Blain’s Morning Porridge – Sept 22nd 2020: Rocketmen and Viruses

Blain’s Morning Porridge – Sept 22nd 2020: Rocketmen and Viruses

“I’m the King of rock and roll, completely…”

From the Ministry of Common Sense: “To celebrate this morning’s Autumn Equinox, we’ve decided to commit economic suicide.”

The pandemic is a pernicious little beast.  It clearly eats away brains. Rising infections are a risk.  In the face of clear evidence fewer people are dying and the medical services are coping better with Covid cases – we could assess that risk, and would probably conclude its better to stay broadly open. Or we can let fear and emotion run us: let’s stay safe by closing down while hoping and praying for a vaccine next year. Hope is never a good strategy – action is. The choice is pain today as more people might die earlier from the infection, or pain tomorrow as jobs, livelihoods, and more deaths result long-term from economic shutdown.

Choices, choices… Both approaches have clear costs. But one is clearly preferable to the other – if government had the guts to say it.

The brutal reality is deaths hump upwards during the autumn and winter from respiratory illness. Markets get it. Markets are about assessing risks and outcomes. Which is why they’ve stalled – losing confidence and knowing both long and short-term economic costs will be lower if we shift towards keeping the economy on track to recovery, and facing down the virus. It’s not just Sweden that get’s that. Compare and contrast the UK approach with Germany – which is going to brazen it out by keeping the economy as open as practical. Germany will suffer a far lower hit.

Just as the UK economy was struggling back onto its knees, it will get the legs kicked from under it. There is now zero-talk of swift recovery – estimates are now for 2022 before the economy claws back its likely 7% drop in 2020. A W-shape looks nailed-on. While Rishi Sunak is nervously muttering about longer furlough and other support schemes, ex-chancellors, Sajid Javid and Philip Hammond, are vocal about it being time to move forward into recovery and normalisation – get over it. Dither and satisficing aren’t going to move the UK forward.

Which is ultimately excellent for markets. At some point UK firms, airlines to aero-engine makers, are going to be a screaming buy. (Everything… except for HSBC which will not be. Ever. Ever Again.) The question is.. when is that buy moment?

In the US the debate about Coronavirus numbers is buried in the sanctimonious nomination battle to the Supreme Court, which will hold back any agreement between parties on a new bailout package. Markets are reacting accordingly – if they ain’t getting more free money tomorrow, they will remain unhappy.

What happens next? October is always a good month for a market crash, but usually on the back of insane market exuberance. This year, flatlining markets feel pretty joyless already, thus I suspect even an old-fashioned October market melt-down will prove lacklustre.

Still… at least we’ve got the King Of Hype on later today as Elon Musk gives us “Battery Day”. I really can’t contain my excitement. (US Readers: sarcasm alert.) What unsubstantiated and unmerited promises will be thrown at us in the form of irrefutable truths?


The tech sector is prone to bubbles, hype and illusion for good reasons. If anything has been around for more than a few years, then it becomes mature and more difficult to construct outlandish investment scenarios and insane valuations around. If Elon Musk is a genius – it’s not because of his tech vision and engineering prowess (he hires people to do these for him), but because he is able to construct highly plausible sounding narratives around his investment scams scenarios. Dress them up in mumble-techno-babble and they sounds like genius.

Take the time to analyse them, and walk away… except it’s not that black and white. There is a kernel of sense and possibility in Tesla and the other things he does…

Like everyone else I’m always to figure out where the next big-money stock might be hiding out. I’ve been trying to work out what the next big deal is going to be. What stock is going to go stratospheric on pulling in the punters? That got me thinking – maybe it’s the one that’s just landed on my desk. A company setting up to launch low-earth orbit satellites from the UK cheaper and faster from anyone else.. It looks a great deal – and the numbers are enticing. For a modest outlay it will be possible to own a slice of a proven rocket launch technology and system.

Satellites are a fascinating market. The opportunities thrown up by space are legion – new markets, new revenues and new possibilities. And as soon as you think of rockets you have to think of SpaceX.

I’ve been shot down so many times on Tesla – because I don’t understand it, apparently. If/when the Telsa bubble bursts – then SpaceX is there as Musk’s next miracle stock. Its latest $1.9 bln pre-IPO funding round values the company at $42 bln. The Manic Monks of Blessed St Elon believe it will be worth $150 bln in just a few years time – with the potential to be worth trillions.

I like rockets so I want to believe.

The recent SpaceX funding round to literally take investors into space was done and dusted in hours. It takes me longer to write the teaser on a deal like that. Investors didn’t need to look at the deal, review financials or understand the tech – they read “Musk”, “Space”, “Disruption”, “Rockets” and heard the fun-fair music playing….

SpaceX is apparently going to make Tesla look small change. Who knew ferrying astronauts to space could be so valuable? Well, it’s not. That’s just what we’ve seen on the news about SpaceX’s Dragon capsule flying to the ISS. That’s a highly regulated game – which limits profits. Boeing’s rival Starliner launch vehicle is more than a year behind SpaceX because it has to pass tests. (But if there is one company I have even less time for than Tesla, its Boeing!)

SpaceX’s success has been the commercially orientated Falcon rocket.  Credit where credit is due. Its superb. The Falcon is one of a number of commercial launch vehicles that has sent the cost of space launches crashing. (Should we use crashing in a story about rockets?)

SpaceX has launched over 100 missions and only lost 5 – which is about normal. What makes it special is the Falcon 9 is reusable – (although it reduces the payload it can carry because it needs additional fuel to land again) and it does cost about 10% of the cost of a new rocket to refurbish. One Falcon has flown 6 times. Kudos and respect – it’s a serious step forward and makes it cheaper overall.

But SpaceX is just one of the firms that has driven the commercialisation of space launches. There are other serious players in the space rocket business including Arianespace, ISRO from India, ULA, Mitsubishi, and Rocket Lab. At the other end of the Space industry race is Virgin Orbit – $700mm of investment that still hasn’t circled the planet, while Virgin Galactic joy-rides are 12 years late. There are significant risks.

The powers that be reckon low-orbit small/mid-sized satellite market was worth between $5-6 bln in 2019 depending whose data you use. Its growing 6-7% per annum. It’s about communication, GPS services, remote sensing, recon and science. There are good military contracts to be won. At some stage it’s going to spawn whole new sectors like micro-facturing and pharma in zero-G, and eventually launch robots to go space mining. For global aerospace industries looking to recover and re-allocate resources from the stalled and stagnant aviation sector – Satellites and Space look a very interesting option.

In a competitive launch market SpaceX isn’t going to be worth trillions on just rockets. Let’s assume Musk gets 25% of launches (because satellite owners will spread launches among competing firms) and the others will cut costs, then he could win $2.5 bln of a $10 bln market. Maybe even $5 bln of a risk market. That is not an exciting metric for Musk.

He has therefore changed the narrative. Musk is spinning the tale the value in SpaceX lies in launching a constellation of 12,000 low orbit Starlink satellites to re-invent superfast broadband. Each Falcon can put 60 of them into LEO (Low Earth Orbit). See SpaceX wants to conquer the internet for a basic primer on the pros and cons of the story. Its already happening.

Musk’s thesis is his Starlink system will disruptthe whole tele-coms sector, making superfast fibre-optics obsolete and undermining existing players overnight… making it available to everyone at a fraction of the current cost. Starlink will make the available to everyone everywhere. Apparently. Just like Iridium et al were going to do 20-years or more ago. Yeah.. that didn’t end as expected.

Does this sound familiar? Like how Tesla went from being a good niche producer of electric alternative cars to re-writing a new narrative that framed Tesla in a whole new agenda for personal travel, self-driving cars, batteries and power – despite not making any profits and selling 0.5% of world autos. Disruptive yes. Bubblesque – definately. Overpromised and underlivered?

Space based internet is an old idea – the problem with Geostationary satellites was latency time-slips. To make it work from Low Earth Orbit, I wonder about the implications of 12,000 satellites in orbit… At $62 mm per SpaceX launch, plus the cost of the satellites at, say, $500k, then it’s going to cost in excess of $18 bln – which isn’t as outrageous as it sounds when Musk has his magic money tree of investor belief. (Some analysts think SpaceX could get to $15 mm per launch and $250k per satellite, which would total $6 bln to launch Starlink.)

There is certainly value in broadband connectivity – but also issues. Competition will be one. The current incumbents are not going to sit and wait while Musk launches 200 Falcons into orbit to eat their lunch. Starlink will be very useful for off-grid communities and out of town. Less so in Cities. Astronomers are objecting to the number of satellites crowding out the skies – I agree with them! Putting more and more satellites into Earths already crowded low-earth space could prove increasingly dangerous in terms of collisions.

Why am I suspicious? Apparently I don’t understand. Again. The Musk fanboys assure me Starlink and Space X will be the secret sauce confirming Musk as the greatest financial/technical genius of all time.  He’s a brilliant something – but it’s a something I can’t really write in the Porridge. With any luck Starlight will be successful and will fund Musk on his trip to Mars.

If anyone wants to learn more about our Satellite project… Would you like to take on Musk for $20 mm with a rocket and platform that’s proven?

Five Things To Read This Morning

FT – Beyond the market hype: Tesla tries to expand its lead in batteries

WSJ – Schitt’s Creek – The factors behind its Emmy Sweep

BBerg – Pelosi’s Funding Bill Lacks GOP Farm Aid, Raising Shutdown Risk

Vanity Fair – How Everyone is Lining Trump’s Pockets

WSJ – HSBC Stock Hits 25-Year Low

Out of time and back to the day job..

Bill Blain

Shard Capital