Is Space the Next Investing Frontier?

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Space stocks have exploded in popularity recently as even exchange-traded funds (ETFs) are being created to track the new industry. Virgin Galactic's successful flight in July 2021 brought space travel closer to reality.

Following that huge moment, we have seen follow-on successful flights from Jeff Bezos's Blue Origin and Elon Musk's SpaceX. And with all this, investor enthusiasm surged. But is space tourism the only part of the space industry? And are space stocks the next frontier or are they destined to burn up in the atmosphere?

Why Investors Should Pay Attention to Space Exploration

It's easy to explain why people should be excited about space exploration. It is the realm of science fiction and childhood dreams. But explaining why investors should start paying attention to the industry is entirely different.

For decades, space travel was so expensive that only those with the biggest budgets could take part in it. For years that happened to be the governments of the world's strongest powers pulling resources from across the economy.

That was then and this is now.

A combination of innovation and the government's willingness to outsource and look for commercial solutions makes space far more accessible on a commercial scale. Elon Musk's SpaceX venture originally grabbed headlines when it snagged a NASA contract for a cheaper alternative rocket launch. A single launch using SpaceX's rocket saved NASA more than $500 million.

While SpaceX may be getting the limelight, it isn't the first commercial company to get government contracts related to space. One of the first private company entrants to do this was EarthWatch (later becoming Digital Globe). In 1995 it won the first contract for a private satellite for imaging.

Since then competition has steadily increased, reaching a crescendo as three billionaires battle for space supremacy. As the competition heats up, the free market does what it does best: drive innovation up and drive costs down. This competition will likely further expand access to space.

Investors have a lot more to get excited about as space technologies rapidly innovate. This includes micro satellites that cost less to launch. And lower costs of course let companies grow faster with less risk.

The Economics of Space

The space industry opened to private companies in the 1990s. But there still remained a key bottleneck for the space industry: There was always only one customer, the government.

The only way companies could generate any revenues was by competing for government contracts and following their stringent rules. At the same time, the pool of governments rich enough to offer contracts of this nature was incredibly small. And geopolitics limited the number of clients even more.

In this way, a company's lifeblood was tied to government approval, with all the bureaucracy that comes with it — not exactly an attractive sales pitch for new companies.

However as innovation develops, the market opens to a new breed of customer. One that is diversified across geography and industry, from data analytics, hedge funds and — how could we forget — tourism.

Along Comes Space Tourism

A new niche has opened: space tourism. And this niche gets most of the headlines these days. Thanks to better tech, reusable rockets and ingenuity, it is now commercially viable to fly people into space and back.

But tickets are still pricey, $450,000 on the low side. So this is affordable to only ultra-high net worth individuals. They may get the chance of a lifetime to turn a dream into reality. If we assume someone with a net worth of over $5 million would be willing to shell out $450,000 for the experience, we have a potential customer pool of 3 million households in the U.S. alone. That makes for a better market than having a single government customer.

To further consider this exciting industry, let's look at Virgin Galactic. That's only fair as it made the first successful flight.

A Deeper Look at Virgin Galactic

Virgin Galactic aims to sell a week-long experience for its customers, with comfort at the top of the priority list. Compared to its closest competitors, Blue Origin and SpaceX, Virgin Galactic reaches the lowest altitude and sells the cheapest ticket, the aforementioned $450,000.

The experience includes three days of training at Virgin Galactic's purpose-built spaceport. Clients get custom-fitted bodysuits and equipment. Then the space tourists board Virgin Galactic's unique launcher. (It resembles a catamaran more than a rocket.) They will be flown to 50,000 feet above sea level before rocket boosters engage to take them 450,000 feet (85 miles) high, to the very boundary of space itself.

Virgin Galactic reports that so far it has deposits from 600 people totaling $80 million in value — an important proof of concept.

Company Finances

The company expects a 65% gross margin on each $450,000 ticket. This takes into account expenses such as fuel, pilots and ground crews. The business model depends on the capacity of the ship and how many ships Virgin Galactic flies.

Currently, its only operational aircraft carries eight passengers, two of which are pilots. At scale however, Virgin Galactic plans to do 400 launches a year. This adds up to more than $1 billion in revenue. Whether it manages to get that remains to be seen.

In comparison, Virgin Galactic's rivals go farther out into space but also charge more. SpaceX for example has the capacity to go much farther than the other two and plans to sell tickets starting at $55 million each. Of course, SpaceX focuses more on space freight than space tourism (for the time being at least).

Much like SpaceX, Virgin Galactic has an alternate business in mind. Its unique plane shape can land at an airport. So the company is looking to also offer high-speed point to point international travel. The idea being that the plane ignites its rocket boosters at high altitude so as to not disturb or disrupt anything below.

Future Possibilities: Asteroid Mining

While the tech may not quite be here yet and there are still many engineering problems to be solved, asteroid mining has already gathered plenty of interest. This is because throughout space, there are hurtling rocks that may be full of platinum or gold. In fact, NASA believes that a 140-mile diameter asteroid named 16 Psyche holds a mineral value of quintillions of dollars.

Mining an asteroid for metals presents an extreme engineering challenge. But water in space is more necessary and a less challenging endeavor.

Rocketing water into space costs as much as $43,000. Finding a way to harvest water in space significantly cuts costs in space missions. Thankfully, many asteroids contain water.

But mining asteroids for drinking water is only the beginning. Doing so makes supplying space missions much cheaper. But some recommend splitting the water into hydrogen and oxidizer, key components in rocket boosters.

Essentially, these asteroids could provide us with fuel in the middle of space, acting as fuel stations. For context, rockets burn 11,000 pounds of fuel per second during liftoff, and fuel is a significant part of the weight-burden in rockets.

If our technology gets to a point where harvesting water becomes cheaper than sending it from Earth, we will see a brand new business model that could take space travel to the next level, servicing rockets to ever farther space missions.

No Longer Science Fiction

Perhaps you feel that this is still completely in the realm of science fiction and may be at least half a century away. But in reality, in 2005 Japan successfully launched and landed a probe on an asteroid, which then harvested mineral samples.

Admittedly this was on a small scale. But some companies are already actively working on solving this very issue. These include Deep Space Industries and Planetary Resources, both of which have been acquired by larger space companies.

How Investors Can Get Exposure to Space

As with any brand new sector, there aren't many options open to investors and even fewer in the public markets. That being said, there are a few very exciting names at the forefront of the industry.

Virgin Galactic (SPCE)

Of course, Virgin Galactic stands as the poster boy for the space industry and for good reason. It had the first successful flight and is a public company. Its competitors, Blue Origin and SpaceX, remain private companies.

SPACs

Some Special Purpose Acquisition Companies (SPACs) plan to bring a number of space-related companies to the stock market. These SPACs give investors front-row seats at their eventual initial public offerings (IPOs).

Maxar Technologies (MAXR)

Additionally, other major space companies work in the less sexy aspects of spacefaring. These include the aforementioned Digital Globe with its satellite infrastructure. Maxar Technologies bought Digital Globe in 2017. It bought several other space-related companies as well. While unrelated to space-tourism, it is a big player in the emerging space economy and has found a way to monetize it.

Ark Invest's ETF (ARKX)

Next, Ark Invest, ever astute in its big bets on the future of tech, offers ARK Space Exploration & Innovation ETF (ARKX), an actively managed space-related exchange-traded fund (ETF). An ETF offers diversification and is great for investors who don't want to get into the nitty gritty of company business models. This way, you get your exposure to an exciting trend with less individual stock risk.

Other Opportunities

Finally, we have the major industrial companies that may not have space as their main target but have the resources and technology to compete in the space race. These are generally companies in the defense and aeronautical sectors. These include Airbus, Lockheed Martin, and Raytheon. And these companies could benefit from the space boom. They may give investors some exposure to the space industry with far less risk.

Risks of Space Investing

Investing involves risk. While space is incredibly exciting, it probably involves even greater risk than your average stock picks.

To begin with, it is an incredibly capital-intensive business. It is no surprise that for decades only governments could launch these projects, mainly due to their mindboggling cost. Technology and innovation helps decrease costs. But the capital needed still remains a high barrier to entry for startups to migrate to the sector en masse.

Also between 4% and 10% of launches fail. Considering everything needs to be launched in order to get into space, this represents a huge barrier. Many startups may see years of money and hard work literally incinerated before their very eyes. This naturally makes investors and financial institutions shy to invest or lend.

When talking about failed space launches, I was referring to freight launches. This kind of failure is a huge setback. But it pales compared to human lives being lost during a launch, which would be a massive setback for any company.

Finally, while technology improves every day, we really are at the earliest possible stages. Companies have yet to prove whether these business models are sustainable and can generate profits long term.

Do We Have Liftoff?

Of course even with all the risks, space is incredibly exciting. It is something that has fascinated mankind since the dawn of time. That being said, we need to think as investors rather than just sci-fi fans.

We are incredibly early in this industry and there are plenty of dangers ahead. While there are investable companies, there is no doubt that as the industry develops, more and more companies will be open to investment.

Isaac Aydelman

Isaac Aydelman is a student of economics and a former soldier. Drawn to financial markets from an early age, he has experience in futures trading and manages his own personal investment account. Isaac is always interested in expanding his horizons and looking out for opportunities in finance.

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