I am constantly on the lookout for ten baggers, stocks that have the potential to rise tenfold over the long term.
Look at the great long-term track records compiled by the most outstanding money managers, and they always have a handful of these that account for the bulk of their outperformance, or alpha, as it is known in the industry.
I’ve found another live one for you.
News came out last week that Elon Musk’s SpaceX has just landed a $70 million contract with the Department of Defense for the creation of its military Star Shield satellite network.
Elon Musk’s SpaceX is so forcefully pushing forward rocket technology that he is setting up one of the great investment opportunities of the century.
In the past decade, his start-up has accomplished more breakthroughs in advanced rocket technology than seen in the last 60 years, since the golden age of the Apollo space program.
As a result, we are now on the threshold of another great leap forward into space. Musk’s ultimate goal is to make mankind an “interplanetary species.”
There is only one catch.
SpaceX is not yet a public company, being owned by a handful of fortunate insiders and venture capital firms. But you should get a shot at the brass ring someday.
The rocket launch and satellite industry is the biggest business you have never heard of, accounting for $200 billion a year in sales globally. This is probably because there are no pure stock market plays.
Only two major companies are public, Boeing (BA) and Lockheed Martin (LMT), and their rocket businesses are overwhelmed by other aerospace lines.
The high value-added product here is satellite design and construction, with rocket launches completing the job.
Once dominated by the US, the market for launches has long since been ceded to foreign competitors. The business is now captured by Europe (the Arianne 5), and China (the Long March 5). Space business for Russia and its Angara A5 rocket abruptly ended with its invasion of Ukraine.
Until recently, American rocket makers were unable to compete because decades of generous government contracts enabled costs to spiral wildly out of control.
Whenever I move from the private to the governmental sphere, I am always horrified by the gross indifference to costs. This is the world of the $10,000 coffee maker and the $20,000 toilet seat.
Until 2010, there was only a single US company building rockets, the United Launch Alliance (ULA), a joint venture of Boeing and Lockheed Martin. ULA builds the aging Delta IV and Atlas V rockets.
The vehicles are launched from Cape Canaveral, Florida and Vandenberg Air Force Base in California, both of which I had the privilege to witness. They look like huge Roman candles that just keep on going until they disappear into the blackness of space.
Enter SpaceX.
Extreme entrepreneur Elon Musk has shown a keen interest in space travel throughout his life. The sale of his interest in PayPal, his invention, to eBay (EBAY) in 2002 for $165 million, gave him the means to do something about it.
He then discovered Tom Mueller, a childhood rocket genius from remote Idaho who built the largest ever amateur liquid-fueled vehicle, with 13,000 pounds of thrust. Musk teamed up with Mueller to found SpaceX in 2002.
Two decades of grinding hard work, bold experimentation, and heart-rending testing ensued, made vastly more difficult by the 2008 Great Recession.
SpaceX’s Falcon 9 first flew in June 2010 and successfully orbited Earth. In December 2010, it launched the Dragon space capsule and recovered it at sea. It was the first private company ever to accomplish this feat.
Dragon successfully docked with the International Space Station (ISS) in May 2012. NASA has since provided $440 million to SpaceX for further Dragon development.
The result was the launch of the Dragon V2 (no doubt another historical reference) in May 2014, large enough to carry seven astronauts.
The largest SpaceX rocket now in testing has Mars capability, the 27-engine, 394-foot-high Starship, the largest rocket ever built.
Commit all these names to memory. You are going to hear a lot about them.
Musk’s spectacular success with SpaceX can be traced to several different innovations.
He has taken the Silicon Valley hyper-competitive ethos and financial model and applied it to the aerospace industry, the home of the bloated bureaucracy, the no-bid contract, and the agonizingly long time frame.
For example, his initial avionics budget for the early Falcon 1 rocket was $10,000 and was spent on off-the-shelf consumer electronics. It turns out that their quality had improved so much in recent years they met military standards.
But no one ever bothered to test them. $10,000 wouldn’t have covered the food at the design meetings at Boeing or Lockheed Martin, which would have stretched over the years.
Similarly, Musk sent out the specs for a third-party valve actuator no more complicated than a garage door opener, and a $120,000, one-year bid came back. He ended up building it in-house for $3,000. Musk now tries to build as many parts in-house as possible, giving it additional design and competitive advantages.
This tightwad, full speed ahead and damn the torpedoes philosophy overrides every part that goes into SpaceX rockets.
Amazingly, the company is using 3D printers to make rocket parts, instead of having each one custom-made.
Machines guided by computers carve rocket engines out of a single block of Inconel nickel-chromium super alloy, foregoing the need for conventional welding, a frequent cause of engine failures.
SpaceX is using every launch to simultaneously test dozens of new parts on every flight, a huge cost saver that involves extra risks that NASA would never take. It also uses parts that are interchangeable for all its rocket types, another substantial cost saver.
SpaceX has effectively combined three nine-engine Falcon 9 rockets to create the 27-engine Falcon Heavy, the world’s largest operational rocket. It has a load capacity of a staggering 53 metric tons, the same as a fully loaded Boeing 737 can carry. It has half the thrust of the gargantuan Saturn V moon rocket that last flew in 1973.
Musk is able to capture synergies among his three companies not available to any competitor. SpaceX gets the manufacturing efficiencies of a mass-production carmaker.
Tesla Motors has access to the futuristic space-age technology of a rocket maker. Solar City (SCTY) provides cheap solar energy to all of the above.
And herein lies the play.
As a result of all these efforts, SpaceX today can deliver what ULA does for 73% less money with vastly superior technology and capability. Specifically, its Falcon Heavy can deliver a 116,600-pound payload into low earth orbit for only $90 million, compared to the $380 million price tag for a ULA Delta IV 57, 156-pound launch.
In other words, SpaceX can deliver cargo to space for $772 a pound, compared to the $7,515 a pound UAL charges the US government. That’s a hell of a price advantage.
You would wonder when the free enterprise system is going to kick in and why SpaceX doesn’t already own this market.
But selling rockets is not the same as shifting iPhones, laptops, watches, or cars. There is a large overlap with the national defense of every country involved.
Many of the satellite launches are military in nature and top secret. As the cargoes are so valuable, costing tens of millions of dollars each, reliability and long track records are big issues.
Enter the wonderful world of Washington DC politics. UAL constructs its Delta IV rocket in Decatur, Alabama, the home state of Senator Richard Shelby, the powerful head of the Banking, Finance, and Urban Affairs Committee.
The first Delta rocket was launched in 1960, and much of its original ancient designs persist in the modern variants. It is a major job creator in the state.
ULA has no rocket engine of its own. So it bought engines from Russia, complete with blueprints, hardly a reliable supplier. Magically, the engines have so far been exempted from the economic and trade sanctions enforced by the US against Russia for its invasion of Ukraine.
ULA has since signed a contract with Amazon’s Jeff Bezos-owned Blue Origin, which is also attempting to develop a private rocket business but is miles behind SpaceX.
Musk testified in front of Congress in 2014 about the viability of SpaceX rockets as a financially attractive, cost-saving option. His goal is to break the ULA monopoly and get the US government to buy American. You wouldn’t think this is such a tough job, but it is.
Elon became a US citizen in 2002 primarily to qualify for bidding on government rocket contracts, addressing national security concerns.
NASA did hold open bidding to build a space capsule to ferry astronauts to the International Space Station. Boeing won a $4.2 billion contract, while SpaceX received only $2.6 billion, despite superior technology and a lower price.
It is all part of a 50-year plan that Musk confidently outlined to me 25 years ago. So far, everything has played out as predicted.
The Holy Grail for the space industry has long been the building of reusable rockets, thought by many industry veterans to be impossible.
Imagine what the economics of the airline business would be if you threw away the airplane after every flight. It would cost $1 million for one person to fly from San Francisco to Los Angeles.
This is how the launch business has been conducted since the inception of the industry in the 1950s.
SpaceX is on the verge of accomplishing exactly that. It will do so by using its Super Draco engines and thrusters to land rockets at a platform at sea. Then you just reload the propellant and relaunch.
What's coming down the line? A SpaceX cargo business where you can ship high value products like semiconductors from Silicon Value to Australia in 30 minutes, or to Europe in 20 minutes.
Talk about disruptive innovation with a turbocharger!
The company has built its own spaceport in Brownsville, Texas that will be able to launch multiple rockets a day.
The Hawthorne, CA factory (where I charge my own Tesla S-1 when in LA) now has the capacity to build 160 rockets a year. This will eventually be ramped up to hundreds.
SpaceX is the only organization that offers a launch price list on its website (click here for that link), as much as Amazon sells its books. The Falcon 9 will carry 28,930 pounds of cargo into low earth orbit for only $60.2 million. Sounds like a bargain to me.
This no doubt includes an assortment of tax breaks, which Musk has proven adept at harvesting. Elon has been a quick learner of the ways of Washington.
Customers have included the Thai telecommunications firm, Rupert Murdock’s Sky News Japan, an Israeli telecommunications group, and the US Air Force.
So when do we mere mortals get to buy the stock? Analysts now estimate that SpaceX is worth up to $200 billion.
The current exponential growth in broadband and SpaceX’s Starlink will lead to a similar growth in satellite orders, and therefore rocket launches. So the commercial future of the company looks especially bright.
However, Musk is in no rush to go public. A permanent, viable, and sustainable colony on Mars has always been a fundamental goal of SpaceX. It would be a huge distraction for a publicly managed company. That makes it a tough sell to investors in the public markets.
You can well imagine that the next recession would bring cries from shareholders for cost-cutting that would put the Mars program at the top of any list of projects to go on the chopping block. So Musk prefers to wait until the Mars project is well established before entertaining an IPO.
Musk expects to launch a trip to Mars by 2027 and establish a colony that will eventually grow to 80,000. Tickets will be sold for $500,000. Click here for the details.
There are other considerations. Many employees and early venture capital investors wish to realize their gains and move on. Public ownership would also give the company extra ammunition for cutting through Washington red tape. These factors point to an IPO that is earlier than later.
On the other hand, Musk may not care. The last net worth estimate I saw for his net worth was $300 billion. If his many companies increase in value by ten times over the next decade, as I expect, that would increase his wealth to $3 trillion, making him the richest person in the world by miles.
If an IPO does come, investors should jump in with both boots. While the value of the firm may have already increased tenfold by then, there may be another tenfold gain to come. Get on the Elon Musk train before it leaves the station.
To describe Elon as a larger-than-life figure would be something of an understatement. Musk is the person on which the fictional playboy/industrialist/technology genius, Tony Stark in the Iron Man movies, has been based.
Musk has said he wishes to die on Mars, but not on impact. Perhaps it would be the ideal retirement for him, say around 2045 when he will be 75.
To visit the SpaceX website, please click here. It offers very cool videos of rocket launches and a discussion with Elon Musk on the need for a Mars mission.
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