Out-of-the-world investments: the commercial potential of space

There are hundreds, if not thousands, of companies vying in the commercial space race to get a slice of the $350 billion-dollar industry. Made up of several lucrative segments, like consumer broadband, Earth Observation services, and satellite launch and manufacturing, the space economy is expected to grow to over $1 trillion in revenue by 2040 according to Morgan Stanley. With its impact ranging from industries such as aerospace and defence to IT hardware and 5G, this space (pun intended) is becoming increasingly crowded with players from large conglomerates to start-ups hoping to build the businesses of the future.

The space economy is expected to grow to over $1 trillion in revenue by 2040

It’s no longer just about Virgin Galactic’s space tourism ambitions or Elon Musk’s SpaceX. The modern space industry is bursting with examples of innovative businesses putting technologies like satellite imagery to practical test. Take for example, Terrabotics. Terrabotics is a British start-up that offers advanced satellite data analytics for energy and mining and counts among its clientele: mining and exploration companies, hedge funds, investors, and commodity traders.

Exponential growth expected in consumer broadband and internet, making it worth in excess of $500 billion dollars

The current space of economy is largely driven by three core elements: consumer TV, government funding, and ground equipment. Most of the growing innovative businesses generate $44 billion in revenue, accounting for only about 10% of the industry. This is set to undergo a revolution, with exponential growth expected in consumer broadband and internet, making it worth in excess of $500 billion dollars. Research from Morgan Stanley predicts that the drivers of the new Space ecosystem will be satellite internet, deep space exploration, and Earth observation, among others.

Space has drawn some truly visionary entrepreneurs and patient investors who are creating differentiated and disruptive technologies that will span out and give returns over this century.

Constellations of satellites, fusion-powered spacecraft, and technologies to mine asteroids and 3D printers to replace worn-out equipment in zero gravity are sets of innovations attracting investors, venture capitalists and private equity firms seeking to invest in the final frontier. Space has drawn some truly visionary entrepreneurs and patient investors who are creating differentiated and disruptive technologies that will span out and give returns over this century. However, investments in this capital-intensive industry come with returns many years into the future, exit plans decades down the line, and dependence on unproven technologies that require heavy machinery, infrastructure, and R&D.

CNBC describes four key areas that investors need to be aware of whilst investing in space: Human Spaceflight, National Security, Imagery and Data Analysis, and Satellite Communication.

The actual contributions of these companies remain more in rhetoric than actual returns on investment

Human Spaceflight companies and news from this sector dominate news cycles with ventures like Branson’s Virgin Galactic, Musk’s SpaceX, and Bezos’ Blue origin. These companies enjoy popularity largely driven by the cult of personality of their founders and widespread enthusiasm with space tourism. But, the actual contributions of these companies remain more in rhetoric than actual returns on investment. Renaissance Capital’s Matt Kennedy, a specialist in IPO strategy, said that much of the initial excitement around Branson’s Galactic was “because it was the first publicly traded space tourism company.” That’s not to say that these companies have not added value to the industry. Virgin Galactic’s IPO was a major liquidity event that invited investors to invest in the space sector and opened doors for several such instants to follow. SpaceX too has had its impact felt after becoming 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.

The National Security side of the space economy is a worthwhile investment, one that can give strong returns from the first day

While the National Security sector of space remains dominated by familiar names, like Boeing and Lockheed Martin, the space division remains only a very small part of their revenue-generating activities. On the other hand, listed companies, like Aerojet Rocketdyne, reflect the bullish sentiment that surrounds the space industry today. The company manufacturers propulsion systems for rockets and spacecrafts and its business is largely driven by orders from the US department of defence and NASA. The stock of the listed business has skyrocketed (pun intended) with growing sales and became one the best performing stocks, remaining at record highs in spite of the global crash in equity prices. The big three, Blue Origin, SpaceX and Virgin, also play a critical role in this space alongside Honeywell, Raytheon and so on. It often becomes hard to separate the space-driven revenues in large aerospace and defence companies since so many of these activities overlap. However, CNBC estimates that each of these companies books millions of dollars from their space-related business. This makes the National Security side of the space economy a worthwhile investment, one that can give strong returns from the first day.

The problem with satellite launch and management; the need for vast infrastructure and long gestation periods eating into return

Satellite Communication is made up of businesses that are directly involved in manufacturing, those in launch and those that have exposure to said satellites. DISH, VSAT, SATS, and several other such companies, whose revenues depend on owning and operating satellites and are involved in broadcast and communication services, often have smaller m-caps. However, these companies can be expected to grow quickly, particularly broadband and internet providers, which is expected to be the fastest segment in the industry. There is a race to put clusters of hundreds of satellites into the atmosphere, called ‘Constellations’. Amazon’s Project Kuiper and SpaceX’s Starlink are leading with Amazon’s new AWS Ground Station division planning to manage over 3,000 satellites and SpaceX working towards launching 60 satellites a week. OneWeb, valued at $14 billion at its peak, collapsed coming under pressure from the steep infrastructure costs and burning through cash. This highlights the problem with satellite launch and management: the need for vast infrastructure and long gestation periods eating into returns.

Imagery and Data Analysis is the easiest to monetise and grow owing to its lean structure, low capital needs, and a plethora of practical applications

Finally, Imagery and Data Analysis sector, which has emerged as the easiest to monetise and grow owing to its lean structure, low capital needs, and a plethora of practical applications that can be supported with given technologies. This segment is the smallest in terms of m-cap but could be one of the fastest growing owing to its uses in GPS or for Main Street businesses like mining and construction. Many of these companies, like Spire Global and Planet Labs, are expected to go public soon and are expected to be the jewels-in-the-crown in the industry. Firms like Maxar Technologies, Garmin, and Trimble currently dominate the market with their constellation of satellites.

The Space sector has grown in a manner reminiscent of the growth of the tech industry before the dot-com bubble

The Space sector has grown in a manner reminiscent of the growth of the tech industry before the dot-com bubble. Successful investment in the final frontier will depend on an investor’s ability to pick winners based on strong financials and truly disruptive (yet conceivable) technologies. While the big three have come to dominate many spheres, a lack of focus might delay their turn to profitability. Space tourism, although popular, remains a far-fetched dream that will be hard to monetise. Satellite Communication plays the most important role in sector but the need for large capital infusions and infrastructure keeps delaying net cash flow from these ventures. On the other hand, operators such as DISH, that are expected to see demand grow exponentially, are much better placed. The large corporations that dominate National Security and sprawling start-ups in imagery seem like the best bets, at least in the medium-term owing to their practicality. Wherever the capital flows, it is undeniable that space will become the next growth investment.