Kevin Rooke is a young independent analyst focusing on investment research on technology companies. Some of his other posts about how Apple’s booming airpods business at $12bn revenues alone is bigger than some marquee tech companies including the likes of Adobe, Nvidia or AMD or the one on Tesla’s now meaningfully large energy storage business making Tesla not just an automobile company, have been quite insightful. This one is about space travel. With all three space travel companies – Jeff Bezos’ Blue Origin, Elon Musk’s SpaceX and Richard Branson’s Virgin Galactic – promising to put their first tourists into space this year, it is an exciting time to be discussing this topic. Kevin’s post not just focuses on the ‘Breakthrough for mankind’ aspect but also the economics of it were it to become another mainstream transportation industry.
“..In the first 12 years of NASA’s creation (1958-1969), the agency spent an inflation-adjusted $253 billion in pursuit of Kennedy’s goal. In 1966, roughly 4.4% of all US government funds went to NASA. And since then, NASA has continued to spend roughly $20 billion per year (inflation adjusted). That’s over $1 trillion spent on various space missions over the last 50 years. And the cumulative result is that 565 people have been to space in human history….the point is that it cost a ton of money to send the first astronauts to space. Somewhere on the scale of $10-$100 billion per person seems about right”
So why are Bezos, Musk and Branson so gungho about something that seems so ludicrously expensive? Is it just another exclusive playground for the billionaire boys’ fetish? Or has something fundamentally changed making it economically viable?
“For one, 50 years of computer chip innovation means the technology behind today’s rocket development and guidance systems absolutely embarasses the technology used back in 1969.
3D printed components can be made at lower costs and higher quality than any manufacturing process from the 1960s. And the cellphone in your pocket has roughly 100,000x more processing power and 1,000,000x more memory than the Apollo 11 guidance system that first sent man to the moon.
But a shift in rocket design has also enabled a steep decline in the cost to send humans to space. The transition from building single-use vehicles to re-usable vehicles means for the cost of building one rocket, many flights can be completed.
Today’s airline industry is a perfect example of a re-usable flight system. A single Boeing 747 plane can endure upwards of 35,000 flights before metal fatigue sets in. If you think your $500 plane ticket is expensive today, take a second to appreciate the 99.997% discount you receive simply because your plane can be re-used.”
The rest of the blog explores the investment case for space tourism using the example of Virgin Galactic, the only space tourism pureplay of the three – with the other two having ancillary business models. Virgin Galactic is valued at $3bn with no revenues today.
With a space ticket costing $250k, finding enough customers shouldn’t be a challenge. However, like most tech businesses, with viability established, competition and the ensuing scale are likely to push down costs and therefore pricing. For this Kevin reckons Virgin should position itself as offering a differentiated experience a la Disney than just commoditised space transport.
“Disney theme parks are great examples of world class experiences with large moats. Disney’s “Parks, Experiences, and Products” business line does over $26 billion in annual revenues, and contributes almost $7 billion of annual operating margin. That represents 45% of the entire company’s operating profits, and a substantial chunk of Disney’s $256 billion valuation today.
Disneyland isn’t worried about the Knotts Berry Farm across the street undercutting their prices. They’re focused on being the “Happiest Place on Earth”. Their fantastic brand name and global reputation for creating magical experiences is what allows Disney to maintain strong margins on a business with many competitors afoot.
And if Virgin Galactic is going to maintain 70% gross margins for years to come, they’ll have to replicate the magic of Disney theme parks in space. Their space flights are already being designed as week-long experiences based out of their New Mexico ‘Spaceport America’, but that’s just the start of what the Virgin Galactic team is dreaming up.
Their enigmatic founder Richard Branson is among the world’s greatest entrepreneurs, and he has been crafting the Virgin brand over 50 years into the instantly recognizable icon it is today. Everything he does is larger than life, and his ambition for Virgin Galactic is no different.
The following quote from Richard Branson describes his vision for Virgin Galactic, and the similarities to a type of “Disneyland in outer space” are unquestionable.
“Let’s go 20 years forward, if all of this goes to plan, I hope that we will have a hotel in space; and in that hotel I hope we will have small spaceships that can go around the Moon – an excursion””
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