New Space strikes back

What happened

The past few weeks have been quite news-rich for so-called New Space companies, i.e., the new generation of space players emerged born in the 2000s and 2010s which have carved their path away from the playbook established by legacy defense contractors:

• AST SpaceMobile launched the first five satellites of its constellation on a SpaceX rocket. Once fully operational, the company's technology will bring satellite-enabled broadband internet to standard smartphones globally.
• The certification of the crewed mission on Boeing's Starliner capsule ended in a technical disaster and a PR nightmare for the company: due to faulty thrusters on the spacecraft and, therefore, doubts about its capacity to safely bring back the crew, NASA chose to have it return empty. To add insult to injury, the stranded crew will return on a SpaceX capsule in a few months.
• Last but not least, Shift4's CEO, Jared Isaacman, made history by becoming the first non-governmental astronaut to conduct a spacewalk. This was done during an entirely private mission (Polaris Dawn) powered by SpaceX, which took the crew farther from Earth than anyone since the Apollo missions of the 1960s. 

Impact on our Investment Case

Quite a wild ride for AST SpaceMobile

AST SpaceMobile's developments perfectly illustrate New Space companies' risks and potential. After going public via a SPAC in late 2020, the stock soared, gaining 150% within two months on the promise of global satellite-to-phone coverage. In September 2022, the company launched a demonstration satellite, Blue Walker 3, the most significant commercial communication satellite ever deployed, featuring a nearly 64-square-meter solar array. The mission successfully validated key technological advancements, marking a significant milestone for the company. 

Investors suddenly discovered that building a constellation would take time and significant capital, which became more expensive with the Fed hiking interest rates in 2022. As a result, the stock entered a prolonged decline, marked by periods of high volatility. This was further exacerbated by supply chain delays that pushed back the launch of the first production satellites, initially scheduled for mid-2023. The need for additional capital to fund the project also weighed on the stock, with a capital raise in Q1 2024 driving the price down to around $2, a sharp drop from its peak of approximately $25 in 2021. 

The dynamic shifted in 2Q2024 with the announcement of strategic commitments from major U.S. telecommunication operators (Verizon Communications Inc. and AT&T Inc). With the technology already validated, the only remaining factor was a strong commercial outlook, which now appears to be in place, unlocking the equity story's full potential. 

The end of the beginning, indeed not the beginning of the end

As a result of the surge in confidence, the stock skyrocketed, reinforced by the successful launch of the first batch of satellites. From the $2 lows reached in early April 2024, the stock soared to $38 by mid-August, making it the hottest stock in the Russel 2000 index.
From an asset manager's perspective, this was a dream scenario:

1) We identified the company early for its potential. Still, we initiated a position only in early 2023, at around $5, capitalizing on what we perceived as an opportunity after the initial over-enthusiasm had subsided. 

2) We maintained our strong conviction, reallocating to the position in early 2024 despite a ~40% loss, confident in our Security & Space portfolio structure (40% Space, 40% Cybersecurity, 20% Physical Security) to manage the inevitable bumps along the way. 

3) Finally, we faced the fortunate challenge of having to repeatedly shave part of the position as risk thresholds were breached on the upside - a "problem" we wish we had with all our holdings! 

At the time of writing, the stock is now the third holding of the strategy due to our recent risk management actions and some cooling down after the outstanding run; its contribution to this year's portfolio performance is significant. The cooldown can also be attributed to some classic "buy the rumor, sell the news" behavior, as the stock was down double-digit at some point in the trading session, which followed the launch of the first batch of satellites on 12 September. However, in our view, this is far from the end of the equity story. The company is still in the early stages of its business plan, with most of its infrastructure yet to be deployed and commercial services not yet launched. While more capital will be needed and execution challenges are inevitable (as we'll see in the next paragraph, space, after all, is a notoriously difficult business), the company is in a unique position. It addresses a market with enormous potential (SpaceX's Starlink, the closest proxy despite targeting different endpoints, is on track to generate >$6bn of revenues in 2024, less than 5 years after the launch of the first batch of satellite), has no direct competitors, enjoys a first-mover advantage, and has proven its capacity for innovation (in the footsteps of many New Space companies when compared to legacy players). 

This represents the ideal long-term combination, the type of opportunity we seek to position in each of our portfolios. This approach isn't unique to AST SpaceMobile, as evidenced by other recent developments across our holdings.

New Space in the spotlight again

The summer has been marked by significant drama around NASA's commercial crew program, which transports astronauts to the ISS. The latest crewed mission was to finally certify Boeing alternative spacecraft to SpaceX's capsule. However, the program's string of embarrassing failures continued, with the capsule having to return empty due to safety concerns over faulty thrusters, despite this being a well-understood technology. Boeing's original funding from NASA in 2014 was significantly larger than competitor SpaceX ($4.2bn vs. $2.6bn). Yet, the spacecraft is still not operational while SpaceX is about to fly its ninth mission. Boeing has already booked $1.5bn of cost overruns, and this figure will likely rise if the company is to complete at least one successful mission. To add to its woes, Boeing must watch "its" crew return on a rival SpaceX spacecraft.

Meanwhile, SpaceX made history by enabling the first private spacewalk, using a derivative of its capsule and technologies it developed from scratch, including a new generation of spacesuits. The contrast could not be more cruel, especially as Boeing de facto admitted they would no longer compete on fixed-price contracts, citing its inability to generate profits.

Similar trends favoring New Space players are emerging across the industry: Rocket Lab USA Inc recently delivered a pair of satellites to NASA in record time and Blue Origin is finally about to launch its first New Glenn rocket, further intensifying competition in the launcher market. 

Our Takeaway

"New Space" stocks underwent a difficult time following the 2020 SPAC bubble, sowing major doubts about underlying business models. The launch of the first satellites of the AST SpaceMobile constellation brilliantly dispelled those concerns, both in terms of business viability and stock performance. This, combined with the first-ever private spacewalk, enabled by SpaceX, and the drama of Boeing's Starliner spacecraft, marks the return of New Space companies to the forefront of innovation over legacy players. More importantly, this handover has proven to be more than promises: it already generates exciting returns, with much more potential still ahead. In this regard, Rocket Lab USA Inc is, for us, a major conviction, but many more companies are poised for growth. Our investment process is designed to identify the most promising ones, on which we will initiate a position when the right time comes.