Our Space Exploration Stock Pick

Unicorn Portfolio Update 11: #15 of 20 stocks added.

Space is an exceptionally risky place to operate and so are any investments in this sector. Yet, we feel it is a perfect fit for our Unicorn Portfolio, where our mandate allows us to tolerate risk for a chance of outsized returns. Although this portfolio has a high-risk tolerance, to be a successful investor you need a risk management strategy. Essentially that means to never get caught up in the hype, but rather evaluate each opportunity quantitatively and qualitatively to make informed decisions. Unfortunately, due to the early nature of this sector, the number of unknown variables and the high level of uncertainty on how things will unfold, none of these space stocks are a sure bet. 

What can you do as an investor to manage your risk? First look at the company itself, dive into their mission, management team, execution, competitive advantage, optionality and risks. There are endless resources online to research every public company. Be sceptical of articles with titles like The Next Tesla or THIS STOCK CAN 100X. Space stocks are also inherently suited for memes, rocket emojis and this company is going to the moooooon prophecies. Take every article with a grain of salt and remember to be wary of the author's bias as well as your own.  

Only after you have thoroughly investigated the company, do you look at the numbers. Are they valued fairly? Do they have a good balance sheet? Are they growing? Do they have attractive profit margins? What is their TAM? What does their past financial record look like? What do their predicted future numbers look like? Remember to evaluate each company in context, it is unreasonable to expect a space startup to be profitable but you probably want a healthy balance sheet, good growth and a clear path to profitability.

The last step can't be read or calculated. What does your gut tell you? This intuitive feeling for companies gets better with experience. You need to visualize the future and try to imagine how the company will position itself. Will you get it right every time? No, not even close, that is why legends like Buffet advise that 90% of investors stick with low-cost index funds like the S&P500. That is also why our ETF portfolio has the highest capital allocation. Is it possible to outperform the index? Yes, but history is not in your favour and it will take a combination of effort, skill and to be honest a little bit of luck.

We are fully aware of SpaceX and their incredible accomplishments and we realise that most people will consider SpaceX as the leader in this sector, but unfortunately they are not a public company. A report by Morgan Stanley predicts that by 2040 the Global Space Economy Revenue will rise to $1.1 trillion led by the Internet, ground equipment and government. This leads us to believe that there will be more than one successful company in this sector and there might be investing opportunities outside of SpaceX. In this article, we give an overview of four listed space exploration companies and our pick for the Unicorn Portfolio.

Planet Labs

Planet Labs is revolutionizing the earth observation industry by transforming the way governments and companies utilise satellite data by providing insights into any changes at a daily rate. This defining feature of high-frequency geospatial data creates unique opportunities.  All this data can be used in a multitude of industries like the military, agriculture and mapping.  

It might be more appropriate to view Planet Labs as a data company which just happens to have 200 satellites in orbit. 150 of these satellites capture our earth every day at a resolution of 3 meters and an additional 21 higher resolution satellites can image at 50cm resolution. Since data is playing a massive role in the modern world, this might be a company to keep on the watchlist.

Maxar Technologies

Maxar operates in the same industry as Planet Labs but they are arguably more mature, being the largest commercial satellite imagery vendor in the United States.  

Maxar provides 90% of the foundational geospatial intelligence used by the United States Government for national security and keeping troops safe on the ground. 

Maxar provides some of the highest resolution satellite images down to 30cm and even 15cm when using machine learning algorithms. Maxar's profile in particular has grown since Russia invaded Ukraine earlier this year, as its satellite imagery has been used by news agencies to track developments in the war. Maxar provides data collection, storage and mining for insights by AI algorithms.

Whether they should be considered the leader in geospatial intelligence depends on the criteria, they are certainly generating the most revenue but Planet Labs collects more data daily. Two red flags for Maxar are their heavy reliance on contracts from the US government and their terrible balance sheet with $2.3B in debt and almost no cash.

Rocket Lab

Rocket Lab is an end-to-end, pure-play space company offering solutions like spacecraft design, rockets, satellites, launch services, flight software and assets supporting space infrastructure. Have they actually launched anything? Yes, this company have successfully launched 27 times and already deployed 148 satellites making their rocket Electron the 2nd most frequently launched US rocket, behind none other than Mr Musk and his Falcon 9. There are also currently more than 1700 satellites in orbit using Rocket Lab technology. 

Electron is a small payload rocket for launching satellites with a capacity of 300kg. The Rocket Lab team is currently developing Neutron, with a massive 8-tonne payload capacity and return to launch site capabilities. This will put them in more direct competition with SpaceX.

Virgin Galactic

Mr Richard Branson is set on his mission to give the wealthy elite among us the trip of their lifetime. Virgin Galactic is the world's first commercial spaceline with the goal to dominate space tourism. Although this sounds exhilarating the current demand does not justify the hype and this company is going to burn a lot of cash before they ever reach profitability, if they ever do.

Our Pick

Rocket Lab is the standout for us, with their competitive technology, vertical integration and visionary leadership team. Their executive team and the engineering team are built with talent hailing from companies like SpaceX and NASA. Thus far Rocket Lab has not only proven their technology, but they have also shown excellent execution and efficiency. Companies that went public via SPACs instead of conventional IPOs have faced a lot of critique in the last year and rightly so with most of the companies overpromising and under-delivering, with many stocks down over 80%.  Unlike most of these SPACs, Rocket Lab is generating revenue and has $2.2B in the pipeline from expected missions.

The space industry is overflowing with opportunities and Peter Beck, CEO of Rocket Lab, is open-minded to ideas like having their own satellite constellation and human space travel. Rocket Lab is experiencing massive growth in their new space systems business which designs and builds spacecraft for their customers. This new business unit led to the company winning a $143 million contract to build 17 spacecraft busses for Canadian space company MDA and its client Globalstar. This was Rocket Lab's biggest contract win to date. 

In a recent interview with Peter Beck, he responded to the question: What edge does Rocket Lab potentially have over SpaceX?

The reality is there are two private companies that have successfully delivered satellites to orbit full stop let alone reliably, and that's SpaceX and Rocket Lab.

The difference that we've always had is we've had to do it much more affordably and we've had to amortize a lot of the costs into a much smaller sticker price. We've had to be very innovative in the way that we've solved a lot of problems.

We have all the operational experience of Electron. We have all the reusable experience of Electron and we get a do-over. We get a blank sheet of paper. So, when you look at a Neutron, when we finally reveal and announce the configuration of the vehicle, you should stand in front of that thing and think you're in 2050, not in 2020. We've innovated in areas that we think will be pretty disruptive and in some areas would be very boring. But the longshot is that we think we can bring to market a very competitive vehicle.

With the recent market drawdown and the severe multiple contraction in growth stocks, we view Rocket Lab as fairly to slightly undervalued with a market cap of $2.1B and an estimated revenue of $310M for 2023. The company is predicted to become profitable in 2024 or 2025 but importantly they have a healthy balance sheet with $600M cash and debt of only $148M.

Key Critical Risks:

• This sector is heating up with competition and SpaceX is still dominating.
• Their larger rocket Neutron is expected to launch in 2024, this will be a key milestone with a lot riding on the success of this mission. Any launch delay or failure will be a setback for the company and its stock.
• Rocket Lab is not profitable yet and they are operating in a high capital-intensive industry.
• Customer concentration is also a risk
   

Our second pick will most probably be Planet Labs but we feel the competition in satellite imagery will be fierce.

Conclusion

Any space stock will only reward the patient investor who can tolerate the extreme volatility. Also, there are no guarantees with any stock and this is even more true for a speculative space company because propelling giant containers of fuel into the sky and hoping they don't blow up is a risky business. 

Rocket Lab seems to be executing on their mission and we like the direction they're taking with revenue diversification. The current valuation presents us with an asymmetrical risk/reward opportunity and therefore Rocket Lab deserves its spot in our Unicorn Portfolio.

Portfolio Updates Summary

• Buy $250 RKLB at $4.26

Disclosure

This is not financial advice and is only based on the author's opinion. This is not buy or sell recommendations of any stock.  The $10K is not real money and only a demonstration of a typical portfolio. The Unicorn Portfolio is a high-risk portfolio and should always remain a small allocation of your overall assets. This is an actively managed portfolio where we will buy and sell positions as we deem fit without any regard for taxation. Remember, all selling of stocks triggers a tax event in most countries and it is the investors personal responsibility to always remain tax compliant.