The Capital
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The Capital

How to Invest in Space X?

Hint: You can’t directly.

Who let the Doge out by Beeple

There is no denying that Elon Musk is the entrepreneur of the century.

SpaceX just might be the most popular company on Earth that everyone wants to invest in, but no one can.

What is SpaceX?

SpaceX is a privately-funded rocket manufacturer and transport services company. Also known as Space Exploration Technologies, SpaceX has developed a reusable rocket and launch system to significantly reduce the cost of space flight.

SpaceX’s wide popularity can be connected to Elon Musk’s publicized promise to take humans to Mars and increasing interest in space tourism. Private investors are all in on Musk’s vision, recently giving the company a massive $74 billion valuation.

As a private company, SpaceX is free from the restrictions associated with a government bureaucracy that normally plague organizations such as NASA. This allows Musk to move with surprising speed, rapidly creating parts and equipment, securing launchpad sites, and hiring employees from competing companies and universities. According to information provided to the Federal Communications Commission (FCC), Musk owns 54% of SpaceX and controls voting rights for 78% of the shares.

A brief history and achievements:

In 2001, Mars Oasis, a project to grow plants on Mars and land a miniature experimental greenhouse, was conceptualized by Elon Reeve Musk. Efforts to buy cheap rockets from Russia saw the birth of this company. In 2002, Musk teamed up with Tom Mueller, a rocket engineer, to expand the business, which was first set up in a warehouse in El Segundo, California.

Since then, the firm has grown its workforce as follows; 160 employees in 2005, 1,100 employees in 2010, 3,800 employees in 2013, 5,000 employees in 2015, 6,000 employees in April 2017, and 7,000 employees in November 2017. As of March 2018, the corporation had over 100 launches representing approximately $12 billion in contract revenue.

The contracts included government and commercial customers. Its principal competitors in the commercial launch are International Launch Services, United Launch Alliance, and Arianespace. Currently, SpaceX is the market leader in the global retail launch provider as measured by manifested launches.

The company aims to save on manufacturing expenses by pursuing the creation of reusable rockets rather than the industry standard of one-time use rockets, thus decreasing the overall cost of entering space.

SpaceX can launch a rocket for $90 million, compared to $380 million charged by its rivals. The lower cost is due partly to an emphasis on in-house manufacturing. For example, instead of spending $50,000 to $100,000 to purchase radio equipment and other communications gear, SpaceX was able to develop gear in-house for $5,000.

Here are the ways Space X plans to dominate the Space Industry:

Commercial Space Travel

Illustration of Starship Test Vehicle

Currently, Virgin Galactic plans to charge its customers $250,000 (or more) for space tourism flights that last two to three hours — most of which is the atmospheric flight time to and from space, and only four or five minutes of which will actually be “in space.” Blue Origin’s flights will last only about 11 minutes from start to finish. Because neither company’s spacecraft can actually escape Earth’s gravitational pull, their time in actual “space” must be necessarily brief.

Not so with SpaceX and Starship. While originally designed as a Mars transport vessel and later tweaked to carry astronauts to the moon and back, Starship would also serve admirably as a space tourism vessel.

Once the company gets the final kinks worked out, each Starship should be able to carry up to 100 passengers on flights of essentially unlimited duration — to the International Space Station, to the moon, or just ‘round and ‘round the Earth in orbit, providing literally hours, or days, of space fun for its customers. And it can do this for a bargain price.

Musk has estimated the operating cost of a Starship launch at just $2 million. Divided among 100 paying passengers, that works out to a cost of service of just $20,000 per head. And that means that…

Well, do the math. Assume Musk wants to undercut the prices of Virgin Galactic and Blue Origin, and also earn a tidy profit for SpaceX. Were he to set a ticket price of, say, $50,000 for Starship, he could underprice Virgin Galactic’s $250,000 ticket price by 80%. And if SpaceX’s launch cost is only $20,000 per passenger, SpaceX could earn a 60% operating profit margin at that ticket price — about the same profit margin that SpaceX is targeting with its Starlink internet service.

Contracts with NASA to design rockets and to carry payloads to the International Space Station.

Starlink: (Broadband Satellite Internet Subsidiary)

Starlink is its ambitious project to build an interconnected internet network with thousands of satellites, known in the space industry as a constellation, designed to deliver high-speed internet to consumers anywhere on the planet. SpaceX leadership has previously estimated Starlink will cost about $10 billion or more to build but believes that the network could bring in as much as $30 billion a year — or more than 10 times the annual revenue of its existing rocket business.

Ark Invest named satellite internet as one of its “big ideas” for investors in 2021, with Korus estimating that Starlink has a $10 billion a year addressable market in the U.S. alone, and $40 billion a year globally.

“Is Elon about to do to telecom what he’s done to cars and batteries?”

SpaceX has launched more than 1,000 Starlink satellites to date, with the company planning to deploy 4,425 satellites in orbit by 2024 to provide service to customers all over the world.

The company in October began offering early Starlink service through a public beta to customers in the U.S., Canada, and the U.K. It also recently widened the scope of that public beta, allowing prospective users to preorder Starlink service for $99.

On his favorite medium, Twitter, Musk responded to a follower asking to take SpaceX public:

We will probably IPO Starlink, but only several years in the future when revenue growth is smooth & predictable. Public market does *not* like erratic cash flow haha. I’m a huge fan of small retail investors. Will make sure they get top priority. You can hold me to it.

Gwynne Shotwell, the company’s president and chief operating officer (COO), said Starlink could be a candidate for a spinoff IPO, but Musk said he gave no thought to such a move.

“SpaceX needs to pass through a deep chasm of negative cash flow over the next year or so to make Starlink financially viable,” Musk said in a tweet earlier this month.

How to Invest Indirectly?

In 2015, Fidelity and Google saw value in buying a stake in SpaceX. The two companies collectively signed a deal that pushed SpaceX's value to $10 billion.

This funding was geared towards financing the emerging satellite business that SpaceX anticipated would develop a unique global communication system. Therefore, anyone with interest in possessing SpaceX, albeit indirectly, can only do so through purchasing shares of Google’s parent company, Alphabet Inc. Because Google’s parent firm partly owns SpaceX, in theory, having a portion of Google stock is a way to indirectly grab a piece of SpaceX.

It’s true. Thanks to Google’s 2015 investment in SpaceX, Google's parent Alphabet now owns a 7.5% stake in SpaceX. As a result, it is now possible to invest in SpaceX — by investing in its part-owner, Alphabet. (As a bonus, you also own a whole lot of Google, YouTube, the Android operating system, and a nascent self-driving car project besides.)

Valued at $735.8 billion today, Alphabet reported a net income of $12.7 billion over the past 12 months, despite taking a big hit from tax reform. Google’s actual cash profits — its free cash flow — are even stronger. According to data provided by S&P Global Market Intelligence, over the past year, Alphabet has generated $23.9 billion in positive free cash flow, which is near twice its reported profit. And as cash has piled up on its balance sheet, the enterprise value of Alphabet stock has shrunk to the point where the whole company, net of cash, now costs less than $638 billion, or about 26.7 times trailing free cash flow. Admittedly, even 26.7 times FCF isn’t a particularly cheap way to invest in SpaceX stock. But neither is it unreasonably expensive. Most importantly, for the time being, it’s the only way you can practicably invest in SpaceX.

KEY TAKEAWAYS:

  • SpaceX CEO Elon Musk doesn’t plan to take SpaceX public.
  • According to the company, the short-term demands of shareholders conflict with his long-term ambitions.
  • Although reports suggest SpaceX could spin-off its Starlink satellite business, Musk says he has given no thought to the possibility.
  • Invest in Alphabet to get a piece of Space X.

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Manav Golecha

Manav Golecha

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