Closing Bell - Manifest Space: Rocket Science with Bank of America’s “Rocket Ron” Epstein 5/11/23

Episode Date: May 11, 2023

Earnings season for New Space is kicking into high gear, some analysts are seeing a tale of two companies. Morgan chats with Ron Epstein, Bank of America analyst, to break down results from Virgin Galactic and Rocket Lab – and why he sees a $1 trillion dollar opportunity in space. For more Manifest Space, listen and follow here: https://link.chtbl.com/manifestspace

Space companies tend to be cash-intensive and require time to realize their visions, whether it's a new rocket that will launch spacecraft to orbit or a new satellite constellation that must be built, deployed, and then come online. But for publicly traded space companies, investors are entitled to an update every quarter, even if the timeline will take years. And much will change over the coming years. Bank of America estimates the global commercial space economy will grow to more than a trillion dollars by 2030, an exponential jump from the roughly $469

billion it totaled in 2021. Ron Epstein is the bank's managing director covering aerospace and defense, a top-ranking analyst many times over in the institutional investor All-America Research Poll. We're equity analysts, and equity analysts tend to spend all day looking at the income statement and the drivers for that. Having done work on a lot of these kind of newer space companies that are earlier stage in nature, it has forced us to become fixed income analysts. We look at balance sheets and cash burn. And I think probably one of the single biggest risks today is when

you're looking at an early stage company, will they have enough capital to get there? Case in point, Virgin Orbit, which recently filed for Chapter 11 bankruptcy. But Epstein puts space stocks in two buckets, new space economy and old space economy. And he says, going through all of the financials and weighing them against all of the emerging technologies, that there's opportunities for both. On this episode, Rocket Ron, as he's known on Wall Street, breaks down recent earnings results from two new space names,

Virgin Galactic and Rocket Lab, and shares his assessment of a sector that knows few earthly bounds. I'm Morgan Brennan, and this is Manifest Space. Two companies, Virgin Galactic and Rocket Lab. It's sort of a tale of two stocks as well, or at least in terms of how you're thinking about them from an analyst perspective. Yeah, absolutely. Very, very different companies. When you look at Rocket Lab, they're really the only publicly traded commercial space

company that has launched, right? So there's other space companies, but they're the only one that has launched. They're the only one who's put satellites into orbit. They've done it very successfully. I think they're up to 38 launches now, close to 40, somewhere between 35 and 40. So they have a heritage proving that they can do it. And they have an active business doing it. And they do it for commercial customers, government customers, NASA, DOD, you name it. They do it. But they also have a space systems business where they make satellite components, everything from reaction wheels to solar panels and other satellite components.

They also build buses, the actual satellites that people put their payloads on our companies whoever puts their payloads on uh so it's that's a it's a full you know gamut of of stuff um virgin galactic's a total different story right virgin galactic is um but basically a play on space tourism and um it you know it's in a sense it's it's's really an expensive roller coaster ride. Potentially life-changing in that, I guess I've never been to space, but apparently the views are pretty good. And so the whole idea here is you can take a ride right to the edge of space. You cross what's called the Karman Line, and then you come right back. And that's what they do. There's no other real play there.

I mean, I think they've marketed themselves a little bit to militaries that can do some maybe modest training quickly in that environment. But they're not putting anything in orbit. And it's not a transportation system per se. You don't take off in spaceport A and go to spaceport B. You go up, you come back. It's a lot like I always envisioned it kind of like one of those rides you imagine. It may sound kind of corny, but you go to the county fair and you can take a ride on a biplane. And that's, that's kind of what they do, but you know, scaled up a lot. But it's not, you know, it's not an airline, it's not a cargo system. It's, it's nothing like that. So they're, they're two very different things. One arguably is super discretionary and you get into a softer economic

environment. People worry about, you know, private aviation, let alone, you know, very, you know, very, very discretionary space travel for fun. So it's very different. When the financials, Virgin Galactic, you know, we saw this quarter burn through a lot of cash and they're going to continue to do so. Rocket Lab burned cash, but at a much lower rate. And if you look at their projections, when they're actually going to be cash flow positive and everything, it's in a reasonable bound of you can actually see it where it's going to be. So let's start with Galactic then, because they've got another

spaceflight test and then the launch of commercial service, if that goes according to plan. But at what point do you start to see a slowdown in terms of that cash burn? Because there's a lot of talk of there's going to need to be more spaceships, you're going to have to get to scale and really actually ramp that service for it to become meaningful financially. Yeah, well, that's part of the rub, right? I mean, they have to build more spaceships and all that. In general, nothing about space or anything that's carrying people into space or in the air is inexpensive to do. It takes a lot of capital. So as they build out their next fleet of, or actually the fleet of ships, that's just going to take a lot of investment. And then ultimately, if you go back to when they originally came public,

they're going to have multiple space ports, a much larger fleet, do launches once a week. So to get to that scale is going to take a tremendous amount of investment. And you have an underperformed rating on the stock. You don't see this happening anytime soon. You sound skeptical. I am skeptical. I'm very skeptical. One of the value drivers we unstuck, when we first picked up the name, we had a buy on it.

And one of the things we liked about it was you had this aspect, the space tourism business, but they were also talking about point-to-point hypersonic flight. Now, let's be crystal clear about this. Point-to-point hypersonic flight is way off in the distance. But it was moving towards a target that was more than just a discretionary joyride, in a sense, right? I mean, you're, it's moving to, you know, from that ride at the country fair to more, more of what an airline does, right? When I think about space, I go back to the beginning of aviation, right? And aviation was sort of a curiosity at first. And, you know, it started with those rides at the country fair.

But then aviation really started to make money when they started flying mail. Air mail was the first big thing. It was cargo and then passenger traffic. And they had this vision of passenger traffic down the road, go from spaceport A to spaceport B. Big challenge to do that. But when you think about a longer term vision

for a company and where they could potentially go, that for us in the far out years created some value. They're not doing that anymore. So they limited themselves to a business model that just seems very discretionary, very risky. And in fact, they've had difficulties even getting to what they wanted to do, if that makes sense. So hypersonic point-to-point travel for Virgin Galactic is just off the table, or is it just that they're not talking about it and they're not making those investments right now as they try to get commercial service launched? Well, as far as I know, it's off the table, right? And that's

what they've communicated to us. Now, they could always change their mind and that all changed. You had a change in leadership at the company and kind of when you had that change in leadership, it's when a lot of all changed. You had a change in leadership at the company. And when you had that change in leadership, it's when a lot of this this changed. But that's yeah, that's where you are. And even on space tourism, if I were to and I would imagine if folks were going to go take a ride on a rocket, you probably want to do a couple orbits. Right. Just want to want to go up and come right back. Now, I can't speak for everybody. I mean, people climb Everest and so on and so forth. And getting a view from above the Kármán line might be on many folks' bucket list. But it does seem like there's a limited population of folks that can afford to do that.

You know, it's sort of like a Venn diagram. Who can afford to do it? And then has to overlap with the folks that actually want to do it of those who can afford to do that, you know, sort of like a Venn diagram, who can afford to do it, and then has to overlap with the folks that actually want to do it of those who can afford to do it. And it just seems pretty limited, where when you look at a rocket lab, or, you know, they're not publicly traded, but a SpaceX, or Planet Lab, Capella Space, another private company, they're going after a much bigger market. Earth imagery, depending on how you're doing it,

optical imagery, synthetic aperture radar imagery, those imagery markets, particularly in the wake of what happened in the Ukraine or is happening in the Ukraine, those are potentially very, very big markets with a lot of applications. And I guess one would argue not that discretionary. So that's what we tend to bias more towards. Yeah. And I mean, it's certainly human space,

like whatever that, you know, whether it's suborbital or orbital is very, very flashy. It gets a lot of attention. I know there's been some controversy around Kármán line as well, whether it's Virgin Galactic, which I don't think actually reaches the Karma line or Blue Origin, which does, to your point. Let's talk a little bit then about some of those ways to potentially make money. But even with Blue, they have a bigger vision. Yeah. It's not just about- It's a diversified portfolio. Yeah. It's not just about going there and coming right back. Yeah. No. And I think that's, and I think that's a really, that's a good point. So let's talk a little bit about Rocket Lab then, because Rocket Lab is known as a rocky company

and a launch services provider. But to your point, it also has this other business that space systems that it's been building out that is more profitable, I believe, or has a potential to be more profitable that is involved in manufacturing hardware and satellites and, you know, being a supplier and component maker as well. So I guess walk me through the economics of the diversity of that, growing diversity of that portfolio, especially because launch and rocket launches, it's like sort of seen as like the sexy flashy thing, but it's not necessarily the moneymaker either because the margins are not so good. Yeah. So and I think, you know, multiple space companies have figured this out. Right. So launch is an enabler, but it's lumpy, can be have challenges with profitability, is inherently very risky.

Space services and subsystems can be quite profitable uh and when you look at the buildouts of uh the the satellite um you know the satellite constellations that are you know so that are on the come and and you look at what has already been built. So as an example, right, Rocket Lab is on, I think, about maybe 70%, something like that, of satellites that are already kind of spinning around the earth. One way or the other, through various systems and businesses that they've acquired over time. And what you can find out pretty quickly is things like reaction wheels, the subsystems, the power systems can, can be quite valuable and have a broader audience than just the, the launch customer.

And I think, and maybe it's because of the name rocket lab, you think launch, but it is, like you said, it's much broader than that. And they're, I mean, they're really doing some interesting stuff. And when you look at, you know, and it's not just them, you look at, you always, everybody kind of comes back to SpaceX. They're building their own satellites and components and so on and so forth so um and when you look at many of the other space companies that are you know in one hand they have a vision that's you know go to mars or a reusable spacecraft or whatever that can be you know more of a vision it's backed up with sort of a you want to call it a meat and potatoes business

that generates money and you and you kind of need both to in my view to to make it um particularly if you're a launch provider right you can do just the space subsystems you can do that and and there's there's companies that do that and they do that profitably. But having, you know, kind of a soup to nuts space offering is, I think it's, I think it's important in this market that is continually evolving. So in terms of that evolution, I guess what, what comes next and who are the companies that are positioned to realize some of those visions? Yeah, so it's a really good question. And let me qualify it by saying I wish I knew 100%. You know, has the killer app for space happened yet?

I don't think it has so you know who's positioned well for it are the companies that are building out the technology building blocks that will be there when that kind of final killer app or apps emerge and there's really fascinating things going right so Right. So like we talked about before the podcast, the. At the space symposium, it was it was made clear you're seeing the U.S. government and other governments moving away, changing the architecture of space, a real movement away from, hey, we're going to have a handful of really expensive, high tech, bespoke satellites that can do a lot of really cool stuff. Then we're going to move away from that. Why? Because they're also really big, expensive targets to a more distributed vision of space.

Because space has become, interestingly enough, a contested place to be. We're not the only nation out there. Our largest nation state competitor, China, is very active in space. The Russians have a long history of being very active in space. So space has become a more contested place. And that's driving, at least from a national security perspective, how people think about space, how they think about architectures in space. And you're seeing this movement away from sort of just these very expensive,

multi-billion dollar, bespoke class satellites to a more distributed architecture, where just like the Internet itself has all these different nodes, if you take out any one part of the Internet and you can use the rest of it, the same idea if you have, you know, two or three hundred little satellites or a thousand little satellites, if somebody takes out a a handful of them you still have the rest of the network um and i think that that's that's part of i think one of the bigger opportunities um but even when you look at commercial space offerings so you know one of the companies we we don't cover but we talk to a lot is uh planet lab um And you know Planet Lab does some pretty interesting

stuff with earth imagery. You know having you know they being able to image the earth all day every day essentially and having really pretty amazing refresh rates. They can do really interesting things with that data. So if you go back to the Chinese balloon that floated across the country, using their data, they could actually go back and show where it was launched from in China. They could show that it actually didn't get blown off course because it was going against the wind. Point being, all this data that's being collected, those libraries of data, so on and so forth, I think can be really useful and are very valuable. And how you collect the data is changing. It's not just optical imagery,

it's synthetic aperture radar imagery, which is really fascinating because it's basically a 3D picture of what's going on. It can see through the weather. So in those domains, in terms of communications, things are changing. But, you know, I think for the time being, space is really being driven by the economy, that space looking down on Earth and what you can do with that. I mean, ultimately, space will become, I do believe, an economy that's based on generating revenue in space from space-based activities. It could be everything from tugging satellites around, refueling satellites, doing manufacturing in space, doing experiments in space. You hear things from the pharmaceutical industry, other industries wanting to do things in zero gravity that they can't actually do on Earth, or they can't do it the same way because of gravity. And I think that that's just a matter of time and that's where you know i kind of i'm

just kind of waxing on here but where things like uh starship become really interesting because you know on one hand when people talk about starship that's too big right if you look at starship i think this is the right um, or it's close if it's not. I think you can take all the CubeSats that were launched in 2020, 2021, and 2022 and put them in one Starship. All of the launches are going to be in one, and then you'll still have room. So folks say, well, it's too big, but flip that around, it'll lower the cost enough that you could actually think about putting very big things in orbit at low cost.

So the CubeSat is an interesting concept because they're small, they're light, they're relatively inexpensive, and they're relatively inexpensive to put in orbit. But if you have a way to put bigger things, maybe you can put big, inexpensive things in orbit or however you want to do it. So that might really change a little bit of the paradigm about how people think about what they can put in space and what you can do in space. So if you're talking about space manufacturing, building structures in space, and you need volume to bring things up, well, if Starship plays out the way most people, I think, expect it to, it could really be a game changer in how you think about what you can do in space in terms of the size of stuff you can bring into orbit. To me, what's so fascinating about this is you analyze stocks. And we're talking about SpaceX, which who knows when or if that company

ever goes public. But you can't not talk about a SpaceX if you're analyzing the space economy and the impact it's going to have on everybody else in this emerging ecosystem. Oh, you can't not because they really enabled it. You know, SpaceX proved, I mean, think about it, before SpaceX, putting things in orbit, doing things in space was almost entirely the purview of large defense contractors or governments or somehow a mix of both. SpaceX really proved that, no, no, no, a commercial entity can do it, that you can actually sell lift as a service to the US Air Force. Before SpaceX, nobody really did that.

And, you know, that really paved the road for companies like Rocket Lab and others to do what they're doing. And that ability to get things in orbit at a important to the our government and other governments that a commercial contractor can be reliable and can do this that this doesn't have to be the purview of governments and and militaries uh so it's you know from that point of view it's been it's very important um but however if you look at rocket lab who is you know it's a smaller company by revenue however you want to measure it then spacex they've done very amazing things too as a as a purely commercial entity that has done it on their own um and it's pretty far out right rocket lab has their own launchpad i mean they try to think of one other company a private company that has their own launchpad

in new zealand it's almost you know kind of kind of James Bond, Dr. No kind of stuff. But it's really enabled, I think, this whole area to be more of a reality, if that makes sense. So if you could put money to work in any one stock focused on space right now, what would it be? Would it be like a rocket lab or would it be something else that's got free cash flow and is profitable and sort of tied to the economy that already exists from space? Yeah, I think. OK, so it's a really good question. And I think there's a couple of different ways you can think about it. There's sort of the old space economy and then the new space economy. So if I was going to play the new space economy in my coverage, it would be Rocket Lab.

Because of all the reasons we said, they've been very they've been successful at launch. They've been prudent with their capital. You have a line of sight to financial metrics like positive cash flow, that kind of thing that I think in the current market and in any market people value, you have a line of sight to that. So Rocket Lab is one I would. And then if you think old space, well, then you're back to kind of the old guard. And in that world, I would say Northrop Grumman. Northrop Grumman has done some very, very interesting things in space.

With the acquisition of Orbital ATK, which they did several years ago, it really opened up their portfolio in terms of classified space. They still do some very interesting classified sensors for space, hypersonics. They're the lead contractor on the Sentinel missile system, which is a space-based system. So if I was going to play kind of old school, large cap, traditional space, it would be through Northrop Grumman, although it's just a piece of the company. And if I was going to play the new economy space,

it would be Rocketman. Remind me, have you put a number out there in terms of how big the space economy is going to be in the coming years? Yeah, we did. We put out a report and it was based on kind of a top down, bottom up, trying to make some educated guesses on when different things could happen. And we were saying, by I think it was 2030, we'd be at a trillion dollar space economy.

And I think today we're at about 650 billion, something like that. So by 2030, it doesn't seem that far-fetched, honestly, at this point that we're on track to get there. And given the real push by the US government, in particular the US government, in trying to grow space and to focus on space as a contested domain, I think it's just going to add more capital investment to the space. And is that trillion dollars? That's everybody globally that just transcends borders.

That's the commercial space market. Okay. Right now, remember commercial space, people are like, all right, well, what's commercial space. All right. So commercial space are commercial space companies, although commercial space companies can have government customers. If that makes sense. Right. Yeah. So, so biggest risks and things that, or things that you would steer clear of in terms of red flags,

looking at companies, particularly maybe companies that have gone public that are still pretty young in terms of their their process of developing their products. Yeah, so I mean, what we and it, you know, this has forced us to, you know, we're equity analysts and equity analysts tend to spend all day looking at the income statement and, you know, the drivers for that. Having done work on a lot of these kind of newer space companies that are earlier stage in nature, they has forced us to become, you know, fixed income analysts. We look at balance sheets and cash burn. And I think probably one of the single biggest risks today is when you're looking at an early stage company, will they have enough capital to get there? And what you hear currently, and no big surprise, is raising capital in the current market is very difficult. So when I look at companies, I look at their cash burn,

what they have on the balance sheet, will they need to raise capital, and how soon will they need to do it? And we've already seen in the current environment companies that couldn't. Virgin Orbit was an example of a company that couldn't do that. And there may be others that kind of come down the pipe because that's one of the key things we look at. And then the other thing we try to keep an eye on, and this is much harder, are there things that will be technology events that could really change things?

As an example, and I'm not saying this is going to happen, but just kind of food for thought, with something like Starship, where you can put a bigger thing in space at a lower price, does that deserve a rethink in what kind of satellites you'll put up? Because now you can put bigger ones up. They don't necessarily have to be small cubes. So maybe you could see changes in technology that could potentially be a threat. And then another thing I think it's very important to keep an eye on, the government is still an important customer. And the U.S. government in particular its investments in space, that would most likely be detrimental to just the broader development of space.

And at least it would hold it back for a while. So something like a debt ceiling standoff is a real risk here, at least in the near term? Could be. I mean, it depends on, you know, I don't, you know, it's sort of beyond my pay grade to guess exactly what would happen if the U.S. were to actually do default. But I mean, I think it's a risk for anything the government's spending money on. Right. So if there's anything in the federal budget, anything, it's at risk. You know, would they want to cut space? I don't know. I mean, people ask me that question about defense. I don't know, but hopefully we don't get there. All right. Yeah. We're going to have to see watching this one in real time. I mean, I've even heard the possibility, and I heard this last year too, the possibility that you could see like a continuing resolution if we just can't find some sort of agreement on the budget,

debt ceiling or not. But maybe that's a conversation for another time. Okay, I got one last question for you. I heard you have a nickname. I heard you're called Rocket Ron. And I'm wondering who gave that to you and why? Yeah, that was my team gave that to me years ago. Because I, you know, I've got a PhD in aerospace engineering. i used to work in the industry and um they gave it to me and it and it kind of stuck so um and that's that's my nickname i i go by rocket ron um which is it's fine by me it's fun fun name um i like space stuff uh but you know i guess strictly speaking when i was working in industry i was more working on designing aircraft and that sort of thing as opposed to space things. But it's a fun name.

They gave it to me, and I'll keep it. Well, Rocket Ron Epstein, thank you for joining me today. I appreciate the time on this podcast. Thank you. Thanks. Pleasure to be here. Thanks for having me. That does it for this episode of Manifest Space.

Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.