3 Stocks for the New Space Race
Welcome to the new space race! Much has changed from the halcyon days of America’s space program, when bragging rights against the Soviet Union were on the line.
You might recall the Soviet Union (now Russia) beat the United States into space by mere weeks in 1961, but America scored an even bigger win when the Apollo 11 landed humans on the moon in 1969.
Now the two countries are partners—at least when it comes to space travel—and the biggest financial contributors to the joint International Space Station (ISS) spacecraft.
Yet, the recent collaboration between Russia and the United States isn’t even the most surprising development in space travel.
Instead, it’s the privatization of space exploration!
Last week marked a significant milestone in the future of space travel when Sir Richard Branson became the first person to take a commercial spaceflight on his own spacecraft.
Branson might be the first spacefarer, but he certainly won’t be the last. In a race against time that harkens back to the early ‘60s, Branson edged out Jeff Bezos by just a few days, as the Blue Origin CEO is slated to take his own interstellar trip next week.
Decades in the making
It’s easy for investors to believe the privately funded space race occurred overnight, but the fact is there have been decades of private investment.
Fun fact: two of the “Big 3” spaceflight companies—SpaceX and Blue Origin—are older than Facebook. The third, Virgin Galactic, is only a few months younger than the social media juggernaut.
Space travel isn’t cheap, so it’s no coincidence these companies were founded by billionaires. Branson parlayed his Virgin Records label into one of Europe’s best-known brands, Bezos is the multi-centibillionaire who founded Amazon.com, and SpaceX is the brainchild of Tesla CEO Elon Musk.
However, when it comes to space exploration, these billionaires will be working in close collaboration with the U.S. government. Although the various factions in Washington are rarely in agreement, the privatization of space travel has been supported and expanded upon by the last three presidents.
Space tourism and so much more
We love optionality at Millennial Money. And considering the global space industry is already a $350 billion annual business, there are myriad ways for businesses to earn revenue.
In fact, in the short-term it’s unlikely that commercial space tourism will even be the biggest revenue driver! Instead, it’s governments that will initially be the biggest customers of spaceflight companies. There’s quite a few ways companies will make money supporting national space ambitions.
Obviously, there are opportunities for spaceflight companies to deliver astronauts to the ISS and provide planetary travel (like the upcoming deal discussed below). But often forgotten are the lucrative contracts for delivering goods and materials (payloads) for government consumers.
But there’s more opportunity than just being an Uber for astronauts. Often overlooked are the tremendous opportunities for suppliers and companies tasked with directly and indirectly supporting governmental agencies. The new space race will provide ample opportunities for manufacturing and contracting functions.
That’s major coin: NASA’s budget in 2021 is approximately $25 billion with an additional $15 billion allocated to the newly created U.S. Space Force budget this year!
That said, we don’t want to overlook commercial space travel, as it will be one of the significant long-term growth drivers for the industry. And growth is certainly expected as analysts estimate space will be a $1 trillion market by 2040.
With such a promising runway for growth, quite a few space stocks are likely to become winners in this industry.
Top 3 Space Stocks for the New Space Race
Here are three stocks you can buy to take advantage of the private space race.
Virgin Galactic is a pure-play spaceflight company
- Market Cap: 0
Unsurprisingly, Virgin Galactic tops this list of companies slated to benefit from the new space economy. As the only publicly traded “Big 3” spaceflight company (Virgin, Blue Origin, SpaceX), Virgin Galactic remains the most prominent pure-play investment.
Virgin Galactic bills itself as a space tourism company, offering flights in its SpaceShipTwo vehicle. That’s understandable as the company has a huge backlog of nearly 600 private customers waiting to take spaceflights at $250,000 a head (that’s $150 million if you were about to whip out your calculator app).
After completing his flight last week, Branson noted, “We’re here to make space more accessible to all.” While this is an admirable goal, it’s likely the price will be out of reach for most potential consumers for the foreseeable future.
Despite the strong backlog, Virgin Galactic has yet to fly a revenue-producing space tourism flight (the recent Unity 22 mission was manned by Branson and other Virgin Galactic employees). Virgin Galactic expects the first of such tourist flights will occur next year.
Although Virgin Galactic appears to focus on commercial space tourism, investors may be overlooking the opportunity for revenue from governments. In 2019, Virgin Galactic inked a deal with Italy’s Air Force to perform a research flight in which researchers will conduct experiments in space.
Per CEO Michael Colglazier, the Italian flight will be Virgin Galactic’s next launch and will include three participants in multiple payloads.
Therein lies an overlooked opportunity for Virgin Galactic stock. Although not often mentioned by “meme stock” traders who have piled into the stock, providing spaceflight services to governments could be the most viable short-term business model.
Just compare it to airlines. Governments will act like dependable business class customers and space tourism will be more akin to leisure travelers for airlines.
As with all stocks, Virgin Galactic comes with risks. In addition to operating in a new and complex industry with significant regulation, the company can best be considered pre-revenue in a resource-heavy industry.
Last year the company reported sales of only $238,000 and through the first three months of 2021 the revenue is negligible.
Virgin currently trades at a valuation of $8.4 billion, meaning the company is astronomically (pun intended) valued. In addition, Virgin requires significant investment in equipment and materials, which will make it difficult to make a reliable profit and require follow-on stock offerings like the recent $500 million stock issuance.
Although it is the best pure-play space stock, an investment in Virgin Galactic is not for the faint of heart. However, for those with a long-term perspective and the ability to withstand significant volatility, the company could be a multi-decade success.
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Boeing’s stumbles represent an opportunity
- Market Cap: 0
Apart from General Electric, no large-cap industrial stock has struggled more than Boeing. To briefly recap: two of Boeing’s flagship 737 MAX planes crashed in a five-month timespan due to a faulty sensor that overrode pilot decisions.
After initially blaming the pilots, Boeing changed its tune when a wide-ranging government investigation put the blame solely on the company, outlining a culture of shortcuts and “management misjudgments.”
Revenue cratered as the company had to delay plane production to address the design flaw. And just as the company was reestablishing lost credibility, the pandemic forced a slowdown in global travel and plane orders. The company continues to work on design issues, the most recent being a defect in its 787 Dreamliner.
Unsurprisingly, Boeing’s stock has been significantly impacted in recent years: the company’s current market capitalization is roughly 45% lower than all-time highs established just two years ago.
Still around after all that? Great.
Boeing’s struggles represent an opportunity for long-term investors. In addition to its high-profile commercial plane operations, remember that Boeing has a long-standing partnership with the U.S. government to provide airplanes and equipment for civilian (NASA) and defense applications.
In a way, Boeing can be thought of as one of NASA’s first public-private partners. The company was instrumental in the manufacturing of the Saturn V rocket in the 1960s—which was essential for launching astronauts to the moon during the Apollo program.
This longstanding partnership continues. In fact, Boeing manufactured many of the modules America contributed to the ISS and the company continues to provide space support and capability enhancements.
Additionally, Boeing is increasingly involved with manufacturing for America’s next-gen space capabilities, including NASA’s Space Launch System and the Air Force’s autonomous X-37 space plane.
Investing in Boeing obviously has risks. As discussed above, its operational issues have been well documented by the media, and have given competitors like Airbus and Bombardier a chance to gain market share in commercial plane manufacturing and even—in the case of Airbus—to surpass Boeing.
Boeing is currently an unloved stock, but it has a few growth drivers, both on the commercial side due to a return to travel and increased faith as it moves past the 737 MAX scandal, and also on the federal side by supporting the U.S. government in the nascent space race.
It’s often said “you’ll rarely make above average returns following the crowd” but that’s what many investors do. Boeing shares look like a train-wreck now but are priced accordingly.
Too many investors become consumed with the present and don’t view the future opportunity. The simple fact is that Boeing is too big to fail as the company is instrumental in American manufacturing and defense industries and the stock could be considered laughably cheap a decade from now.
ARK Space Exploration ETF has it all
- Top Holdings: Trimble, Kratos Defense & Security, Iridium
Here’s the deal: We know the new space economy is slated to make early investors major bank.
The overall industry is expected to nearly triple in the next 20 years. Those expectations could be significantly understated when considering the effects of technological breakthroughs and patent improvements that will be utilized across multiple industries.
Think about it: it’s no coincidence three of the richest and most forward-thinking people in the world are spending billions to win the new space race!
Like any new industry, however, there are also going to be quite a few high-profile failures. You don’t have to look back far to see this boom-and-bust cycle in action: last year EV stocks were on fire; now many are on the verge of collapse.
For that reason, the best way to take advantage of the space race for many investors is to buy a diversified portfolio of companies overseen by a proficient investment management team.
Enter the ARK Space Exploration and Innovation ETF, or ARKX. While some shine has come off ARK’s CEO Cathie Wood as growth stocks have pulled back, Wood is still one of the most forward-thinking investors on Wall Street and has the returns to prove it.
Crazy stat: Wood’s flagship ARK Innovation ETF has advanced 150% in the last three years, nearly tripling the S&P 500’s return during that period.
In addition to the direct aerospace companies, ARK’s Space Exploration and Innovation ETF includes many of the critical technology companies slated to gain from the space race as suppliers or beneficiaries of new technologies whether Bezos, Branson, or Musk’s name is on the rocket. The ETF’s largest holding is an under-the-radar geospatial and data analytics company called Trimble, and the fund has many downstream aerospace manufacturers and equipment makers.
As an actively managed ETF, holdings can change provided any new developments occur. Therefore, ARK Space Exploration is well situated to take advantage of any shifts in this nascent industry. With $627 million in net assets, it can shape the space race through its role as a capital provider.
As with all ETFs, ARKX comes with downsides you won’t get with stocks. The biggest is the management fees. Currently, ARK’s Space Exploration and Innovation ETF charges 0.75% per year, which is significantly higher than many index-based ETFs but in line with actively managed funds.
Additionally, ARK eschews the diversified approach many fund managers use and often takes large positions in single stocks. Even now the company has 10% of its net assets in its leading stock. While this has served Wood and company well for the last few years, it could hurt future returns even if the overall industry grows.
All that said, if you’re looking for an ETF with broad exposure to the space industry that’s run by one of the most successful investors of the last five years, there’s no better stock than ARKs Space Exploration and Innovation ETF. Investors looking for a diversified approach should consider this fund.
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