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The space economy is hitting an inflection point and is presenting several attractive publicly-traded opportunities. 7investing CEO Simon Erickson interviews Procure AM's Andrew Chanin about how to invest in the space.
February 16, 2023 – By Simon Erickson
Morgan Stanley believes the space economy will be worth more than $1 trillion dollars by 2040. Bank of America Merrill Lynch believes it will reach $2.7 trillion by 2045.
If those estimates are even directionally-correct, outer space will soon become one of the biggest investment opportunities of our lifetime. And it’s more than just a science-fiction dream. The commercialization of space is already well-underway. The Federal Communications Commission (FCC) recently granted SpaceX the right to launch 7,500 of its next-gen satellites, and it’s working through a backlog of nearly 40,000 more applications. That would represent a quadrupling of the total number of satellites currently in orbit; as the whole sector is hitting an inflection point.
What’s the best way to invest in this trend? Will satellite internet really account for half of the overall space market by 2040? Will we see a renewed “militarization of space”, with demand for military intel vaulting defense contractors even higher? Will launch providers appeal to a new wave of commercial customers? And how should investors think of the newly-public “SPAC” companies who raised funding in 2021?
To help us answer those questions, we’ve brought in a space investing expert. 7investing CEO recently spoke with Procure Asset Management’s Andrew Chanin. Andrew is a favorite guest of our 7investing show, appearing on our podcast in 2020, again in 2021, and then again in 2022, and Procure’s ETF with the ticker “UFO” offers pure-play exposure to the space economy.
In the first part of the discussion, Andrew describes the role of private companies in the militarization of space. Elon Musk’s SpaceX played an important role in enabling satellite communications for Ukraine during its conflict with Russia. Other satellite operators are similarly assisting in military operations.
One of those companies, Maxar Technologies (NYSE: MAXR) was recently acquired at an impressive 129% premium — demonstrating the importance of military intelligence and the potential opportunity for investors. Andrew goes on to discuss the implications of the Chinese spy balloon and how geopolitical tensions are escalating between the US, China, and Taiwan.
In the next segment, Simon and Andrew discuss how the FCC recently approved 7,500 of SpaceX’s next-gen satellites for satellite-based internet. Other commercial enterprises are also interested in proving high-speed internet connectivity to enable new technologies — such as 5G or the Internet of Things. This has led to a frenzy of applications for spectrum rights, as satellite internet will be one of the largest contributors to the future commercial space economy.
The two go on to discuss the role of consolidation, startups, and skilled labor in the space. Simon points out that Rocket Lab (Nasdaq: RKLB) is investing in infrastructure that would enable an order-of-magnitude increase in its current launch capacity, while Andrew discusses how many companies are actually collaborating to achieve common goals and milestone. At the conclusion of the conversation, the two discuss additional M&A opportunities.
Publicly-traded companies mentioned in this interview include Aerojet Rocketdyne, Intel, Lockheed Martin, Maxar Technologies, Rocket Lab, Taiwan Semiconductor, and Virgin Orbit.
1:05 – The militarization of space – SpaceX’s role in the Russia/Ukraine conflict and Maxar’s acquisition
13:06 – Commercial opportunities for space-based broadband internet
23:34 – The FCC is streamlining its review process
30:42 – Rocket Lab’s new Virginia spaceport
33:21 – Diversification of assets and businesses
37:04 – Upcoming consolidation in the space?
Simon Erickson, Andrew Chanin
Simon Erickson 00:02
Hello everyone and welcome to this edition of our 7investing podcast where it’s our mission to empower you to invest in your future. You can learn more about our 7investing membership and get access to all seven of our top stock market ideas each and every month for just $1 at 7investing.com/subscribe.
Simon Erickson 00:19
I’m 7investing founder and CEO Simon Erickson. This is a real treat for the podcast today, because we’ve got one of my favorite returning guests. Andrew Chanin is the co founder of Procure asset management, they have an ETF $UFO that is a pure play on the space economy. Andrew, I always love chatting about space stuff with you. Welcome back to the 7investing podcast.
Andrew Chanin 00:42
It’s a pleasure to be here. Thanks for having me again Simon.
Simon Erickson 00:45
We’ve chatted about the space economy quite a few times in the past and we’ve talked about the commercialization of space. We’re gonna talk about a couple of investment opportunities later in the program. Today, I want to touch on Rocket Lab, I want to touch on the into in consolidation of several of the players, and I want to talk about the FCC’s recent review process.
Simon Erickson 01:05
But maybe we start at something that’s been in the news a lot, definitely for the last past a year or so. As so many of these conversations start, this one shall also start with Elon Musk. We’ve seen Starlink playing an increasing role in the Russia and Ukraine conflict. Maybe that’s just kind of opening a can of worms to ask about how this private company, which is SpaceX, is playing a role in that conflict. And then kind of broader, what are the roles for private companies to be in the militarization of conflicts like this. Andrew you can take this any direction you want to. But I just want to throw it to you and see what you have to say about it.
Andrew Chanin 01:43
Now, there’s a lot that we could certainly unwrap here. And a lot of it’s unfolding before our very eyes. Some is obvious, and in front of us, while other is happening behind closed doors.
Andrew Chanin 01:53
But when you look at Ukraine and Russia, you have to go back to, you know, prior to the invasion, and one of the first signs of a potential invasion was satellite imagery from a company called Maxar, which happens to be the largest holding of UFO as of last night’s close. And they were providing imagery of troop and supply build up on the Ukrainian border. And around that same time, satellites that were providing communications to Ukraine also went offline. And there’s a belief that either Russian or other adversarial forces help to take the satellites out of commission, so that there wasn’t the secure communication available in Ukraine. And Elon Musk and Starlink saw that as an opportunity to provide satellite connectivity for Ukraine, whether that be for military reasons, or even for for civilian use. And there’s been many other providers that have rushed to the aid of Ukraine to provide communication, satellite connectivity, certainly weaponry and other ways of providing assistance.
Andrew Chanin 03:03
But space really entered the front of the stage at the start of this conflict, showing how integral it is for military purposes. And there’s been many different companies whether you know, advertising, that they’re providing assistance, like secure sat phones, that are being used by the leaders of Ukraine to communicate securely. But one of the major things was how we learned how important space is, for the militaries. Certainly we knew governments relied on it, and businesses and individuals like you and I. This interview today wouldn’t be happening without satellite capabilities and connectivity. But how important space is viewed and space is now being seen as the military high ground for all modern warfare.
Andrew Chanin 03:52
And it’s not just communications, it’s not just surveillance and imagery, seeing what’s happening on the ground. But your connectivity with things like hypersonic weaponry for being able to track missiles and other types of offensive or defensive capabilities from your adversary space is helping us get that insight and in many cases, real time. And so this has become something that is, you know, being viewed by militaries worldwide as if you want to have a significant military presence or even the ability to just defend yourselves or continue operation without being interrupted. A, it’s difficult. But you’re going to rely on space moving forward. So this is something that’s being viewed at the highest levels of the military and governments around the world. And something that is not just becoming, oh, it’d be nice to have, but a must-have. And back to Elon Musk and SpaceX, they’re providing you all different types of capabilities for players around the world, which also potentially makes them a target when you’re providing your someone’s adversary with capabilities. One of the things that they typically look to do is to get rid of that that capability. And so there’s certainly the company’s put themselves in the crosshairs. But they’re making their own business decision to move forward, you know, at this current moment and providing these capabilities.
Simon Erickson 05:16
And it happened quickly, right? Like Elon, you know, the Starlink thing — it seemed like the satellites were down. We knew there was an escalating kind of conflict going on in Ukraine. And all of a sudden, Elon comes in as the white knight that saves the day and the satellites are back up. And of course, the government intel is important. We know that military intelligence has been around for decades. Andrew, but back to Maxar, you just mentioned that was a big deal. I mean, that was a 129% premium that they got acquired for back in December. A $6 billion buyout from a private equity company. This isn’t just kind of an incremental, 10% or 15% premium or anything like that. That’s a doubling of the stock price just over over something that had happened kind of kind of quickly.
Simon Erickson 06:00
I know that in addition to Russia and Ukraine, we’ve had a Chinese spy balloon in the news lately, floating over Montana and different parts of the country here. Do you feel like this is just an escalating geopolitical risk environment we’re in right now, and is that serving as a huge catalyst for a lot of these companies that are playing this necessary part of all of it?
Andrew Chanin 06:21
So it’s difficult, you know. I don’t have any knowledge that you or your listeners don’t have.
Simon Erickson 06:29
I want the intel and security clearance here! [laughs]
Andrew Chanin 06:33
We’ll have to save that for whoever your next guest is maybe. But, you know, really, you look at this spy or weather balloon or whatever this may be. And you actually have to look back further to 2018, where there are actually videos taking place in China, where they’re showing capabilities of being able to load what are known as hypersonic glide missiles on to these high altitude balloons with the ability to launch these missiles from these balloons. So regardless of whether or not this recent instance was something that had military designs behind it, the capabilities are there. And so being able to get over us airspace over the continental US for a significant amount of time. And potentially having the ability to launch hypersonic capable missiles is an absolute security concern. And to the extent that this is a region that’s not being patrolled, or monitor, to see if there are any potential incursions certainly is a major concern. And it’s something that needs to be ratcheted up.
Andrew Chanin 07:45
And so this might be something that is a space capability, where we’re able to have an earlier detection of these potential intrusions. And that is all the difference when you’re talking about your hypersonic weaponry. I mean, seconds milliseconds, any advantage that you have to detect a potential income and destructive capability is monumental. And so this shows that because there was this gap and capability in being able to detect this, this is going to need to be a high priority to prevent incursions like this in future. So regardless of what this balloon most recently, what the purpose was, who sent it, what its capabilities were, this shows a major gap that needs to be closed. So spy spying, espionage, offensive defensive capabilities are all something that needs to be considered by the highest levels of military and government when preparing what to do moving forward for national security purposes. And now this just check the box as being a high priority.
Andrew Chanin 08:56
So it’s very likely that your capability to detect these and monitor these for earlier points. The solutions may come from satellites or from space companies and technologies. And we’ve seen a rapid amount of spending here in the US but also globally from governments and militaries ramping up their space spending. And there’s always new areas that can be spent on to the US has admitted numerous times that we may have already been leapfrogged in hypersonic capabilities by China and Russia. And what do we do here in the US to provide that we can remain a superpower it’s outspending all of our adversaries, and in many cases, our spending to numerous countries combined. And space is one of these domains that is now being viewed as one of these high priority. So anytime we see some type of deficiency, one of the best ways to attack closing that gap is by spending money. And we’re seeing it happening in real time with all different types of military programs.
Simon Erickson 09:59
And one last question on the military topic here. And we talk a lot about Russia, because that’s the conflict where there’s there’s tanks and troops and things actually happening on the ground. But it does seem like the there’s more and more whispers of things with China and Taiwan escalating out there. Without speculating too much, do you have a perspective on what’s going on with China and in Taiwan right now? Is there an imminent conflict with that? Are you seeing an increase in spend for that region of the world? Or what’s your take on China and Taiwan?
Andrew Chanin 10:28
So, again, I don’t have any inside knowledge here to what what’s really happening behind closed doors. But just look at how the US has been posturing in the over the last year. And then realizing that Taiwan is a country that we’re heavily reliant on for many of our technological capabilities, whether it’s semiconductors and chips or otherwise. And we’re seeing major programs being rolled out to encourage the development. You’re on US soil, you’ll manufacture manufacturing capabilities that previously we had. You figure, okay, we don’t need this here, because we could do it so much cheaper when we when we outsource things overseas. But now, when looking at national defense, national security, these are things that are major gaps in our own capabilities, and becoming less reliant on foreign powers, whether they’re allies or not. Now understanding how easily an allied nation could fall to the hands of a larger, more powerful local neighbor of theirs, is requiring us to reconsider how our government operates, how our businesses operate, how our supply chains are managed. And this creates more opportunity back home in the US as well.
Andrew Chanin 11:39
So you know, there’s interesting technologies that are being developed today that could maybe improve on on our ability to make high important technological capabilities on US soil. And that’s encouraging, because not only is that making us less reliant on foreign powers, but it’s also bringing jobs to America. And ones that are, in some cases, very high paying because there’s an incredible amount of expertise that’s required for some types of these technological innovations that we’re building here in the US. And so, at the same time, we’re always concerned for our allies. But we’re also limited in our capabilities and capacity for what we’re able to do. And being that Taiwan is so close to China, it is something that is difficult for us to step in, in a moment’s notice. Especially when there are many battles being waged around the world as we speak. Some small, some large. Some unknown to most. And so, hopefully this can also be an opportunity for the US as well, as a way to better protect itself from negative actors that would like to see the US have a lesser role in the global perspective.
Simon Erickson 12:55
Yeah, the geopolitical tensions will always be there, and nobody wants to be at a disadvantage. So you certainly have to keep peace with everyone else. And in terms of satellite technology, and the defense budget out there. Great points on that one.
Simon Erickson 13:06
Let me segue to a lighter note. You know, let’s stop talking about wars and military and let’s talk about commercial opportunities for satellites.
Simon Erickson 13:13
One thing that we just saw was the FCC approved 7500 of SpaceX’s next gen satellites. They have been given approval for the spectrum that they wanted to operate in for broadband broadband internet, that they were going to supply the world with high speed internet. If this was a commercial purpose. You know, there’s obviously a lot of remote locations, that really, it’s just hard to get high speed internet. You might take it for granted if you live in a city or you work from an enterprise, you know, an office building or anything like that. A lot of places in the world don’t get that luxury. It’s very expensive, really high speed fiber optic cables or anything else to get to those. So satellite has been one of the opportunities for those.
Simon Erickson 13:52
And the reason I bring this up is because SpaceX has already got 500,000 global subscribers for their high speed internet. You buy a terminal, you kind of pay $100 a month for the service. Somebody on our 7investing team is using Starlink and is very happy with it, and the location that they are, but it seems like this might be a catalyst for several other telecom companies to follow suit. Certainly, it’s not only SpaceX and Starlink that has the mission of providing broadband internet to the world. Do you have thoughts on this Andrew? This is kind of generally considered one of the largest applications for the space economy, is going to be broadband internet globally. Where do you see this fitting in from the investing thesis?
Andrew Chanin 14:35
So you look at the different research houses and they’ll put out their own various projections on how they see the space industry growing. And if you look at Morgan Stanley, they believe that space could be a greater than a trillion dollar industry by 2040. Bank of America Merrill Lynch came out a couple of years ago saying that they believe the space industry could be $2.7 trillion by 2045. So there’s a wide range of what people believe the size of the space industry can be over the next coming decades.
Andrew Chanin 15:05
But one thing that many of these projections seem to believe in is that broadband internet connectivity communications will continue to be one of the larger growth areas for the space industry, making up roughly half of the growth over the next coming years. And one of these things that this is doing is allowing for other technologies like connected devices to potentially be more efficient, make more sense, and lower the costs for implementing these types of technologies.
Andrew Chanin 15:37
You look at a lot of the different areas of investment that people are looking at kind of in the thematic realm. And it’s things like 5g connectivity, it is Internet of Things, it’s big data, it’s cloud computing. And one of the common threads here is sending data from point A to point B. And in many cases, if you take satellites and space capabilities out of the equation, these technologies won’t work. Or they’ll be nowhere near as efficient as they can be with having space related solutions. So these are kind of the the picks and shovels of the digital data superhighway; kind of a digital data superhighway toll operators and main use cases.
Andrew Chanin 16:19
But there’s other technologies that people are investing heavily in, be it retail institutional, or so on. You look at things like satellite connectivity, though, and you’re one of these big areas of interest is low Earth orbit. So yes, Starlink did get FCC approval. However, it is only partial approval. So they received this partial approval for 7500 satellites to be launched into low Earth orbit for part of this second generation Starlink network. And 7500 satellites sounds like a lot because it is. And some of these constellations are talking about 10s of 1000s of satellites. And Starlink is certainly talking about that as well. I believe the proposal was for about 30,000 satellites, and they have this partial approval for now. Which is kind of, hey, let’s see what happens.
Andrew Chanin 17:10
The reason this is so important is because that almost doubles all of the active satellites in low Earth orbit today. And so we’re talking about sending up magnitudes of what we currently have today. And we’ve seen things like near misses and collisions, we’ve seen things like space debris, you know, harming satellites, and other spacecraft and assets that we have in outer space. And the more things you add to low Earth orbit, the higher chance that you can have more collisions. And it’s not just a collision, and then it’s done. These items and debris, travel at orbital speeds, you know, for potentially years to come. And so cleaning it up avoidance, deterrence. All of these become important technologies and capabilities that you’ll need to see in future generations of satellite as well, the more cluttered things get. And there’s a strong belief that because we’re sending so many things into low Earth orbit now that debris fields could be something that could make low earth orbit very difficult to operate in if we see significant areas of collision.
Andrew Chanin 18:21
In the future, when there is a space race, there is a land grab for these different orbits. And so to the extent that you’re a company that can get the approval and set things up today, you might be in a better position than 10 years down the road, when companies are saying, hey, I want to send things up. But maybe there are a lot more restrictions from the FCC or other global entities that are going to reduce it. So that does many things as far as driving demand for. And so there are numerous types of companies here that could see benefits from that.
Andrew Chanin 18:52
So watch a company that might have a ton of orders coming in because companies are racing to send satellites to space. It could be a satellite operator or manufacturer, like Maxar that we just mentioned that’s being taken private — based on the acquisition proposal that you mentioned earlier. It demands for parts for satellites, you know, chips and sensors and things like that are key components for satellites. So there are numerous types of sub industries within the space industry that could see an increase in demand. If we see a huge demand, they’ll push forward to have satellites sent in into low Earth orbit before restrictions are raised. So this is a really interesting part of the the space economy that isn’t necessarily getting a ton of attention. But there is an urgency today. And that’s why you’re seeing companies like SpaceX with Starlink Amazon with Project Kuiper and others putting forth proposals to send 10s of 1000s of satellites up into space for their constellations.
Andrew Chanin 19:55
It’s almost like if you don’t do it now, you might lose that opportunity as well. When you look at these approvals in many cases, you have a certain timeframe to which you must send the satellites up. If you don’t send them up by that certain time, you might lose some of your future approvals that you have as well as some of the satellites. So there is a mad dash to send satellites to space. And there are potentially several sub industry categories that can see a benefit from that.
Simon Erickson 20:22
I’m so glad you brought up some of that as context, Andrew. Because it seems like this is under appreciated what an inflection point we are going through right now.
Simon Erickson 20:31
When you when you throw out a number like a trillion dollars by 2040 or $2.7 trillion by 2045. That’s a massive market, right? There was $600 billion of chips sold globally last year. This is now another chip industry. And this is something that is completely perhaps underappreciated out there right now. Go ahead.
Andrew Chanin 20:53
I wouldn’t even just say under appreciated, but I would say completely misunderstood. And I think that that’s why you see your bids from private equity firms to take a company like Maxar private at 130% of their previous night’s close. It’s because there’s opportunity that these companies are saying, Hey, I don’t think people realize what these companies really are the importance that they provide today and what they might be able to do in the future. And they’re saying, Hey, I’d happily pay over 100% what the current market is pricing these companies at because they do see this long term opportunity, or even short term immediate opportunities, whether that’s combining a company with what they already have in house. Or they just see it as a standalone, strong business. It’s tough to see what they’ll end up doing with Maxar in the future. But you know, they clearly saw some opportunity.
Andrew Chanin 21:42
And the reality is, you know, from my own conversations, most investors don’t understand space. They don’t understand that supports today. They hear space and they think, oh, space exploration, you know, finding another planet and moving earth to, you know, to planet B. That’s not what’s driving the space economy today. There are real revenues being generated. And in many cases, it’s different technologies or applications that are benefiting our life here on Earth. And there are many stable companies in the space industry that aren’t saying, hey, we need to make our money. When we start mining that asteroid, that’s worth a trillion dollars. It’s, hey, we can benefit life here on Earth, based on these capabilities that we’re providing. And they’re creating real businesses out of space is something that I think so many people miss. It’s so vast have so many areas that it can encompass that the vision is focused on maybe what they’re hearing the most, which may be space tourism, because all the billionaires are doing space tourism are offering those opportunities that can draw the headlines.
Andrew Chanin 22:47
But there’s a real need for many different space capabilities today, though. For having communications like this for military purposes for government, that is why the Space Force was created. Because space is its own critically important domain. And each branch of the military here in the US is also reliant on space, even though there is a space force. So there are real opportunities today, governments are having to spend today to see those benefits in the future. And this is a real time for the space industry. And it’s this misallocation due to, I believe, likely misunderstanding that’s allowing for these opportunities to persist. And we look forward to the time in the future when people have a better understanding and a realization of what these companies have to offer and where we could potentially be in the future.
Simon Erickson 23:34
Absolutely. And so for the purposes of this show, and the 7investing podcast we’re on today, let’s wrap this up a little bit of what this actually looks like. We’re not just saying we’re gonna go put colonies on Neptune 500 years from now or anything like that. This is actually commercial opportunity. Let’s kind of walk through what this looks like.
Simon Erickson 23:52
It starts with the FCC, like you just said. If you want to put something into low earth orbit, you have to get approval for the spectrum for the frequencies you’re going to be broadcasting anything at. And to put some context around this, as you alluded to earlier, there was at the end of 2021 about 4500 active satellites around the Earth that were active and operational. And around a little less than 10,000 at the end of 2022.
Simon Erickson 24:18
The FCC has gotten more than 38,000 pending approvals for satellite requests, including the one that was just recently approved for SpaceX. And several others you mentioned several of them. Project Kuiper with Amazon has got some 2500 for this that it wants. Other companies like Astra wants 14,000 for broadband internet. Even Intelsat, Hughes Network, OneWeb… I mean, Boeing, telecom companies, everyone has got plans to put satellites out into space. And that’s why you got the FCC streamlining its process to more rapidly approve even the first step of this.
Simon Erickson 24:53
I want to talk about the next step now, which is okay, let’s say that they get approval. Let’s say that they’ve gotten you know the frequencies to everybody who wants to put them up there. It’s not easy to put a satellite that can handle the conditions of space. When you got direct the sun is right there without an atmosphere. I mean, I know that the temperatures alone are going from negative 50 to 100 degrees Celsius and the sun’s direct exposure. I mean, there’s some technical factors of even getting this done. But Andrew, to the satellite operators and the manufacturers of those satellites. Do you see? I mean, it’s just one of the opportunities you focus on with UFO is the people that actually do this, it’s not so easy to even get a satellite, even if you get approval, right? How does this factor into your investing case, if you look at these kinds of companies?
Andrew Chanin 25:41
So really the index providers looking at companies that are deriving revenues from space. And so for UFO, we at rebalance, at least 80% of the weighting of the fund is in companies that derive a majority of their revenues from space. You’re also understanding that there are some very large diversified aerospace and defense names that are major players in space, but they don’t derive a majority of the revenue from space related activities, businesses and services. So they’re allowed to have in total up to a 20% weighting in the fund.
Andrew Chanin 26:20
Each of these companies are different. They either have different technologies, they’re providing your capabilities for different segments of the market. And you just look at the launch industry alone. And there are numerous players, public, private, in UFO alone. You’ve got a company like Rocket Lab. And then you’ve got a company like the United Launch Alliance, which is a joint venture between two UFO holdings, Boeing and Lockheed Martin, that have the ability to send you a much larger payloads than something like a Rocket Lab. But a Rocket Lab has its own benefits, in that it’s faster to create a Rocket Lab rocket that have several different areas around the world now that they’re able to have the approval to launch to launch rockets for and they have the smaller payloads. So they can be a little bit more nimble, they can find smaller clients that don’t need to send massive payloads into orbit.
Andrew Chanin 27:13
So they’re all kind of carving out their niche. And then some that are successful then start expanding into other areas. Whether that’s from creating their own technologies through R&D, whether it’s through acquiring other businesses or merging with them. But you know, a lot of these publicly traded companies, since going public, are finding opportunities to get government contracts as well. So government contracts and military contracts to these can be the lifeblood for many companies. So it also kind of helps to have diversified revenue streams, where you’re catering to both the government as well as commercial and or civilian applications, so that you can smooth out your revenue streams a bit more, whereas government contracts can can be rather chunky. And if you’re completely reliant upon them, there could be any number of reasons why you might not be able to win your government contract, whether that’s your better rivalry competition, maybe it’s something that your CEO said or did, maybe it’s a company in adversarial nation that you did business with, these conditions can change, you know, with with the snap of a finger. And if you’re completely solely relying on having a business model that’s only catered to one type of customer base, it could be riskier, as well. So diversification is something that makes a ton of sense.
Andrew Chanin 28:29
There’s 1000s of players, space companies from around the world that are specializing in different areas. Many of them are private, but you also do have publicly traded companies as well. So this is your constantly evolving industry. You know, mergers and acquisitions are something that have happened throughout the space industry. For years, in many cases, it’s those prime companies, those diversified aerospace and defense names that have the deep pockets, that when a technologies may be struggling or a company struggling, that they want to own those assets. They combine for pennies on the dollar down the road, if the company is not able to achieve their goals fast enough to get those government contracts that they built their entire business model around. So consolidation wouldn’t be shocking. It’s something that we’ve seen for decades in the space industry. But that doesn’t mean that players and upstart players can’t come up with great technologies that solve for a certain gap in in the offerings out there. And they’re able to excel and become their own large major player and make their own acquisitions and grow as well.
Andrew Chanin 29:36
So I think another major thing we need to see is the workforce expanding there is an incredible demand for talented and educated and capable individuals that want to work in the space industry. And you’re starting to see universities realizing that by by offering your catered programs for individuals and engineers that want to work in the space industry, and some just space companies are deemed as those very cool ones that graduates want to work for. And so that is all helping to drive innovation. Because it’s not just money. It’s not just the contracts. It’s also great ideas and great employees. And these are things that you need as a foundation to build any strong industry. So it’s good to see that we’re seeing a lot of people that are starting to say, hey, you know what, this, this is a real industry today, one that I might be able to find a job and be very happy for years ahead. And these are all kind of critical parts of the recipe that you need to see to see a great final output for these companies.
Simon Erickson 30:33
Absolutely, I’ve got a very close friend who is in the industry, and he says the hiring is for real and the applicants are very, very highly qualified. So there’s no doubt about that.
Simon Erickson 30:42
Let’s double click in a minute just on the mergers and acquisitions that you brought up. But I first wanted to chat about the publicly traded launch providers too. Because it’s very difficult to put satellites into space and the orbital planes that you want to and everything else like that. Perhaps we take for granted that you can’t just get a satellite up there and then it automatically just works. We’ve seen several failed launch attempts recently, right? Whether it’s Virgin Orbit, with the issues that they had astral labs that are ones that they had. But then we also saw the positive note, you mentioned Rocket Lab. Rocket lab’s just opened a new spaceport off the coast of Virginia. And they just had their first successful launch for Hawkeye 360, who’s doing RF data collection for the government. Which is, of course, conveniently right there in Virginia as well. But it seems like in addition to thinking through FCC approval for spectrum, thinking through creating the satellites, and what you actually want them to do, you also have to have a reliable launch partner. Whether that’s Jeff Bezos with Blue Origin, whether that’s Rocket Lab with a much smaller electronic rocket, like you said, whether that’s hitching a ride, and ride sharing with the SpaceX Falcon rocket. But it’s not like this is all just a commoditized industry of launch. I mean, Andrew, it’s fair to say these are different approaches on how do you even getting these into into orbit in the first place? Right?
Andrew Chanin 31:59
So let’s look at Project Kuiper, which we both now mentioned today. They want to send 10s of 1000s of satellites into low Earth orbit for their constellation. And you know, from the casual observer, they’d say, Oh, Blue Origin that’s owned by Jeff Bezos, well, Amazon, of course, is going to just use Blue Origin to do that, because that’s gonna make you know, their founder that much more profitable in his next business venture.
Andrew Chanin 32:23
But the reality is, they contracted three different launch providers. And none of those rockets that they require, for their various specs, to launch these massive payloads of tons of satellite cargo, Have they even been built yet? They’re still building these rockets to be capable to send up these Project Kuiper satellites. So in some cases, it’s, Hey, you need to build it today, so that they can be used tomorrow. But just seeing how, you know, it took more than one company to basically fulfill this demand for this first wave of launches, is talent. And we’re always striving for better, faster, stronger, cheaper solutions for the space industry. And this is also not just a way of being able to get all of these satellites launched in time.
Andrew Chanin 33:21
Diversification is important. There’s been times when the government has contracted your company, not even just for space, but for other purposes, where they contract them to create some type of product or service that they’re going to need, and the company goes bankrupt before they’re able to actually deliver. And so for a company like Amazon, that is trying to make a big step into space with Project Kuiper, they’re diversifying things as well.
Andrew Chanin 33:47
So it’s a strategy not just for investing, it’s for running your business. Whether that be supply chain, whether that be your customer base, your diversification is and can be an important factor. And so, it’s almost like the butterfly effect – where one company’s flapping its wings and it’s driving to many other companies. So just because you’re SpaceX, a major space company, doesn’t mean that what they’re doing isn’t benefiting other space companies as well. And so, you know, they only have so much bandwidth to launch things using SpaceX capabilities that there needs to be other solutions as well, and they’re picking up a lot of slack too.
Andrew Chanin 34:32
As much as you might you believe that there are fierce rivalries with the space industry, there’s also a lot of collaboration. And when you look at government contracts, a lot of times it’s you have several companies putting their heads together and doing a joint bid. And that’s the way that a lot of things get done too. So although there’s a lot of government secrecy and other things with different types of programs that are being done with space, there’s also a tremendous amount of collaboration. Look no further than how The International Space Station has still managed to survive as a cooperative place for countries that here on earth might be adversarial. But they’re still doing work today. And commercial space stations and space stations are another thing that we haven’t even talked about that there could be another major way forward for the space industry.
Simon Erickson 35:21
It feels kind of like the semiconductor industry in a lot of ways. To me, you look at what Intel did, and then what Taiwan Semi did, it’s just like they always invested so far ahead of the cost curve and the computing need for that for the current year. They’re always investing for the future demand. And then you see, like you mentioned Rocket Lab, who’s doing three launches a quarter right now with the Electron rockets going out there. And saying, Hey, we have opened a third spaceport globally. Now, we’re equipped and ready to do 120 a year, which is 40 A quarter. I mean, that’s an order of magnitude jump from three a quarter that you’re doing right now! They are not just investing in those capabilities for the fun of it. They see that the demand is going to be there another data point that suggests the point of inflection like we’ve been chatting about for this entire conversation.
Andrew Chanin 36:07
Absolutely. And we’re already forgetting about it because we’re in 2023, but SpaceX basically launched a rocket every single week last year. When we talk about the importance of diversity and suppliers and whatnot, there are other major obstacles like we haven’t mentioned. Like I mean, timing could be important, but you have to be patient when you’re when you’re trying to involve space into your business. Because just because you have a deadline or target doesn’t mean that every other factor is going to abide by that. And in many cases, you can see a launch delayed days, weeks, even months if the conditions aren’t right. So a lot of things need to go right for companies to be successful. But that’s another reason that they tried to diversify themselves in numerous ways, whether it’s having launchpads in different regions of the planet, different government jurisdictions and rules and regulations. There’s many ways that these companies need to be nimble, so they can be competitive.
Simon Erickson 37:04
And then finally, back to the M&A point that you brought up earlier, Andrew. With the exception of SpaceX, which is already a private company but valued at more than $100 billion in the private markets right now. And with the exception of massive defense contractors like Lockheed out there, the majority of the companies that are publicly traded in our space theme that you’re looking at for the ETF for UFO, I would say most of them are sub $10 billion market cap. They’re still very small cap companies. There just hasn’t been a ton of revenue, at least in years past to support them being higher than that. Do you think we’re going to see, and then back to the point that we we just saw about Maxar, you know, 129% premiums? I think that was a $6 billion cash offer? At least it has not closed yet, but it’s on the table? Are we going to see more consolidation of some of the smaller companies in this space?
Andrew Chanin 37:53
Yes. So you know, we’ve seen, you know, with Aerojet Rocketdyne, how this is slowly moving forward as well. Another major hurdle for some of these companies to be acquired or merge can be competition. And so not only does another company think that you’re worth the money, but the government has to sign off on it. Because a lot of these companies are doing things that are very sensitive, for governments or for the Department of Defense, or other foreign equivalent agencies, that just because someone wants to pay you a lot of money doesn’t necessarily mean that the deal is going to go through. So mergers and acquisitions have been in the space industry for decades. And to think that that would disappear seems unlikely. There’s also a lot of competition. Sometimes a company might just have one really interesting aspect that might be worth it. So they might be willing to spin off and focus their efforts on something else. Things can become obsolete and really quickly as well. So you might make a technology that you know, in all future rockets going forward might not be required. So how do you continue to grow as a business? Do you? Do you sell yourself to the one or two companies that might maybe you’ll be interested in your product? Or do you invest to find your passport so you can still remain a relevant player. There’s all different types of methods.
Andrew Chanin 39:19
We’ve seen kind of the spec craze from several years ago bring a lot of companies public. Not all of these companies were necessarily ready to be publicly traded companies but just saw the cash and decided to cash in on that opportunity in time. Some of these companies that help them dramatically, where now they’re able to get government contracts because they’re on a much better financial footing. You know, Rocket Lab that we’ve talked about a couple of times is an interesting company. They successfully de-SPAC’d and are trading, you know, half of that $10 kind of SPAC price. But they’re still showing a lot of impressive stats. And so, just because a company’s market price is something today doesn’t mean that that’s actually what it should be valued. And so as you see M&A – whether it’s companies looking to make their own company stronger or just because they find value and think that something’s being completely mispriced, people are looking at the space industry. I think that’s the important sign that you know, it might not happen today or tomorrow, but in many cases space companies that are undervalued are seeing demand.
Simon Erickson 40:30
Well, this is always one of my favorite conversations of the entire year. Andrew Chanin is, once again, the co founder of Procure Asset Management. You can follow along with their ETF, the ticker on that is U F O for pure plays in the space industry. Andrew, it’s always a lot of fun. Thanks for being a part of the 7investing podcast today.
Andrew Chanin 40:46
It’s my pleasure. Thank you to you and your audience. I’m happy to come back anytime.
Simon Erickson 40:50
And thanks for tuning in to this edition of our 7investing podcast. We are here to empower you to invest in your future. We are 7investing!
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