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Think twice before generalising 'space economy' equities

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Space might well be the new frontier in equity investing, with several deals catching the attention of capital markets professionals in the past couple of weeks. But as exciting as investing in space and space technology are, grouping vastly different businesses together under the catch-all term 'space economy' runs the risk of stoking fads or even an equity bubble.

In EMEA, the listings of Emirati commercial satellite company Yahsat in Abu-Dhabi and new fund Seraphim Space Investment Trust in London gave investors a chance to back the growing use of space technology, mainly commercial satellites, an industry that is booming, according to a recent report by the Satellite Industry Association (SIA).

In 2020, a record number of new satellites were launched into space, three times as many as in 2019, according to the report. It was the third year in a row that the record had been broken. By the end of last year, there were 3,371 satellites circling the globe.

This rapid growth is a response to growing consumer demand for technology like GPS as well as government and commercial requirements and military needs.

The commercial satellite industry is characterised by stable revenues and long-term clients, but Yahsat and Seraphim were not the 'space economy' companies generating the most headlines this month.

The show was stolen by Virgin Galactic, which is planning a $500m share sale in the US following a successful test mission which sent its billionaire founder Richard Branson briefly into Earth’s orbit before returning him to the company’s spaceport in New Mexico. Virgin Galactic was taken public in 2019 through a SPAC merger.

However, the three firms taken together have been used to highlight the growth of the ‘space economy’. It is reminiscent of the late 90s and mid-2000s, when firms with very different business models were often grouped together just because they were all on the internet.

During those times of turmoil, myriads of companies benefited from hot money chasing a trend, but most proved to be bad investments, with only a handful of names, like Amazon, Apple and Google, becoming the market leviathans that today represent the core of the sector. Generalisation proved to be folly during that craze.

Similarly, despite all being linked to the growth of investment in space, Virgin Galactic, Yahsat and Seraphim are completely different animals.

Virgin Galactic is, in essence, an expensive airline with huge overheads. Last year, the cost of producing a single spacecraft for the company was pegged at $30m to $35m. Each vehicle accommodates 6 passengers.

They are built to last 10 years, making 50 flights a year, and the company is hoping to produce enough to accommodate at least 400 flights per year and revenue of $1bn per spaceport. Analysts have said that to hit this revenue target, tickets would have to cost $400,000 on average.

It is questionable whether there is a $1bn a year market of customers desperate to be regularly flown into orbit, and even if there is, Virgin Galactic already trades at 9 times this potential revenue, before it has built out its fleet or even run its first commercial flight. Its stock price has risen by well over 400% since it was taken public.

Equity investors are already paying through the nose for a company which is little more than an idea and at its best may grow to become a sort of sub-orbital Concorde, which was never a major profit generator for airlines.

Investors need to stay away from broad thematic investments in space or risk falling into the same traps that sunk those that ran headlong into bad investments during the dot com bubble.

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