How to invest in the new space race without being a billionaire

Tesla’s Elon Musk and Amazon’s Jeff Bezos, two men who currently hold the first and second spot in the world’s richest rankings, have both invested billions in their space companies. Seemingly not content with dominating the Earth’s economy, Musk’s SpaceX and Bezos’s Blue Origin have their sights set on making fortunes in outer space. Richard Branson’s Virgin Galactic is a further example.

The first space race, which saw the USA compete with the former USSR to achieve firsts for humanity like sending a man to the moon, was funded by taxpayers. But once these symbolic achievements had been completed, and the Cold War ended, it was hard to justify the huge outlay on government-funded space programmes. At least not at the same level.

But after a decades-long pause in the most ambitious space exploration programmes, a new space race has begun. And this time it is being funded privately by the world’s billionaires.

There is almost certainly a strong element of ego mixed with the opportunity to indulge the schoolboy fascination with space behind Bezos, Musk and Branson’s motivation to invest significant portions of their vast wealth in a new space race. But not only. These billionaires see conquering space as a potentially vast new business opportunity.

Some of the money-spinning ambitions are:

• Satellite constellations bringing affordable, high-speed internet to the entire globe
• Wealthy adventurers paying through the nose for space tourism trips
• Mining asteroids for precious metals and minerals

and eventually even;

• Establishing human colonies on Mars

The modern-day titans of industry behind the new generation of private space exploration companies are convinced that by applying the same principles of efficiency and monetisation to them as they have to their core businesses, they can also achieve far more than government-funded agencies like Nasa.

The fact that Nasa is now handing contracts to SpaceX for missions like transporting its astronauts to the International Space Station, instead of sending its own rockets, suggests they are right. The massive leaps forward in science and technology over the decades of lull in space explorations also mean new possibilities for the private space companies.

Nobody involved in the space race expects to start making money any time soon. It is as long a game as there is in business. But the amounts of money now flowing into the sector indicate that many see the potential for huge rewards, even if they are some distance down the line.

But how exactly will space exploration companies make enough money to justify the colossal upfront investment currently being made? And is it an investment practically limited to the world’s wealthiest or can everyday investors also take a stake in the future of space exploration and exploitation?

The final frontier is a risky environment and not just for astronauts

Space isn’t a sector or category that is typically covered by financial markets analysis in the same way as, say, frontier markets, fintech, or the legal cannabis sector. But all three were once, until varying degrees of recently, unheard of investment categories. They now attract billions in investor capital every year through both public and private markets.

Brand new, untapped markets are always a risky investment because nobody really knows how they will evolve and how quickly the inexperienced, fresh-faced companies in them will hit upon a profitable business model. But they are also the biggest opportunity.

E-commerce is one good example. The early excitement around e-commerce in the late 1990s led to the dotcom crash of 2000 that saw many investors lose a lot of money. Companies like Pets.com and eToys.com were given huge valuations on the perceived potential of an online shopping market that was only just getting started.

Most couldn’t find a way to make a profit. Or even much money with ecommerce still very niche and buying online limited to a shallow pool of early adopters. But others did overcome the tough early days and crack the ecommerce business model to huge success. Amazon went public in 1997 with a share costing $1.73. Today, that share would be worth over $3220.

The legal cannabis market is only a few years old but there are already tens of publicly listed companies. The sector is also experiencing growing pains and valuations of companies volatile. Not all are profitable.

But ten years from now the likelihood is at least some of today’s pioneers will have evolved into huge blue-chip companies with large shares of a valuable market.

Investing in space is a little like investing in the first legal cannabis companies several years ago. Except on a much, much bigger scale. Another significant difference is that the scale of the opportunity is grand enough to have attracted the world’s wealthiest individuals, institutions, and companies at the very earliest of stages.

That changes the complexion. The fact there are so many unknown factors around how space companies will make money and the business models that will that profitable means the level of risk has to be considered as very high indeed. But the sheer range of possibilities and potential first-mover advantage (who successfully plays catch-up with the world’s richest men if they have already cornered a market they are intent on keeping? Especially if it is already adding to their wealth) means the opportunity investing in space represents is equally high.

The investment case for investing in space: what’s the cosmos worth and when will it turn a profit?

Predicting what the space economy could be worth to companies in future years inevitably involves a degree of guesswork. But with commercial companies already paying Musk’s SpaceX to launch satellites more cheaply than ever before and Nasa also contracting it to carry its astronauts to the International Space Station, as well as new satellite-based broadband internet services, by 2020 the space economy was already worth $350 billion.

The investment bank Morgan Stanley thinks the annual revenues being generated by space economy companies will grow to over $1 trillion by 2040. To put that sum in context, it’s almost three times the $386 billion Amazon brought in across all its divisions in 2020.

The private sector’s involvement in space exploration has already yielded some impressive results with the cost of launching payloads into orbit falling from $10,000/kg to $1000/kg in just a few short years. The newest generation of  launch technologies now in the research, development and testing phases are expected to slash those costs to as little as $50/kg within a decade.

That level of price can be expected to open up multiple new commercial applications for satellites and other technology in the earth’s near orbit. Spaceflight may well even replace long haul flights on traditional aeroplanes, with spaceplanes able to carry passengers and cargo around the world at hypersonic speeds. The UK company Reaction Engines is already working on the technology that may make spaceplanes viable within a couple of decades.

Of potentially even more value is the prospect of relocating heavy industry from the earth to the moon and Mars, leaving our own planet as a ‘residential zone’ where only light industry and manufacturing is permitted. And the vast wealth that could be unlocked by mining metals and minerals on the moon, Mars or from meteors is potentially mindboggling.

Can I invest in the space economy today?

Most companies in the space economy, at least those that offer concentrated, direct exposure, are still private. That means retail investors can’t invest in them directly by buying shares over a stock exchange. And participating in a private funding round would have a starting level in the tens, often hundreds, of millions.

But it is possible to gain investment exposure to the space race by investing in funds that have an allocation to private companies in the sector. For example, the Scottish Mortgage Investment Trust. The fund has made a series of hugely successful early bets on technology companies in recent years, including a stake in Tesla that makes it the electric car company’s single largest external shareholder, and has 0.9% of its £18.6 billion portfolio invested in Musk’s SpaceX.

Another Baillie Gifford fund, the £1.4 billion Edinburgh Worldwide Investment Trust, also holds stakes in SpaceX and several other ‘space-themed companies. These include Spire Global which uses nanosatellites for weather forecasting and asset tracking. Another is the US start-up Relativity Space, which is building the world’s first automated rocket factory.

And there are some exceptions to the rule space companies are generally still private, such as Virgin Galactic. Richard Branson’s space tourism company is pre-selling seats for ‘space safari’ flights into the earth’s near orbit. The Virgin Galactic share price is up over 20% over the past 12 months but down 62% since a test flight was delayed in February and for risk-tolerant investors could represent an opportunity at its current valuation.

Susannah Streeter, an analyst with investment platform Hargreaves Lansdown comments on Virgin Galactic:

“Maintenance issues are likely to tie up spaceships until early 2022 when the first commercial flight is due to take place. However, there is potential for supersonic flight closer to the Earth with an agreement reached with Nasa to work on an intercontinental supersonic vehicle. And it has a deal with Rolls-Royce to develop the design as part of a long-term bet on the popularity of superfast travel.”

Other options are listed aerospace, defence and satellite businesses as well as companies that perform a less obvious role in the supply chain. Boeing, for example, has been engineering for space exploration for decades and helped to construct the first stage of the Saturn V rocket that sent astronauts to the moon.

There is also now a small selection of index-tracking funds focused on the space economy. Two to mention are the newly launched exchange traded fund (ETF) ArkX and Procure Space ETF.

ETF research company Ultumus’s Bernie Thurston comments:

“The excitement around SpaceX’s success has sparked a number of ETF launches, but investors must check what they actually contain. There are some surprising additions in the new Ark fund, such as John Deere, Amazon and Netflix.”

Investing in Space is high-risk so tread carefully

For the average investor, the space economy is probably still at too nascent a stage to be considered as a sector any significant part of an investment portfolio should be invested in. Except perhaps indirectly via diversified technology funds such as Baillie Gifford’s star performers.

But for those investors who do set aside a portion of their capital for higher risk to higher reward bets, it could be an enticing prospect. A ‘moon shot’ investment that genuinely lives up to the name.