Investing in space: more than a flight of fancy

2021 will be remembered as the year that tech’s big boys blasted into space. In July, Richard Branson’s (pictured above) Virgin Galactic [SPCE] rocket plane Unity flew 53 miles above the Earth, just over a week before Jeff Bezos’s Blue Origin flew above the Kármán Line – the internationally recognised boundary of space.

The space race between the billionaires has involved plenty of hubris. They’ve disagreed about where Earth’s atmosphere ends and space begins. Blue Origin has even mocked Virgin Galactic’s spacecraft, saying it only had “airplane-sized windows”.

This tit-for-tat between Virgin Galactic and Blue Origin means the Virgin’s share price can be affected by the advances the latter makes.

Virgin Galactic has only completed one fully crewed flight, which carried six people, whereas Blue Origin has completed three flights carrying a total of 14 tourists, with the most recent one taking place in early December. This is arguably hurting investor confidence in Virgin Galactic over the short-term; its share price has slumped 75% from an all-time high of $59.41 set back in February.

Going into the new year, Blue Origin is scheduled to make its first cargo flight in the coming months. Virgin Galactic announced in October that it has delayed the beginning of its commercial space flights to the fourth quarter of 2022. Following the pushback, UBS analyst Myles Walton downgraded Virgin Galactic’s stock from ‘neutral’ to ‘sell’ and lowered the price target from $26 to $15, which is slightly higher than its 21 December closing price.

“The event path for the stock is now disjointed for the better part of the next year” - UBS analyst Myles Walton

 

Walton acknowledged that Virgin Galactic has made the right decision with the delay, given safety concerns. However, these starts and stops are a sign of the problems facing space tourism companies. It’s also an indicator of how unpredictable investing in space can be.

“The event path for the stock is now disjointed for the better part of the next year,” wrote Walton in a note to clients reported by MarketWatch.

Companies involved in space tourism are typically unprofitable and their cash burn is high. For the third quarter of 2021, Virgin Galactic reported a loss of 32 cents per share on just $2.58m in revenue.

 

Heavy metal

For investors looking to gain exposure to the sector in 2022, there are less volatile ways to play the space race game, namely satellites.

Heavy hunks of metal aren’t as glamorous as day trips to the final frontier, but satellites are critical infrastructure. They can be used in mapping technologies, for beaming communication signals back to Earth and for monitoring other planetary bodies.

As of 1 September, there were 4,550 satellites in operation, according to the UCS Satellite Database. Of these, 3,790 are in low Earth orbit and 2,788 are US-owned – China and Russia own 598 between them.  There are also thousands of defunct satellites just floating around.

Speaking to Opto Sessions earlier this year, Andrew Chanin, who heads the ProcureAM’s Space ETF [UFO], said there's a land grab for low Earth orbit going on. Companies are competing to get satellites up there, as the more space junk there is in the future, the more difficult it’ll become to launch satellites.

“We certainly know that when it comes to military desires these things don't happen in a vacuum. The US is certainly one of those countries that doesn’t like to be in second place in any area of military capability” - Andrew Chanin

 

“Another untold story is government and military ambitions for space,” Chanin said. “We've seen China announce many of its ambitions, such as building a permanent lunar colony by 2028 for research purposes, and potentially a permanent military colony on the moon by 2030.

“We certainly know that when it comes to military desires these things don't happen in a vacuum. The US is certainly one of those countries that doesn’t like to be in second place in any area of military capability.”

The satellite race means satellite companies should present strong growth opportunities in 2022 and beyond.

Take Maxar Technologies [MAXR], for example. As of 22 December, the stock is in ProcureAM Space ETF’s top 10 holdings with a weighting of 5.04%. Morgan Stanley analyst Matthew Sharpe has picked Maxar as one of the best buys within the company’s government services and technology coverage, Seeking Alpha reported in November.

"The stock has notable upside that will be driven by revenue growth from its new satellite constellation, WorldView Legion, and rebounding margins from stabilised operations at its space Infrastructure business," Sharpe wrote in a note to clients in November.

Morgan Stanley has assigned an ‘overweight’ rating and a price target of $46, which implies an upside of 70% from a 16 December closing price of $27.