has been reported that they have approximately 600 customers on their flight waiting list. Statistically speaking, 19 of them won’t make it back, and so can’t spend a further $US250,000 on a repeat purchase. It won’t be a great advertisement for the product either. It’s not irrational to believe that their successful flight ratio will underperform that of nation states. Even if all 600 take up their space flight successfully, the forward revenue looks very skinny indeed at $US150 million. It’s especially concerning given they’ve had to raise a further $US500 million in private convertible bonds which don’t mature until 2027. Based on their share price performance, it’s not a bet any investor who is not prepared to risk their life in space might take.

Since June last year (Branson’s flight to the edge of space on July 11, 2021) the Virgin Galactic share price has plummeted from $55.90 to a paltry $8.99 close last week. If there was ever a market that was more hype than reality, it has to be Space tourism. This however, shouldn’t be seen as a blight on the LEO opportunity.

Space Hauling & Infrastructure

The segments of space hauling and infrastructure builds are where savvy investing ought to focus. The Total Addressable Market (TAM) of these arenas are nearly as infinite as the physical space they can happen in. There isn’t a human on earth who won’t benefit from building an earth-centric space infrastructure. When comparing this to space travel, it isn’t just the size of the customer base, but also who the customers are: Governments with big cheque books.

The US Government is Space X’s biggest customer, while NASA also funded Blue Origin’s commercial mixed-use space station called Orbital Reef to the tune of $US130 million. Space X has secured nearly $US885 million from the Federal Communications Commission for their Starlink satellite internet infrastructure.

The killer app of the Non-Government space organisations has been the re-usable launch vehicle. In December 2021, the 100^th successful recovery of a commercial re-usable rocket occurred. The most common is VTOL (Vertical take off and landing). The first of these was merely six years ago. It took the space shuttle program 19 years to achieve this number of returned flights.

It seems as though Governments the world over have placed their vote on who will do their space hauling and infrastructure builds – private industry. While both Space X and Blue Origin are well placed to benefit from this, we can add to the mix traditional military industrial stocks like Boeing, Lockheed Martin and Northrop Grumman.

Private Constellations

While Tesla is one of the most overhyped stocks, Musk’s Space X (currently private) and Starlink, might be equally underhyped. He and his firm are literally building a LEO infrastructure, which could literally serve the world. It’s worth remembering that 40 per cent of the global population are still not on the internet, mostly due to lack of access driven by geographical constraints.

The numbers to date are impressive. Space X has already sent up 2042 satellites with over 1800 in functional orbit. That’s a 30 per cent share of all satellites in the sky. At present, the firm is authorised for 4408. This is set against a lofty goal of eventually putting 42,000 in orbit. The market they’ll be serving is providing global internet access via satellite dishes on the ground, of which 100,000 are already up and running for which customers pay $99 a month. The internet speeds are between 50-150 Mbs, which is below what 5G networks can provide, but well above the bungled NBN which ranges from 20-100Mbs.

It raises again the issue of big tech taking on formally governmental roles of providing vital infrastructure. While the NBN was meant to provide connectivity to wider Australia, it seems it’s more likely to come from Starlink’s Satellite constellation. This is especially true given they have the ability to offset costs across a global market, and not just a single sovereign nation. It isn’t just the upside we should look at, but how these may create downside on local geo-centric infrastructure – another case of big tech’s global dominance having local business impacts. With Space X having an off-market valuation of $100 billion there’s a good chance the Starlink division will be spun off to fund Musk’s Mars ambitions via an IPO or SPAC.

If COVID has taught us anything, it should be that travel is a business with frequent and unexpected upheavals while digital infrastructure is only becoming more important. Once we add the regional renaissance, the work from anywhere revolution and the need for connectivity for autonomous transport, space hauling and infrastructure seems like an attractive play. It has natural monopoly characteristics, governmental funding, and an instant global presence. And while those in the burgeoning LEO market can’t easily be invested in at present it’s a market we should keep in our orbit for when investment opportunities arise.