The Space Stock Market's Meteoric Descent to Earth
image credit SITTIPONG
For space enthusiasts, or any investor looking to profit from the space industry, the six months from November 1, 2021, through April 29, 2022, has been marked by a substantial decline in stock prices, and great uncertainty. Both new space and traditional space stocks have been dominated by extreme volatility, and a drastic decline in prices. Many investors have been left wondering why? And when will space stocks begin to trend towards their previous highs?
As diversifying through exchange traded funds (ETFs) has typically been viewed as a more stable method to gain exposure to the space industry than selecting individual securities, the leading space ETFs have struggled to net positive. Procure’s space etf UFO declined 26.17% between November 1, 2021, and April 29, 2022.[1] Cathy Woods’ ARK Invest ARKX fund dropped 25.32% in the same span. Individual securities have dropped as much as 61.69%, as was the case with the well-known space tourism company Virgin Galactic (SPCE).[2] New space stocks like Virgin Galactic have historically been volatile, largely gaining momentum from news headlines, market sentiment, and even twitter posts. But even well-established defense contractors like Boeing (BA) have struggled with a 30.64% decline. So, for this many companies in a single industry to drop into correction territory over six months suggests there are other factors at play than just typical volatility.
Why has space struggled to be a profitable industry for investors?
Although it is impossible to pinpoint exactly why the space stock market retreated so greatly, and market reactions are rarely the product of a single variable, several factors that could give insight into the current market landscape.
The first is the systematic decline of the broader stock market. Heavy exposure to a single industry comes with higher risk than being diversified across the entire stock market. But when the broader stock market begins to decline, diversification is no longer the haven that investors typically rely on. The S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq have seen drops of 10.44%, 8.18%, and 20.91%, respectively in the six months.[3] Analysts attribute this pullback to a transition out of pandemic times, the Federal Reserve’s efforts to curb inflation, geopolitical instability, and global economic changes.[4] With market wide turbulence and declines, space stocks followed.
Another is general overvaluation in November 2021. Looking back into 2020-2021, space stock prices grew at a tremendous rate. Between the record number of SPAC acquisitions giving generous valuations, several launches of rockets into space, and many positive headlines boosting market sentiment, it is possible that by November 2021, most new space stocks were greatly overvalued, without the necessary company growth to justify the increase in market capitalization. Virgin Galactic (SPCE) stock, for example, increased 230% between May and July of 2021. When New Shepard carried Jeff Bezos and company into low earth orbit on July 20, 2021, space stocks gained even more momentum. However, amid this growth, a sizable percentage of new space companies are not yet generating profit, despite billion-dollar valuations—implying investors are buying based on future earnings and potential growth. It is important to note that this trend is more representative of the new space industry specifically, and not as much of established companies in defense contracting, or those involved in commercial aviation or transportation. Nonetheless, by November 2021, new space stocks were sky high, without the foundation of traditional investing metrics, positioning them to fall back to earth once traders lost confidence.
Thirdly, new space has a long-term maturity outlook, and investors are turning to more stable alternatives. By the nature of the industry, many new space companies are not yet mature, and do not project to be profitable for several years—a prospect paired with high R&D costs and costly infrastructure in the short term. This positions space startups and publicly traded space companies to rely heavily on funding rounds and positive market sentiment to sustain them until they can prove their business models and assume greater prominence in the space economy. The speculative nature of new space, given current market conditions, has possibly deterred even the most passionate space investors from choosing to invest their capital into new space. Retail investors and institutional investors alike may be waiting for the next bull market to bring back their confidence in new space.
Looking forward
Despite the market conditions of space from November 2021 through the end of April 2022, there may be reason for optimism. The space economy is currently valued at roughly $450 billion[5]—Morgan Stanley projects the industry to generate over $1 trillion by 2040.[6] New Space is still rapidly evolving, and space startups are still attracting capital through funding rounds. In 2021, space startups recorded $15.4 billion in total financing, as shown in the illustration from BryceTech’s report on Space Startups.[7] Unfortunately for new space, macro market conditions like inflation may hinder institutional investors from directing their capital towards new space in the short term, but momentum is currently still in favor of new space.
There are also plans for more launches, other opportunities for companies to demonstrate their viability, and ambitious growth targets for many space companies through the remainder of 2022. Defense contractors, and other traditional space companies have also released goals to revamp space exploration and their presence in low earth orbit (LEO). NASA’s Artemis program, national security interests, and more government initiatives also introduce contract opportunities for new space companies.
As always, it is unknown how the current market conditions will develop and what the future of the space stock market holds. However, the space industry is continuing to expand, and opportunities for new space and traditional space companies to secure government contracts, and drive revenue through proving their business models and products is growing. For passionate space investors and space enthusiasts, hopefully the recent descent of space stocks to Earth will eventually see higher altitudes.
Ross Kujdych
GUSI Team Investment Co-Leader
***Disclaimer: This article solely reflects the opinion of the author and does not represent the views of the Georgetown University Space Initiative, or any of its advisors. The content of this article is strictly intended for entertainment purposes and should not be taken as an investment recommendation in any capacity. ***
[1] Procure Space ETF (UFO) Stock Price, News, Quote & History - Yahoo Finance
[2] SPCE 6.32 -0.26 -3.95 : Virgin Galactic Holdings, Inc. - Yahoo Finance
[3] Yahoo Finance - Stock Market Live, Quotes, Business & Finance News
[4] Here are 3 reasons why stocks are tanking : NPR
[5] State of Space 2022: Industry Enters ‘Era of Access and Opportunity’ – The Space Report
[6] Space Stocks & ETFs That Are Out of This World | CMC Markets
[7] Start-Up Space: Update on Investment in Commercial Space Ventures 2022 – BryceTech