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Investors in space tourism can expect a bumpy ride
This week, Richard Branson’s Virgin Galactic became the first space tourism company to list on public markets. Fifty years after humans first set foot on the moon, it will soon be possible for ordinary millionaires to book a joyride into near-Earth orbit.
There’s no doubt that these trips will be sensational for those who can afford the fee but, for investors, it may be better to keep your feet firmly on the ground.
Virgin Galactic listed in New York on Monday through a merger with Social Capital Hedosophia, a publicly traded cash shell floated by former Facebook executive Chamath Palihapitiya. It is the only pure-play for ordinary investors into an industry that Swiss bank UBS has calculated could become a $3bn (£2.3bn) a year industry by 2030. However, the risks to capital remain enormous.
Investors will hope that Virgin’s spacecraft will perform better than its share price has this week. Those who bought into the shares post-flotation are already nursing potentially significant losses. Initially priced near $12 a share under the ticker symbol “SPCE”, Virgin Galactic shares jumped about 8pc in intraday trade before crashing back to sit at $11.75 apiece by the session end. They have fallen every day since and are now at $9.41, down by more than a fifth since their debut.
Tickets cost $250,000 each, which is a steep price to experience a few minutes of weightlessness in the lower thermosphere, which starts at about 50 miles above sea level. Each flight is expected to last just 90 minutes but it will allow passengers to see the curvature of the Earth themselves.
Virgin Galactic was valued in the offering at $2.3bn but, quite clearly, it is yet to make any money. Last year’s net loss was $138m.
However, it has already sold more than 600 tickets for its orbital flights, with unconfirmed reports suggesting celebrities such as pop star Justin Bieber and Alien actress Sigourney Weaver have put deposits down to get as close to space as ordinary people can. There is even speculation that Princess Beatrice is set to become the first member of the Royal family in space.
This suggests $150m in potential revenue may have already been locked in – and management hopes to achieve profitability by 2023, when an estimated 115 flights could generate $210m in revenues. Despite the experience costing nearly $3,000 a minute, demand will be high.
Virgin Galactic chief executive George Whitesides believes demand will continue to exceed supply. He thinks the high price tag means the addressable market for space tourists is now about two million individuals.
However, space flights – even to regions that do not break through the Earth’s atmosphere – are dangerous. That’s why there have been multiple delays, with the most significant following a fatal accident in December 2014.
Virgin’s SpaceShipTwo crashed after an explosion during a test flight over the Mohave Desert in California, killing one of the pilots and seriously injuring another. The crash served as another stark reminder of the dangers of space exploration and any repeat with fee-paying passengers on board would be disastrous.
Of course, Virgin Galactic is not the only space tourism company racing towards the stars. Other billionaires are also trying to get their own services operational.
Amazon founder Jeff Bezos has Blue Origin, which is likely to be the next company to launch a service. Founded in 2001, the group had set itself a target of launching paying passengers into space aboard its suborbital New Shepard aircraft before the end of this year.
This target will not now be met, Blue Origin chief executive Bob Smith conceded last month. The cost of a seat on Bezos’s zero-gravity jolly is yet to revealed, but Smith concedes that it will be in the hundreds of thousands of dollars region. There is no indication on whether there are plans to go public.
Tesla founder Elon Musk’s SpaceX is a far more ambitious beast than that envisioned by Branson and Bezos. Its near-term goal is to perfect reusable rockets, with its ultimate aim being a mission to Mars. An IPO of this company seems very far off as it has already secured some government contracts, including a $1.6bn agreement with Nasa to deliver cargo supplies to the International Space Station.
Should the company go public and have increased disclosure requirements, this could complicate the closing of additional contracts.
Caution is required in this fledgling industry, but there is actually no need for ordinary investors to take the risk of investing in a pure-play company anyway because they are likely to already have exposure to the industry in their portfolio through suppliers such as US defence manufacturers.
If you own shares in Google-owner Alphabet, you actually have exposure to a direct stake in SpaceX.
In 2015, Musk’s business raised $1bn in financing from Google and Fidelity, which took a combined 10pc stake in the company.
Troubled US aircraft maker Boeing also invested $20m in Virgin Galactic ahead of its IPO. But whether an investor would want to have exposure to Boeing itself while it is still suffering the fallout from the 737 Max debacle is another matter.
FTSE 100 listed Scottish Mortgage Investment Trust, owned by many UK investors, also has a small stake in SpaceX that often goes under the radar.
So, investors wanting to shoot to the stars should stay put. Given the risk, you probably have enough exposure already.
Garry White is chief investment commentator at wealth management company Charles Stanley