How to invest in the second space race

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

China is going to the far side. India went for the price of making a movie. The US wants to create a new time zone. With everyone shooting for the moon, how can investors snatch a piece of the action? 

There’s plenty to reach for: the global space economy will treble to $1.8tn by 2035, reckons the World Economic Forum. If these projections pan out, this will be a sector roughly on a par with the global semiconductor industry. 

Pure plays with scale are rare. Elon Musk’s SpaceX is unlisted. Virgin Galactic, UK tycoon Richard Branson’s lunar tourism play, is more accessible, having listed in New York via a Spac in 2019. Despite a rare share price jump last week, on opening a ground testing facility, widows and orphans may opt to steer clear. Shares are still a fraction of the peak.

One rung down, aerospace and defence contractors are muscling in. Space last year accounted for 18 per cent of sales at Lockheed Martin, inching up to 19 per cent in the first quarter of this year. The unit is marginally less profitable than other units. 

Space systems provided more than a third of revenues at Northrop Grumman last year; margins of 8.7 per cent below defence and mission systems. In practice total space exposure — including non-civilian — is likely to be bigger within the sector. 

Expect that trajectory to continue as projects come down the line in areas like communications, logistics and transport. Northrop Grumman earlier this year won a contract to plan for a railroad on the moon — the very infrastructure that helped fuel earthbound America’s economic rise.

M&A activity in the sector, while inevitably subject to heavy regulatory oversight, is ratcheting up. Antitrust concerns stymied Lockheed Martin’s $4.4bn bid to buy Aerojet Rocketdyne in 2022, leaving L3Harris to carry off the prize a year or so later for $4.7bn. BAE Systems in February sealed its $5.6bn acquisition of Ball Aerospace.

Commoditisation is under way: SpaceX is closing in on fielding a vehicle that could reduce cost per kilogramme to low earth orbit by 50-80 times. Reduced costs like these, Bain says, will help reshape established portfolios and consolidate tiddlers. 

Of these there are plenty, especially in specialist areas such as clearing space debris. Some have launched on to public markets, before falling spectacularly to earth, with tales of abortive launches and rocket-fuelled cash burn. 

Momentus, a commercial space company once flirting with a $1bn market cap, is now worth under $8mn. It is under notice from Nasdaq to file its delayed 10-K — a form detailing its financial performance — to retain its listing. Astra Space is returning to private hands after shrinking from near-$4bn in 2021 to $15mn.

Take heed: this is not a smooth ride. Government budgets are shaky. Russia’s glory days are fast fading, both in terms of launches and funding. In the US, Nasa’s budget requests were pruned by $2bn-plus for this year and next, to $24.9bn and $25.4bn respectively. 

As India demonstrated with last year’s successful controlled landing of the $75mn Chandrayaan-3 mission, big budgets are not mandatory everywhere in the world.

That matters since, for at least a while yet, governments remain the biggest customers. Mishaps, too, are far from uncommon — see the (admittedly accident prone) Boeing spacecraft’s aborted launch this week after a problem was found with a valve.

Space investing, like any moon shot, requires two things of investors: diversification and long time horizons.