November Space Stock Review + 3Q22 Earnings Scorecard

Topic of Interest: 3Q22 Space SPAC Earnings Scorecard

Hello fellow space enthusiasts! 🚀

In this month’s Space Stock Review:

1. 🔊Update from Case / Space Case Origin Story

2. 📈 November Market Overview

3. ✍️ Space SPAC Performance and Valuation

4. 🗣️ Topic of Interest: 3Q22 Space SPAC Earnings Report Card

Disclosure/Disclaimer: Case Closed should not be interpreted as investment advice or an investment recommendation; posts represent Case’s opinions only. Please do your own research before investing. Case owns shares of ASTS, PL, and SPIR at the time of this post (12/11).

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1. UPDATE FROM CASE / SPACE CASE ORIGIN STORY

Last week I gave notice to my employer, and I will soon begin a new chapter as an investor at a newly formed growth equity fund focusing on dual-use companies…and I was in-part recruited because of the “Case Closed” newsletter.

Prior to now I didn’t work in the space industry and I wasn’t a professional investor—my career has gone from equity research (covering media & cable at Guggenheim Partners) to investor relations (Comcast Corporation) to strategic finance (Comcast Corporation).

Current LinkedIn mugshot

I actually didn’t become interested in space until late 2020, when Starlink won nearly $1 billion in federal subsidies to deploy its service in rural America—given that I was working at Comcast at the time (the largest broadband provider in the United States), seeing Elon Musk come into our industry made me pay attention!

So in early 2021 I started researching the threat that Starlink posed to existing US broadband providers, and I became fascinated by the idea that Starlink was created to fund SpaceX’s mission to Mars. At the same time, I started learning more about the business of space through space SPAC filings and investor presentations. During my research I became frustrated by the general lack of business analysis about space companies—so I decided to do the work myself, starting with space SPAC earnings report summaries on Twitter and then making the “Case Closed” newsletter for more in-depth analysis.

What began as a passion project attracted the attention of the right people, and I now have the opportunity to get paid to do work I was doing for fun in my evenings and on the weekend—it is a dream come true!

Space Case (🛰,📈) @spacecasetayl0r

Just gave notice at my job—very bittersweet moment I’m excited for the next chapter, but telling my manager I was leaving felt like a breakup😭 I’ll share details about my plans later, but long story short is that it’s time to see what Space Case is made of as an investor😤

Working with space companies feels truly meaningful to me because of the way that space technology can inspire people and materially benefits life on earth. I can’t wait to now be a part of this industry’s bright future and pursue something I am truly passionate about.

It feels surreal to be in this position, and I want to thank everyone who has encouraged me and helped along the way, with a special shoutout to:

• My girlfriend (who has put up with more ramblings on the business of space than any non-tech person should have to deal with)

• My parents (who encouraged me to pursue something that I was passionate about, despite the hard work that it entailed)

• Space Twitter friends Joe Morrison, Phil Scully, Ari Lewis, Mo Islam, Sinéad O’Sullivan, and Aravind Ravichandran (who helped me see the value in what I was doing and told me to keep going)

I plan to continue the “Case Closed” newsletter, and in the coming months I will share more details about the the fund I am going to work for, but for now, back to our regularly scheduled programming…

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2. NOVEMBER MARKET OVERVIEW

November was another solid month for the broader stock market, as investors responded positively to data suggesting that inflation was easing (inflation growth decelerated to +7.7% y/y in October from 8.2% in September) and comments from Fed Chairman Jerome Powell re-flamed hope that the central bank will announce a deceleration of its aggressive rate-hikes during the Fed’s upcoming December 14 meeting.

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” Powell said in a speech at the Brookings Institution in Washington, D.C. “The time for moderating the pace of rate increases may come as soon as the December meeting.”

- CNBC, 11/30

However, while broader indices and legacy space stocks saw continued positive momentum in November, growth stocks (i.e. the ARK Innovation ETF and the space SPACs) did not follow suit.

This was the 6th month of negative returns for the space SPACs, which are now down -63% YTD.

3. SPACE SPAC PERFORMANCE AND VALUATION

PERFORMANCE COMMENTARY

Biggest Loser: Velo3D (VLD, -48%)

• Velo3D’s decline in November was primarily driven by the company’s downward revision of 2022 revenue guidance during its 3Q22 earnings report on 11/8 (management’s 2022 revenue outlook was revised to $75M - $80M vs $89M prior).

  • Management attributed the change in guidance to “shipment delays, and potential fourth quarter supply chain and production disruptions” that impacted both 3Q results and the 4Q outlook; however, they stated that underlying demand remains strong, backlog + bookings continue to grow, and “this adjustment does not reflect any change in business fundamentals or the outlook for customer demand for our systems.”

  • This downward revision comes after the company increased 2022 revenue guidance during its 2Q22 earnings call—unfortunately, having to walk back guidance after increasing it just one quarter prior hurts management credibility and investors will likely be more skeptical of VLD’s outlook going forward.

    • We can see evidence of this skepticism in analyst revenue estimates: following earnings, consensus 2022 revenue moved from $88M to 76M (a -13% decrease and at the bottom end of guidance), and consensus 2023 revenue moved from $148M to $129M (also a -13% decrease) despite management saying they expected 2023 revenue to be “very close to what we discussed before” (though mgmt noted that the 2023 budget wasn’t finalized yet).

Biggest Winner: Arqit Quantum (ARQQ, +70%)

• I am continually stumped by what drives movement in ARQQ shares, and I unfortunately have no insight into the +70% jump in November.

  • From 11/2 - 11/8, ARQQ went up +125% on no news and abnormally high trading volume; then from 11/8 to 11/30 it declined -25% on average trading volume.

  • ARQQ didn’t submit any filings with the SEC between 11/2 - 11/8 and there was no material UK-specific news during this time period. I also didn’t find any material quantum-industry related news during that time period either.

  • Please respond to this email, comment online, or DM me if you have any insights here!

VALUATION COMMENTARY

• The two biggest changes in valuation in November were for Virgin Orbit and Velo3D

  • I generally like to break down changes to valuation multiples by looking at how the numerator (enterprise value) and denominator (2023 revenue) changed.

  • VORB shares got nearly 40% more expensive (going from 3.4x to 4.7x) primarily due to a 28% decrease in 2023 revenue expectations (i.e. the denominator of its multiple got smaller) following earnings.

    • The decrease in consensus revenue is likely due to comments management provided during the 3Q22 earnings call where they outlined a framework for arriving at a 2023 revenue estimate, stating that 2023 launch volume would more than 2x vs 2022, and that the company is focused on higher-value payloads.

      • Note: Virgin Orbit has had 4 launches thus far in 2021 (and is hoping to execute a 5th before end of year), and its most recent launch on July 2 launch served the US Air Force, Canadian Dept. of Defense, and NASA (i.e. high-value customers) and resulted in $31M of revenue.

    • This kind of detail allowed analysts to pencil in more concrete and believable estimates for 2023 vs what they had prior (which was based on the company’s original SPAC presentation) and although the result was lower than before ($193M vs $268M prior) investors likely have more confidence in the new number.

    • This explains why, the stock only went down -5% in November despite the downward revision to 2023 revenue.

  • VLD shares got almost 50% cheaper in November (moving from 4.0x in October to 2.1x in November), primarily due to the stock’s -48% decline in the month (i.e. the numerator of its multiple got smaller) following its negative revenue guidance update (discussed above).

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4. TOPIC OF INTEREST: 3Q22 SPACE SPAC EARNINGS REPORT CARD

In August I shared a framework that could be used to identify which space SPACs were in a position to survive the oncoming economic “winter” and therefore might be suitable to invest in amidst a market downturn (link to August post).

I’ve found that this framework is also useful for evaluating the quality of the space SPAC earnings reports (link to 2Q earnings review using this framework).

Note that this “back-of-the-envelope” approach to analyzing an earnings report ignores results in the context of previously issued guidance, analyst expectations, or management commentary—all of which should be included in a full earnings analysis. Additionally, I will update this scorecard following Planet Labs’ results on 12/14.

With this framework BlackSky and Rocket Lab are the “winners” of 3Q22 space SPAC earnings, each scoring a perfect 8 of 8. This is the 2nd straight quarter that BKSY has achieved an 8/8, while RKLB scored 5/8 in 2Q.

A few things to highlight:

• I view the “capital management” section as the most important part of the framework given increasingly difficult capital markets / fundraising conditions.

• Unsurprisingly, the companies that didn’t get a perfect 2/2 score in this section are often named as some of the most likely space SPACs to face serious financial turmoil in the next 12-24mo (AST SpaceMobile, Virgin Galactic, Terran Orbital, Momentus, Redwire, and Virgin Orbit).

• While these companies were (mostly) able to lengthen their capital runway via strategic debt investments or equity raises this past quarter, they all saw accelerating FCF burn rates, which doesn’t help their argument that they are managing their balance sheets responsibly in the current macro environment.

  • Virgin Galactic was 0/2 in this section of the report card due to its manufacturing footprint expansion and ongoing fleet enhancement/expansion plans. Though its capital runway through 2Q26 remains the longest of the 11 companies in this comparison due to massive capital raises before the Federal Reserve began raising interest rates in 2022, if FCF burn continues to accelerate, the company’s longevity could be jeopardized.

  • AST SpaceMobile, Terran Orbital, Momentus, Redwire, and Virgin Orbit are all 1/2 in this section of the report card after failing to manage their cash burn in 3Q vs 2Q. However, they all extended their capital runways—ASTS did so via equity raises, MNTS established an equity purchase program with Stifel, and VORB/LLAP/RDW issued convertible debt to strategic investors.

    • Generally when raising capital, companies prefer to raise debt vs equity to minimize dilution impact. However, in difficult market conditions management teams often have to take whatever they can get. ASTS and MNTS are pre-revenue and therefore had the worst fundraising options, going with pure-equity. VORB/LLAP/RDW are more established companies and were able to raise convertible debt (meaning the lender can choose to be paid back with either cash or equity in the future)—better than pure equity, but still worse than a more traditional (and non-dilutive) debt raise.

    • Going forward, these are the companies I would keep the closest eye on for risk from additional equity dilution in the future if they don’t manage their FCF burn.