The space exploration industry is set to boom in the coming years, but which is a better investment to benefit from this megatrend?
The space industry has changed dramatically with advances in technology and lower costs. With private companies looking to the stars, this provides an opportunity for investors to benefit from what is forecast to become a $1 trillion industry by 2040, but which is a better buy?
Virgin Galactic: Bull vs Bear Arguments:
Virgin Galactic (NYSE: SPCE) was the first publicly traded space tourism company and was brought public by the self-proclaimed King of SPAC’s, Chamath Palihapitiya, in 2019.
Virgin Galactic estimates a market of over two million potential customers worldwide at the current price point of $200,000 – $250,000. The number of future astronauts remained stable at roughly 600 in 2020, with a further 1,000 people signed up to its “One Small Step” initiative. The first few years of commercial service are likely to be supply-constrained due to its fleet size.
Virgin Galactic is expanding its fleet to reach its target of 400 flights per year per spaceport. This is likely to be some years away, as the company is still testing VSS Unity, having passed 27 of 29 elements necessary for commercial trips to commence with its next flight scheduled for May 2021. A second spaceship was recently announced and will commence ground testing and glide flights this summer.
Virgin Galactic is yet to make any substantial revenue as it has not commenced commercial service. However, it has taken in over $80 million in deposits from future astronauts. It also strengthened its balance sheet with a stock offering and has a cash position of $666 million and liabilities of $141 million.
Space tourism is not Virgin Galactic’s sole venture and is also eyeing point-to-point hypersonic travel, having teamed up with engine maker Rolls-Royce to collaborate on this project. It has also entered into agreements with NASA and the Italian Air Force for revenue-generating flights.
Virgin Galactic reported a net loss of $273 million in fiscal 2020 compared to $211 million in 2019. Virgin Galactic has not specified when Branson will fly on the first commercial flight, and it has missed deadlines for this before due to failed test flights. Other space companies such as Elon Musk’s SpaceX also pose a threat, although it is not solely focused on space tourism.
ARKX Bull vs Bear Arguments:
ARK Space Exploration & Innovation ETF (BATS: ARKX) is an actively managed exchange-traded fund. The ETF consists of a wide range of companies that are “benefitting from technologically enabled products and/or services that occur beyond the surface of the Earth.” ARKX opened on March 30, 2021, and space exploration was one of ARK Invests “big ideas” for 2021.
The fund is split into four categories that will benefit from space exploration, comprising of forty companies with the top ten positions having a weighting of 51.35%, meaning that it is relatively concentrated. The top ten holdings include established aerospace players like Boeing and Lockheed Martin, while Trimble Inc, The 3D Printing ETF by Ark, and Kratos Defense & Security Solutions, Inc make up the top three positions.
There are some rather unusual names that investors may not associate with space. These include Netflix and Amazon and warrant inclusion due to the greater exposure to the internet from space technology and the dependence on global connectivity and may also help to reduce volatility.
Due to it being the only fund of its kind, there is little overlap with ARKX and other ETF’s and thus can offer investors diversification. Cathie Wood’s experience should also give investors confidence as her performance in the past has been unrivaled among money managers.
ARKX has little exposure to pure-play space exploration companies, with companies like Virgin Galactic having a 1% weighting. Ark has decided to think outside the box, limiting the risk and arguably the upside potential, and investors may question whether some of these stocks are space plays. Despite the enormous market opportunity, this does not mean that this will translate into share price gains for these companies.
It is also important to note that due to it being a fund, there is an expense ratio of 0.75%, and statistically, actively managed funds underperform.
So, which is a better buy right now?
ARKX is an exciting concept and a bet on Cathie Wood and her team’s ability to find the companies set to benefit. For investors looking for broad exposure to the trend, it could be a good buy. Nevertheless, investors with higher risk tolerance and looking for a pure-play Virgin Galactic may be a better buy today.
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