Typically, This Stuff Is the Domain of Countries, Not Companies.
The bull case for investing in SpaceX
To Investors,
In July this year, SpaceX announced a $750 million secondary share sale at $81 a share, valuing SpaceX at $150 billion. SpaceX’s revenue 2x’d to $4.6 billion from 2021 - 2022, and SpaceX is yet to come near its full potential as a company.
There’s an immense bull case to participate in the next investment round for SpaceX, and/or to participate in a secondary market offering to own a significant share of SpaceX.
In the realm of space exploration and technology, SpaceX has emerged as a dominant force, revolutionising the space industry and achieving unprecedented success. The story behind SpaceX's triumph is not just one of groundbreaking technology, but also a masterful demonstration of how to build a highly defensible company. We’ll use Hamilton Helmer’s 7 Powers to analyse how SpaceX managed this.
When you’re building a company you typically identify a problem, you scope the market and suss out the available solutions to the problem. Then you say: “well how can I build the best solution to this problem, given the status quo?”
Counter Positioning
SpaceX’s business model is superior to the traditional rocket industry business model, to the point that SpaceX 1) is able to become a price setter, 2) while reducing the cost of a launch, 3) grabbing a large market share in the process, and 4) adding Starlink as a business line for additional revenue - all of which result in SpaceX being the go-to space shipping company.
Traditionally there were no private companies attempting (at least successfully) to launch rockets into space. This was something done by countries through national budgets mainly because of the cost. A rocket was generally used once and then thrown away. This resulted in a high cost of launch because for every launch a rocket would need to be built from scratch.
SpaceX took a different approach and looked to reduce the cost of launch drastically by building a rocket from scratch using a first principles approach and using the least amount of parts possible. This means they would need to control the entire supply chain for design and manufacturing.
This was the result of that effort:
The Apollo program cost $390 million cost per seat
The Space Shuttle cost $170 million cost per seat
The Russian Soyuz cost $80 million cost per seat
The SpaceX Dragon 2 (one of SpaceX’s earliest rockets) cost $55 million per seat.
The decision to vertically integrate from design and manufacturing of the rocket, to launch - enabled SpaceX to streamline inefficiencies, the benefits of which include:
cost control by reducing expenses associated with outsourcing, enabling SpaceX to optimise production processes
faster product iteration - allowing the company to learn from failures and improve their technology faster
reducing SpaceX’s dependence on external suppliers and mitigating potential delays caused by supply chain disruptions or geopolitical issues. This includes avoiding bottlenecks that might arise when relying on multiple suppliers. SpaceX has the flexibility to allocate resources where needed to ensure a smooth production flow.
controlling the manufacturing process internally, meaning SpaceX can ensure a high level of quality and consistency in its products.
the ability for SpaceX to create customised solutions tailored to the company’s specific needs. This level of customisation can lead to better performance and efficiency.
reduced COGS which can feed into higher profits.
Starlink as a revenue line
The introduction of Starlink as a business line enables SpaceX to also become partly revenue funded, not just contract funded.
For perspective on the potential with Starlink, global internet penetration was only 59% in 2020; and total revenue of the internet connectivity part of the Internet Value Chain was around $1 trillion in 2020.
If Starlink can grab just 3%- 5% of that market, that’s $30- $50 billion in annual revenue for SpaceX.
Starlink has already gained significant traction, benefiting from frequent constellation deployment (due to proximity with SpaceX) - allowing faster growth in coverage and boxing out the competition.
It's been reported that Starlink subscriber numbers went from 1 million in December 2022, to approx. 1.5 million subscribers in May 2023.
As of July this year there were 4 519 Starlink satellites in orbit, and the target is 42 000 satellites for Starlink to be able to say they have global internet coverage.
There’s still a way to go, but another 22 Starlink satellites were just launched into space on August 26th. There is no satellite internet competitor growing as quickly - or has the chance to even grow as quickly.
For context on how quickly SpaceX is launching, to date SpaceX has conducted 257 total launches and 191 total re-flights (i.e. reusing rockets).
In 2022 SpaceX handled 27 flights for outside customers.
In the first six months of this year, SpaceX has already handled 21 flights for outside customers, or 64% of the worldwide total.
Additional revenue
An additional feature that allows SpaceX to gain that marginal customer is SpaceX’s rideshare product, where anyone can catch a lift on a SpaceX launch and send a product to space for as little as $250K. The beauty of rideshare is that it supports new innovations as startups can build for cheaper.
A great example is Varda Space Industries - an in-space manufacturing company valued at close to $0.5 billion that in June 2023 was able to launch their first space factory with SpaceX. Without SpaceX Varda might not have existed.
SpaceX’s counter positioning Power emerged because there was no organisation doing, or even attempting to offer products similar to those that SpaceX now offers. The incumbents (government agencies) are not capable of this scale of operation because they simply cannot move as quickly to introduce products and iterate continuously, and there is no close private competitor meaning SpaceX is the dominant rocket laucnh company for a long time to come.
Scale Economies
Building on SpaceX’s idea for vertical integration, the company did not entertain the one-time-use model for building rockets. By developing rockets that can be refurbished and reused, SpaceX can benefit from scale economies. Simply put scale economies occur when a firm can reduce its average cost of production by increasing its output level.
Let's use some basic maths;
Assumptions:
The cost of building and launching a new expendable rocket is $100 million.
The cost of building and launching a reusable rocket from first principles is $80 million, with refurbishment costs of $20 million.
SpaceX aims to perform 10 launches.
Scenario 1: Expendable Rockets
In this scenario, SpaceX uses traditional expendable rockets for each launch.
Total Cost for 10 launches = Cost per launch * Number of launches
Total Cost = $100 million * 10 = $1 billion
Average cost of production = $100 million.
Scenario 2: Reusable Rockets
In this scenario, SpaceX uses reusable rockets for the same number of launches, taking into account refurbishment costs - but now they will only pay for refurbishment costs after the first launch.
Total Cost for 10 launches = Cost per launch * Number of launches
Total Cost = ($80 million * 1) + ($20 million * 9) = $260 million.
Average cost of production = $26 million.
Process Power
These process advances mentioned above are difficult to replicate, and can only be achieved over a long time period of sustained evolutionary advancement. Keep in mind that SpaceX is still aiming to send humans to Mars with the Starship and revolutionise international travel here on earth.
A company with Process Power is able to improve product attributes and/or lower costs as a result of process improvements embedded within the organisation.
We’ve seen how SpaceX reduced launch costs through vertical integration and reusability.
And below we will look at howSpaceX’s products are currently unmatched.
Brand Power
My interpretation of a great brand is one that delivers constantly. To do that you need to be iterating your product quickly but also you need to be cleaning out any one risk for the company at any one time.
If you’re building rockets the risks generally are:
Can you build a rocket?
Can you launch successfully into space?
Can you launch successfully into space multiple times?
Can you do it at the lowest possible price vs competitors?
For SpaceX specifically the risks also include:
Can you build a reusable rocket?
Can you successfully launch the reusable rocket into space?
Can you successfully recover the reusable rocket?
Can you successfully launch and recover the reusable rocket multiple times?
The answer to all of the questions above is yes.
SpaceX's brand power is a testament to its commitment to innovation and reliability. Milestones like the successful launch and return of rockets and the ongoing Starship development program have elevated SpaceX's brand to iconic status. The SpaceX brand is synonymous with pushing the limits of space exploration, attracting clients and partners who seek to be part of history in the making.
A business that leverages branding enjoys a higher perceived value to an objectively identical offering that arises.
Right now, what's the first name that comes to mind when someone says rockets… or space?
A strong brand can only be created over a long period of reinforcing actions which itself serves as the key barrier.
Network Economies
If we say that, in this context, the network is the space industry, then the network effect that SpaceX has created resonates throughout the space industry. After the US ended its space shuttle program it was SpaceX coming into its own that revived and ignited the global space industry. As more clients entrust their payloads to SpaceX, the network (read: innovation and industry in the space industry) continues to grow.
The big thing about rocket launches is repetition - i.e can you launch successfully, continuously. So for every person/company that wants to ship something to space, the more customers SpaceX gets and executes for successfully, the better for another client or startup, because there’s a reliable shipper.
This snowballing effect acts as a formidable barrier for competitors seeking to establish a foothold, and new entrants face the daunting task of building a comparable impact from scratch.
The benefits to these network economies is that SpaceX now has a de facto monopoly on space shipping. The barrier that SpaceX has created is that competitors will have to at least lower their prices to below what SpaceX charges to compete, which would be difficult unless they were employing the same or better processes for manufacturing, launching and recovering rockets.
So everyone stays with the trusted partner.
Switching Costs
Though the notion of switching costs may not be as palpable in space exploration, SpaceX's performance has inherently established some level of switching cost for its customers. As clients experience the reliability, cost-effectiveness, and cutting-edge technology that SpaceX delivers, the thought of switching to another provider becomes less appealing. In fact, is there a better priced or reliable alternative?
This subtle inertia contributes to the company's ability to retain a loyal customer base, strengthening SpaceX as a brand.
Cornered Resources
With great brand comes great responsibility. Because of all the 6 Powers mentioned above, SpaceX has access to a specialised talent pool and cutting-edge technology, which serves as a reinforcement mechanism for success. Talented people want to play for the winning team, always. The company has clearly managed to attract some of the brightest minds in the aerospace industry, allowing it to develop groundbreaking technologies.
Continuous collaborations with government space agencies like NASA are an additional stamp of approval.
Currently there is no company receiving as many requests to launch products into space. And there is no alternative organisation that can take astronauts to and from the ISS in the US since NASA ended its shuttle program in 2011. Some additional thoughts:
SpaceX rockets powered 66% of customer flights from American launch sites in 2022, and handled 88% in the first six months of this year.
This advantage for SpaceX was further bolstered by Russia’s invasion of Ukraine. Russia’s invasion of Ukraine put one alternative, the Russian Soyuz rocket, off limits for many launch buyers. For example Satellite-communications company OneWeb bought rides on SpaceX’s Falcon 9 rockets after losing access to Russia’s Soyuz, and SpaceX also handled a flight for the European Space Agency that was originally planned for a Soyuz.
There is no close competitor:
This is normally a country thing:
SpaceX's success narrative is not just a tale of rocket launches and groundbreaking achievements; it's a case study in building defensibility. With each element of the 7 Powers seamlessly woven into its trajectory, SpaceX emerges as a powerful example of the potential unleashed by these foundational principles that enable a defensible company.
It's also important to note that these are early days and that there is a gargantuan amount of upside and value, in reach, but not yet captured by SpaceX. One simply has to think about the stated mission for SpaceX - to make humans multi-planetary - to get a picture of the potential in space, and to see that SpaceX is the frontrunner to capture a lot of that value.
Sources:
https://www.space.com/spacex-starlink-internet-satellites-mars-colonization.html
https://www.statista.com/chart/21904/estimated-cost-per-seat-on-selected-spacecraft/
https://www.statista.com/statistics/445838/ranking-of-the-biggest-us-dod-contractors/
https://www.statista.com/chart/29409/nasa-contractors-with-the-highest-awards-volume-in-fy-2022/
https://www.wsj.com/articles/spacex-targets-150-billion-valuation-6e5980b6?mod=article_inline
https://www.spacex.com/mission/
https://www.starlink.com/technology
https://www.space.com/spacex-starlink-satellites.html
https://www.gsma.com/publicpolicy/wp-content/uploads/2022/05/Internet-Value-Chain-2022-1.pdf
https://www.cnbc.com/2023/07/13/elon-musk-spacex-near-150-billion-valuation.html
https://mansas.substack.com/p/the-mars-portfolio
https://www2.deloitte.com/za/en/insights/industry/aerospace-defense/future-of-space-economy.html