“Space… the final frontier.” The saying might be from the fictional Star Trek series, but it’s still indicative of the vast potential for the global space industry. Flying and conquering space is a bet for many companies, NASA and the U.S. Government too. But not all space stocks are the same.
Before investing in space stocks, you should know there are two main categories: companies with revenues and companies with zero revenue. Unsurprisingly, not all of these ventures are profitable; space exploration requires highly intensive capital expenditures.
Morgan Stanley (NYSE:MS) recently published a research report titled “Space: Investing in the Final Frontier.” In that report, analysts said “The revenue generated by the global space industry may increase to more than $1 trillion by 2040.”
Some of the catalysts for this booming space industry could be “declining launch costs, advances in technology and rising public-sector interest position space exploration.”
And despite the negative effects of the pandemic, the space industry could bounce back with business developments such as new constellations of satellites due to enter low-Earth orbit in the coming years, and significant investments in satellite-based internet, and space travel.
The aerospace and defense sector, alongside satellite communications is probably the sectors that will gain most of the attention of investing in the space industry.
With that in mind, let’s take a look at 3 space stocks to avoid.
3 Space Stocks to Avoid
There are many severe risks, plenty of uncertainty and intense competition within the space industry. The space stocks we’ll discuss below are best avoided for now, as their financial performance leaves almost no room for excitement.
Space Stocks to Sell: Virgin Galactic (SPCE)
If you can spend $250,000 on a trip so you can kick back and relax in orbit, then Virgin Galactic is the travel company to have on call. But SPCE stock is an entirely different story. Yes, space tourism seems appealing to millionaires and billionaires now. But things aren’t looking so hot for this space stock to sell.
In mid-November 2020, the company announced it had to postpone a test flight out of its New Mexico-based Spaceport due to the coronavirus pandemic. Delayed tests mean delayed flights for sending Virgin Galactic customers into space.
Certainly, SPCE stock is flying high right now, with an astronomical price of $23.51 per share and a market capitalization of $5.571 billion. And this company had a rough go of things last year.
The company reported revenue of $2.85 million in 2018, $3.75 million in 2019, and a plunge of revenue in 2020 to $238,000. It has huge net losses, which widened to $273.04 million in 2020 compared to losses of $210.94 million in 2019. Free cash flows are also negative; it’s obvious this company is burning money and cash at warp speed.
Virgin Galactic will eventually have plenty of rich clients, as visiting space is a dream for many people. But unless it finds a way to start turning a profit soon, losses are set to widen. And that makes SPCE stock too risky.
No one knows whether the space tourism trend will persist or deflate. But for now, logic dictates avoiding the stock unless you love speculating.
ViaSat provides communications technologies and services. And space is a big segment of its business, as this company operates satellite services, commercial networks and government systems. The main problem is that it operates in a sector with plenty of tough competition, satellite-based high-speed broadband services.
Considering the five-year revenue trend, you could be forgiven for getting over-excited. Revenue has increased for each of the past four consecutive years. But there are two key points investors ought to worry about.
First, satellite services in the latest 10-Q Sec filing represented 38.36% of total revenues for the three months ended December 31, 2020. Satellite services revenue was $220,789 compared with total revenue of $575,559 from all segments.
Compare that to the three months ended December 31, 2019, when the satellite services revenue was $211,700, or 35.98% of total revenue of $588,224. So total revenue declined on a year-over-year basis, but the contribution of the satellite services to total revenue increased. Digging through the financial numbers, you’ll notice that the company has been unprofitable for the last three years.
Losses of $67.62 million in 2019 declined almost 100% in 2020 as the company reported losses of only $212,000. But this spells financial trouble as Viasat has had negative free cash flows for all the past five consecutive years.
This company is burning cash and clearly in distress mode due to its weak financial strength. VSAT has an Altman Z-Score of 1.3 according to Gurufocus, implying the possibility of bankruptcy in the next two years.
AST SpaceMobile (ASTS)
AST SpaceMobile operates a space-based cellular broadband network for mobile phones, with its SpaceMobile network designed to provide connectivity at 4G/5G speeds on land, at sea and in-flight as well.
This company went public in early April 2021 via a SPAC merger with New Providence Acquisition Corp. a blank check company. “AST SpaceMobile received $462 million in gross proceeds from the transaction, consisting of New Providence’s approximately $232 million cash in trust and approximately $230 million from a PIPE investment,” plus it had no debt on the balance sheet at closing.
Why then, am I pessimistic about ASTS stock? Data from Yahoo! Finance indicates the company had revenue of $5.96 million for 2020. Operating income was -$24.35 million and net income was -$32.35 million. Reported free cash flow of -53,21 million and capital expenditure of $-30.41 million practically make my argument for me. But still, my case against ASTS stock is as follows.
The company will need to invest heavily, which will likely lead to several years of being unprofitable while burning cash. Unfortunately, this is simply not sustainable. I’m not saying this is the only path available to AST SpaceMobile, but it is the most probable.
Dealing with the regulatory costs of being a public company and the need to find an economic moat in the very competitive market of satellite broadband services, plus lacking financial performance history, ASTS stock looks very risky.
All three of these space stocks are the definition of unstable companies. With high risks and uninspiring fundamentals, plus lofty valuations, be aware of these risks now. The final frontier will always be interesting, but when it comes to these space stocks, their price is far from appealing.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.