November Space Stock Review + 3Q22 Earnings Scorecard
Topic of Interest: 3Q22 Space SPAC Earnings Scorecard
Hello fellow space enthusiasts! š
In this monthās Space Stock Review:
šUpdate from Case / Space Case Origin Story
š November Market Overview
āļø Space SPAC Performance and Valuation
š£ļø 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 Caseās 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).
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 companiesā¦and I was in-part recruited because of the āCase Closedā newsletter.
Prior to now I didnāt work in the space industry and I wasnāt a professional investorāmy career has gone from equity research (covering media & cable at Guggenheim Partners) to investor relations (Comcast Corporation) to strategic finance (Comcast Corporation).
I actually didnāt become interested in space until late 2020, when Starlink won nearly $1 billion in federal subsidies to deploy its service in rural Americaāgiven 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 SpaceXās 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 companiesāso I decided to do the work myself, starting with space SPAC earnings report summaries on Twitter and then making the āCase Closedā 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 weekendāit is a dream come true!
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 canāt wait to now be a part of this industryās 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, SinĆ©ad OāSullivan, 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 āCase Closedā 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 programmingā¦
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 Fedās upcoming December 14 meeting.
āIt 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,ā Powell said in a speech at the Brookings Institution in Washington, D.C. āThe time for moderating the pace of rate increases may come as soon as the December meeting.ā
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%)
Velo3Dās decline in November was primarily driven by the companyās downward revision of 2022 revenue guidance during its 3Q22 earnings report on 11/8 (managementās 2022 revenue outlook was revised to $75M - $80M vs $89M prior).
Management attributed the change in guidance to āshipment delays, and potential fourth quarter supply chain and production disruptionsā that impacted both 3Q results and the 4Q outlook; however, they stated that underlying demand remains strong, backlog + bookings continue to grow, and āthis adjustment does not reflect any change in business fundamentals or the outlook for customer demand for our systems.ā
This downward revision comes after the company increased 2022 revenue guidance during its 2Q22 earnings callāunfortunately, having to walk back guidance after increasing it just one quarter prior hurts management credibility and investors will likely be more skeptical of VLDās 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 āvery close to what we discussed beforeā (though mgmt noted that the 2023 budget wasnāt 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 didnāt 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 didnāt 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 companyās 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 stockās -48% decline in the month (i.e. the numerator of its multiple got smaller) following its negative revenue guidance update (discussed above).
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 āwinterā and therefore might be suitable to invest in amidst a market downturn (link to August post).
Iāve 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 āback-of-the-envelopeā approach to analyzing an earnings report ignores results in the context of previously issued guidance, analyst expectations, or management commentaryāall of which should be included in a full earnings analysis. Additionally, I will update this scorecard following Planet Labsā results on 12/14.
With this framework BlackSky and Rocket Lab are the āwinnersā 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 ācapital managementā section as the most important part of the framework given increasingly difficult capital markets / fundraising conditions.
Unsurprisingly, the companies that didnāt 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 doesnāt 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 companyās 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 runwaysāASTS 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)ābetter 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 donāt manage their FCF burn.
Hey Casey - major congrats to you! I am thrilled to see all your hard work led you to a career that you are passionate about and so knowledgeable about in a short amount of time. Happy Holidays to you and your family.
Massive congrats on the move! I'm excited to hear more about the new role!