« Exchanges at Goldman Sachs

Space: The Next Investment Frontier

2017-05-22

Long dominated by government agencies, space is now in play for private companies and venture capitalists, who see big potential in areas like launch, communications and exploration. Noah Poponak, senior Aerospace and Defense equity research analyst for Goldman Sachs Research, says this investment interest has helped reduce launch costs and spur innovation across related industries, opening up a new chapter in the history of the space economy.

This podcast was recorded on May 3, 2017.

All price references and market forecasts correspond to the date of this recording.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2017 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs, where we discuss developments currently shaping markets, industries and the global economy. I'm Jake Sewer global head of quarter communications here at the firm, a second Base age is emerging according to my guest today, nor panic who, in a real Goldman Sachs Research report called space. The next investment frontier no is here today to tell what's reinvigorating the industry after all these years, but the surgeon new space activity could mean for the economy here on earth. Noah welcomed the programme Jake Thanks Lover Let's start with this idea of space being the next big invest, frontier. What do you mean exactly by that? Ariel speak? A little our process and how we ultimately arrived at, conclusion, so we cover Aerospace and with an investment research in your day, job.
Exactly, and so the twenty company, we covered a dozen or so of them have some space business, but as a percentage of the total business for most companies that cover spaces and particularly large, so we ve always known the space market. We ve always looked at the space market. We studied it, we ve done work on it, but we'd. Never looked at it. The way we look at commercial aircraft fundamentals work, the defence budget were things more kind of core to that data. That reference, but separate we're always looking for new markets, longer term investment opportunities. Ways to think outside of the box think bigger picture if we can, in fact, report is part of a series that our research division did called profiles and innovation, which is really a broader effort to look for the bigger picture, long term opportunities across all market and many of those other reports could be called a new investment frontiers,
and so with what we knew about space and what we sort of saw was going on outside of our coverage, especially in the private world. We had a feeling that there is a lot of investment. Return space, so we really dug in with this effort and you know it say my single biggest take away from doing this is really there's so much, more going on here, then I would have thought or that I the average investor, realises when you look at how much private It is going on in space. How much is moving into commercial world how many really big interesting players are really pushing hard and also You know in the classic governing several market, the potential for NASA to be reinvigorated and also just a huge dollars, and that's there in the military. Really a lot of opportunity, a lot of new investors putting a lot of real dollars here and so, ultimately, but we do think it is a new investment frontier and, of course, also a nice play on the famous William Shatner STAR, trek opening credits not lost on me
yet so sounds like a lot of a new interest and activity hinges on falling launch costs. So, what's driving the decline there, break down. Where you're seeing the changes, we think about a very simplistically. In order to have activity in space you have to get to space and so launches. Just super critical. And one can easily imagine that the cost of developing and manufacturing and actually performing rocket launchers outer space would be pretty expensive. So allow the beggar players here and make comments like that. Seven mission is to hide a plan, things like that and Strip that's. Why was the province of governments. For a year I only those who are willing to spend big public money for the research capability exactly right now, there's been this wave of those that are capitalized outside of the government world that have been pushing into here and either it's for personal reasons that they have or because they deceiving investment opportunities,
so you know when you look at the space spaces and the blue orange of the world, who are really the big known private players in launch they just innovating like crazy and really pushing the envelope and between them. I've done and what others have done consummate here. Common factor on a kilogram I'm too low earth orbit basis prices for I have come down about ninety percent over a decade which has just incredible so Those costs having coming down. I think they continue to come down. Another really big part of that conversation in appertains back to those two companies, mentioned in the private world. Is ability to huge, focused point in terms of what's going on in this. Industry and basically that is launched. Something into space on a rocket and then bringing the rocket back down earth and landing it over the sort of you no eighteen hours. In what way the government was operating now, Basically never been done until the past means almost like still never been done, like basically in the last eighteen months
Your first ever landings fed a few successful landings. A lot of that has just been in testing and actually in March of this year, Spacex had the first ever successful, relaunch taking a satellite back up in Iraq. A better used before Those two companies have been talking about for a while, but it's really brand new and real life and practice and a huge thing to focus on in terms of launch going forward, but yeah launch has been really the biggest bucket of innovation and a huge critical component of what's going to happen, you're going forward because it actually get up to this economy. So what are the risks, if there are any to these falling launch cause, there's a ton of risk in something. That's this technologically sophisticated there failures all the time. There's investors who look at companies that launch and say how far this company and just wait for the inevitable failure and that all look at investment opportunity after that is reasonably comment. The failures get along with a lot of browser,
and so, when you are pushing the envelope on the edge of technology and capability or more likely to have failures just hard to do there's a lot of risk in getting it right specially something like reusability. There's also actually also in just volume and overhead are you trying to do something that a more expensive process or more expensive technique in uniting the repetition out of it? If there's not enough customers, I want to do it a lot. The model doesn't necessarily works out I think the total volume of risk and absolutely reliability, sometimes the payload that you're putting on one of these is so insane their expensive that if there's a two percent chance of failure, it's just too Let's get into some of the cool stuff exploration. What can we expect now that the cost getting to space were lower than ever. You mentioned asteroid mining, which is one thing that caught the public's attention. Viable business models. First, asteroid mining has probably had more incoming questions per page
a tribute to do it in the report of anything in there, there's something about these reports of world economic collapse as commodity prices, far capsule, who not our intent to have that view and in fact for me when we first started studying. Stewart Mining. I thought I can't be but when you realize how many really so Scientist and really serious investors are absolute, looking at it. Then you realize it could be real. What's the basic idea the initial idea is actually not I'm going to go into and final these riches and take them back and keep them The initial idea is actually that you can create or bodies of places to go for things you need, while your in space so rocket fuel, is really water kind of manipulated, that's extremely simplistic, but its water in its base and asteroids have a ton of water And so, if you have something in space and you want to take it elsewhere in space and it just needs to be reviewed, if you could,
something where you are mining that water out of an asteroid, and then you can refuel thing that to fueled without without having to bring all the way back down without having to send something else. Up. These are two little many gas stations in space that their money back with theirs an energy angle, to it as well. That's discussed because the moon has helium three, it turns out that helium through is a non radioactive form of nuclear power, and so there's just out there about just bring a tiny bit of that back to the earth and being extremely substantial, clean energy source, so there's a bunch of different elements to that lot of. That is super long term, so be it asteroid mining or some of the other places that we may see new exploration for awhile. There's been a decent of discussion about the space tourism market. The cost for that had been Astro a high for for a long time. Still quite what has come down to giving. So
a sort of major players and that bucket or talking about being able to take every day. Citizens into into space, for it to a thousand dollars still a very high number, but something that I think will see a into if we get him out of the population, look to do doesn't really get that far into space The discussions around a hundred, kilometers above earth and so again the feeling of being in space, the weightlessness of space? He looked back. You see the image of the earth, but you're not going to the moon. We think that over the next decade, or do becomes more real, another one that that I think can be reasonably real risk. We soon and where there's a couple, big players that her very serious about the size of a much longer term, in orbit, manufacturing and There are multiple private players who have said that they think a lot of the earth's manufacturing should be done in space for number of reasons.
Having a lot of heavy manufacturing in space seems hard to do in seems always office provocation, but there are, steps to that that are pretty interesting, so companies that are working on satellite, Sir sing offerings wherever it has done in space, satellite out of fuel needs to be refueled. You can actually just refill it in space and have that service life extended. Are also companies that actually have funding from NASA from DARPA the Deity Research Agency to- to turn a launch all the raw materials of manufacturing, a satellite product into space and then build it. While you are in space and the logic there being rebuilt satellite on the ground on earth. It's very meticulous internet process and you ve made an extremely expensive asset and so to be really careful when you launch it and it's pretty big and spread out? And so it's a tough launch versus You just take all the raw materials and packed them really neatly in a concise way. And then you launch that, as is into space, you could,
shouted a substantially lower cost easier to get through the earth's atmosphere, in the early part of launch. What you're doing that and then you have to we build it expects and that something currently has a little bit of funding from NASA and DARPA. The or to other ones. Beyond the mining discussion that we covered in the report that I think are probably more real sooner than mine, grub. Certainly, NASA was the big player here in the United States. Other space agencies run world. This was their ex the province. What role do you see for that old guard in the new space age legacy? Launch? An exploration giants, stay relevant year, to me, it's really hard to envision a period of time in my lifetime. Well beyond that. Nasa doesn't exist and is not significantly relevant NASA Nasa. Books on space, but NASA is also really research and Science Organisation you on the NASA website and look at their discussion of what they plan to do. Next, there's a lot of
of going to Mars, there's a lot of discussion of going back to the moon. Aloud russian. What they want to do with the International Space Station There is also a lot of discussion of what they want to do in aerospace and what they want to do with air traffic control and what they want to do with me real science and what they want to do with climate change We focused on a lot more than just space, but I think NASA is here day in near deep man on manned space exploration, the economy, that government nor in terms of the old guard. If you well in terms of the order players back to that yes on the risks in something like launch the release. Ability of the guys that happen. Robbers is the new private letters. Gonna keep them very on the market for a long period of time and also in a government military work there doing, coming their way up. There's A ton of innovation, a lot happening the private world, but there is absolutely a place for the old
the other point I make on NASA to. As the budget matters, the NASA budget has actually been under, pressure pressure for a long time and just declined in real dollars for decades, and it's declined as a percentage of federal outlay like every year for thirty years,. The new administration is discussing reversing that but their numbers aren't really showing it. The fiscally team budget request with new administration just put out had NASA down one percent, I think part That changes intentional, because as a government to decide, if you and encouraged privatisation or not, but Part of it is also arguably the nation sort of taking its eye off the ball of this really important thing and so see what politicians able to do to reverse that funding trend for NASA, because they need the money to stay element. So I was surprised when in the report to learn is how much space exploration research has contributed to everyday life
can you share a couple examples from the report that might not occur to people vile hearted powder of drinks? like, when you came out from Master s borders, some of the less well known things have come out of the space programme. You know it was a NASA engineer who first proposed to shoe companies to have push and souls in running and workout shoes they were working with material for something totally unrelated, and then they realised that it worked there. There were a proud AIR, Jordan yeah exactly or the old school pump an example. Is there was a NASA project where there are taking these forms of algae that they thought could actually create oxygen. To give you oxygen in space and they stumbled across the fact that these algae had this random type of fatty acid. That happen to be exact what you need when you are, feeding as an infant, and so they incorporated that into baby food and so like that now exists in baby food, and so a lot of people attribute baby food to NASA so there's a bunch of examples like that that seems
silly and ran about really what it has as NASA has constantly investing explore. Innovating, and they come up with these acts The other thing I do not really specific and ass a budget. So much of your everyday life runs through space without you thinking about it like automatic tollbooths your credit card authorizations. When you use an atm machine, I was if you, things out of their radio or satellite tv. Gps much that you do every day that you are thinking about his running through space and the commercials, the commercialization stage, which is invisible, lottery. So honesty is space gets privatized. It draws investors in Some of the investors. Just deep pocketed people are passionate about space, but there's some your capital money, people looking for real returns into having taken a look at this. What trends?
Can you point to where the money is going ahead? You see that evolving overtime rideau deep into that to sort of what was happening here from investment reflective we teamed up with these Terry has been on the pod before who's, our internet analyst, in the research division and his team Surely separately has recently come out of the really cool, broader look at the venture capital landscape that they're going venture capital horizons in the last two, for years there is a little over a billion dollars. Each year put into space, we say, which is small relative, obviously to that total world, but in every year, two thousand fourteen. There has never been more than a hundred twenty five million dollars, but into space something like seventy five. Eighty percent of, like all visa activity in space from the last twenty years, was in the last three or four so any of the charter. Looking straight up into the right and there's been, a real concentration of investment activity in the last of years compared to last handful of decades and there's
something real in here, something is going on and is bringing real money to the space, and you believe in follow the money to find the clues it's coming into this market in her, What trends you sing about, where that money is going and what our investors looking for to get returns, there's a pretty diverse set of sub markets that were being private money of easy money, look at back to how much discussed the significance of large launchers by far the biggest place, you're seeing money go, there's been private placement into space acts and there's a lot of other smaller launch operations, one of them Example is offering shared payloads, where you can literally go on to their website and sign up to have your payload go up on one rock, with other people's payload to to the account for large. There, a number of different things enlarge the other big one is in the satellite market, some satellite constellations, are a big growth area in the market and are seeing a lot of easy money and the car there is lighter. We
easier to manufacture, easier to maintain less costly. If you lose one more flexible able to put them in different places to get different coverages whether her communications are imaging. Versus the traditional, your very large one ass, a miniaturization of space on the likely darker, speaking of money. Another place, there has been a lot of investment and spaces in Sir military side is based. There's been a little bit of writing about the militarization of space. How has space become a or pillar of U S strategy and what role did the big defence contracts as the EU covering your day job play in that space yet now actually struggle without a hot says base in reference to a sector where an emergency to trick you a lot of what we have discussed thus far is commercial private eye was inadequate. Civil would allow. The report has focused on the commercial and private, because that's where a lot of the rapid, in
is happening in the really long term, outside investment opportunities lie. But today, as we speak, the military is really one of the larger and more visible and measurable pools of capital available in the space market. The? U S, military has significantly more of its assets in space than people realize The military to be firm has always been an innovator, the motors area embrace technology early and so sometimes liquor. What they're doing we're all gonna be doing it in five or ten that's actually right. That's absolutely means similar to our discussing NASA specific to space. The military's sort has an element to have been a more broader sense, including space later, but it also just the case that recognised communication system speak to each other through space. Drones are flying around collecting data. Are sending it back via space just
the infrastructure and the assets kind of run through space, and so the deity and other three letter agencies combined of a lot of assets and space, and so, if you will you just what spent on that per year This amount is classified total jacket on earth the data, but it looks like about twenty two twenty five billion dollars a year spent by DOD and the entire world on space. That's a big number relative to the defense budget. If you look at the airfare where's, the air force has disclosed total classified budget. That's about thirty billion dollars, the Airforce spend fifteen billion dollars a year on. Closed not classified aircraft, so the third That's classified it's not all space, but Look at things therefore says healthy chunk of thy space, so we say ten of that, a space you it. You can sort out its articles eyes of their military. The earth what does the airports by besides airplanes,
exactly right, so those numbers were really surprising to us. So there's a lot, he spent and then the other piece of it is. If you look at things that Pentagon leadership is saying anything Google exercise where listeners is googling, airforce chief of Space Command, sixty minutes, because the agreement on sixty minutes and revealed a decent man what's going on and on China is a lot of our Europe adversaries that we perhaps thought couldn't get these assets, where learning can get to these assets. And so there is also this race of space asset protection that we think is going on that getting back to the defence companies. We cover that could end up being of pre important part. The companies so part of the strategy's essential response to one of the countries are trying to do in the freezer, nor to wrap up pick little picture what space could look like two decades from now sugar production of the industry's growth come true.
The reality is there's a very wide range potential outcomes, with almost everything we ve covered individually. You know. I think, first and foremost, NASA is alive and vibrant, but I do think we really just continue to hear more or about these big? Well, capitalized? Really serious, really ambitious private players becoming a larger and larger piece of the puzzle. I think we see a lot of rockets. Landed and reused. I think we take a lot of steps towards more NASA has a plan to be at Mars by twenty three sides. Within twenty years, manner? Unmanned manned in terms of exactly whose stepping foot onto the planet as a different question, but because sometimes they lay other plans in terms of where they want to literally be standing. Sometimes they lay them out in terms of what they want to be organised. And also something that is that far away the plan and the timeframe will change
NASA has a multi, tiered plan to go to Mars They will make a lot of progress on that over the next twenty years, so The moon, but there's a lot of plans in place space access. Be orbiting tourist around the moon within like twenty four months time. Now you know many entities in this arena have had timeline slept, but there's anger. I think there are must be a race between and the most serious private players with regard to Mars plans and moon plants because of your NASA, and a private player starts to get ahead of your timeline. Then you have to debate whether or not it's worth using money or they're, not space tourism business, they want to show that they are at least ahead of the curve, otherwise they're very existence. It's called into question right. I think some version of asteroid mining, in particular with regard to that water for fuel point there were making will exist space tourism will be a real thing. You know the pricing that's being talked about their now's feasible, for these amount of the earth's population
yeah, I think, lousy. Also, I think we're going to see in twenty years time a lot of investors having made really nice returned in a lot of these really early stage market interesting. Nor, thank you so much for joining us today. Thanks lover, everyone. That concludes this episode of extreme Goldman Sachs, I'm Jake Stewart thank for listening. This podcast was recorded on May three rd, two thousand and seventeen all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this podcast does not constitute research or recommendation from any golden
Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person. A client of any Goldman Sachs Entity
Transcript generated on 2021-05-20.