Ready for blast-off? UBS highlights hot space stocks

Rocket Lab is due to hit the Nasdaq by the end of September with an anticipated US$4.1b valuation. Photo / Rocket Lab

Giant investment bank UBS says recent space launches by Sir Richard Branson and Jeff Bezos are just the beginning.

By 2030, space tourism will be a US$4 billion per year business, according to a July 20 report compiled by 10 UBS analysts - and it sees a possible role for soon-to-list-on-the-Nasdaq Rocket Lab.

That's up from a 2019 report that pegged it as a US$3b opportunity.

And it would represent around 5 per cent of the total space market, which UBS says will grow from an estimated US$447b last year to US$896b by the end of this decade.

What caused UBS to up its estimate? The banks says strong growth in interest from "HNWs" [high-network individuals] is one factor. In New Zealand, for example, there are six Kiwis who have paid either US$200,000 or US$250,000 for a ticket on Branson's Virgin Galactic, which says it will start commercial flights next year and build to one flight per day.

Other factors include advances in technology, and this month's very public "proof-of-concept" flights by Branson and Blue Origin founder Jeff Bezos.

UBS says the number of high-network individuals has grown overall during the pandemic. And it notes that "more specific to space tourism, Blue Origin has run a very
successful auction for the first paying seat, attracting 7,600 bidders from 159
countries and more than two dozen bidders willing to pay more than US$5m".

The winning bid was US$28m.

And the bank notes that beyond the 600 who have paid a deposit for a Virgin Galactic ticket, 9200 had registered before it closed off its current round of ticketing (Katrina Cole, who heads House of Travel's "Travel Galactic" unit - the local agent - expects another wave of tickets at "new pricing" shortly).

And UBS says the potential market is far larger. Based on a CapGemini survey, the bank says there are 1.9m high net-worth individuals worth between US$5m and US$30m and 200,000 people in the "ultra high net-worth individual" bracket, classed as worth US$30m or more. That's a lot of people who could afford a US$250,000 ticket for themselves or a family member.

To boot, UBS says long-haul travel via low-orbit - where Elon Musk has mooted a spaceplane that could get passengers from New York to Shanghai in 39 minutes - could be a US$15b market by 2030, or 3 per cent of the total space spend.

That's down from the US$20b the bank predicted in 2019 before "Covid headwinds" stunted enthusiasm for long-haul travel.

UBS sees the impact of the pandemic "likely persisting for many years, both in terms of leisure travel recovery and especially corporate travel".

So how to play the possible space travel and spaceplane long-haul boom?

UBS says Virgin Galactic is "the poster child of space tourism" and the only pure-play public space tourism stock. But if you're not on board now, you could be too late to the party. Virgin Galactics long-moribund, NYSE stock has spiked to a US$7b market cap, which prices in its anticipated success, according to UBS - which accordingly rates it neutral.

Bezos' Blue Origin and Musk's Space X are both privately held, with no immediate plans to list.

Rocket Lab is due to hit the Nasdaq by the end of September, however, with an anticipated US$4.1b valuation.

And UBS sees space tourism potential in the Kiwi-American company's future.

"Rocket Lab's pending public listing suggests a path to commercial human space transportation, which would further enable the space tourism market."

But indications are that could be a stretch. While a chunk of the proceeds from Rocket Lab's listing - which will boost its cash-on-hand from US$48m to an estimated US$750m - are earmarked for the development of its larger Neutron rocket, which will be able to take people into space at some point after its first commercial launch in 2024 (all going to plan), founder Peter Beck has never mentioned space tourism, nor does it crop up in his firm's latest investor presentation.

And today, Rocket Lab comms director Morgan Bailey reiterated that Neutron will initially be focused on cargo.

"Neutron is being developed as a crew-capable launch vehicle, though the primary market for it is expected to be satellite constellation deployment," Bailey told the Herald.

Inside Blue Origin's reuseable New Shepard capsule. Photo / Getty

UBS says another option to play the space boom is by investing in aerospace conglomerates who have a growing part of their business in space - either by building spacecraft or components - or, like Boeing both. Boeing has a commercial crew space transport in the works. Both Boeing and its arch-rival Airbus have had on-off plans for a spaceplane for long-haul flights.

Here, UBS rates Boeing, Airbus, Dassault Aviation, Thales and Lockheed Martin (which has a small stake in Rocket Lab) and Rolls Royce as a neutral.

Currently, it's hard to see how the space tourism maths adds up. Virgin Galactic, which lost US$273m last year as it continued its R&D-intensive development phase, says it has $80m in deposits across its 600 reservations (privately-held Blue Origin claims a US$100m pipeline).

UBS sees efficiencies as the frequency of flights scales up and more of those "HNWs" book a thrill ride into space. But still not enough to nudge its rating above neutral.

And while long-haul travel via sub-orbital flights is a possibility, the bank also notes that it could be crimped, or eclipsed, by various startups who have supersonic or hypersonic aircarft on the drawing board - the possible successors to the Concorde.

Branson briefly weightless during his one and a half hour Virgin Galactic flight. Photo / Getty

The broad take for wannabee space investors is that the overall market will double.

Rocket Lab has already told potential shareholders it will ride the boom.

In an investor presentation, Rocket Lab projects US$1.6b in annual revenue by 2027 (last year, it broke even on $90m revenue), with its much larger Neutron rocket driving an earnings surge from its first launch in 2024.

It estimates Rocket Lab will make its first operating profit (US$26m) in 2023, with earnings rising to US$505m by 2027.

But if space tourism is in Beck's plans, as UBS anticipates, he's keeping it under his hat for now.