SpaceX & Tesla: In Musk we trust?

Elon Musk has had a good pandemic. SpaceX is now NASA’s preferred vendor and Tesla’s share price has gone stratospheric. Both are born of a visionary mind with genius-level engineering skills. But is Mr Musk, like Icarus, flying too close to the sun? Victor Hill inquires.

Mission accomplished

Last Sunday evening (02 August) two NASA astronauts returned to Earth from the International Space Station (ISS), where they had spent 63 days, aboard SpaceX’s Endeavour spaceship. Space enthusiasts like this writer regard that as a significant moment. This was the first time that NASA has outsourced the launch and return of astronauts to a private company. The economics of space travel have entered a new era.

Astronauts Doug Hurley and Bob Behnken, who launched into space on May 30 on a SpaceX Demo-2 rocket, landed their Crew Dragon spacecraft off the coast of Pensacola, Florida, in the Gulf of Mexico. They chose to land there to avoid Hurricane Isaias out in the Atlantic. This was the first ocean landing by US astronauts since Apollo 17 in December 1972.

A NASA spokesman said the mission marked “the next era in human spaceflight” and indicated the agency is now poised to purchase further flights from SpaceX. SpaceX, founded by Elon Musk in 2002 and based in Hawthorne, California, designed, built, and operated the vehicle on the back of about $US2.7 billion in contracts from NASA’s Commercial Crew Program. These contracts will fund about half a dozen missions.

The Demo-2 lift-off was the first manned space flight launched from US soil since July 2011. Since then, until now, the US has relied on Russia’s Soyuz rockets to ferry its astronauts to the ISS which the agency hopes to use as a springboard to the moon and, eventually, to Mars. The ISS also offers an ideal environment in which to conduct scientific experiments – in pharmaceuticals, materials science, astronomy and medicine. Gwynne Shotwell, SpaceX’s CEO, revealed that even she was surprised by how smoothly the mission had gone.

Russia’s charge for each round-trip for NASA astronauts has been increasing. In 2008 – before the space shuttle was retired – the cost was about $US21 million per astronaut; but seats planned for this October will cost over $US90 million. The cost of a seat on SpaceX’s Crew Dragon, in contrast, is reportedly $US55 million. (Though that figure does not take into account NASA’s $US2.7 billion in funding.)[i]

Each Soyuz launch was limited to two seats for NASA astronauts – compared to the space shuttle’s seven. That limited American participation in the ISS, which can accommodate as many as 13 people at once, though the space-station is typically restricted to six people at any one time. The reliability and safety of the Russian launch system were also put into doubt by a rocket launch failure that triggered an emergency landing in October 2018[ii].

We’re all going to Mars

Last February SpaceX announced that it had sold four seats through a spaceflight tourism company called Space Adventures. In March, news broke that the company Axiom Space – led by a former ISS mission manager at NASA – had also signed a deal with SpaceX. There is even talk that actor Tom Cruise might fly aboard a Crew Dragonspacecraft soon to film a scene for an upcoming space movie.

Mr Musk’s immediate goal is to set up a commercial space station in the Earth’s orbit. From there, he wants to fly people around the moon and later to land them on the lunar surface. But that is just the beginning of the adventure. His long-term vision is to establish colonies on Mars. He has spoken of his dream of one million settlers on the Red Planet by the end of this century.

Elon Musk is not alone in his Martian dreams. On 14 July, a rocket carrying a sophisticated autonomous probe blasted off from a launch centre in Japan to begin a nine-month journey to the Red Planet. The probe will examine the Martian upper and lower atmospheres for the first time. And the Hope mission has been conceived, designed, financed and built by the United Arab Emirates (UAE) under the banner of the Emirates Mars Mission (EMM). (You can track the spacecraft’s progress from their website).

The EMM’s vision is to have a human colony on Mars by 2117. This is part of the UAE’s post-oil diversification strategy. This initiative harks back to the long history of scientific achievement in the Arab world. The mission is undoubtedly exceptionally good PR for the UAE as well as an investment in future technology.

And on 30 July, NASA launched the Perseverance space probe which will land a rover at Jezero Crater on Mars on 18 February next year after a 314-million-mile journey. The rover will collect rock and soil samples in titanium tubes. Later this decade, a smaller probe built by the European Space Agency will go to Mars, pick up the tubes, and bring them back to Earth. Hopefully, scientists will then be able to determine definitively if life ever existed there. The rover will be assisted by a drone which will offer scientists a bird’s eye view of the Martian landscape.

There have been 45 unmanned missions to Mars since the 1960s. Of those 26 have failed – either by falling silent or crashing. Currently, eight missions from the US, the EU, Russia and India are either orbiting Mars or roving across its surface. It cannot be long before SpaceX joins the fray.

Meanwhile, back at Tesla…

As I write this (Thursday) Tesla’s share price is trading at around US$1,492. Exactly 12 months ago Tesla’s shares were worth US$230.75. When the company listed in 2010 the shares were valued at US$17. So, if you owned Tesla shares one year ago, and held onto them, you would have secured a return of nearly 550 percent. You will also have patted yourself on the back for saving the planet and generally being cool.

What has powered the share price is that the company has now reported three consecutive quarters of profits – despite the global backdrop of the pandemic, economic retraction and plunging car sales. Sceptics point to Tesla’s continued reliance on regulatory credits and government subsidies behind these numbers – but no one can argue with the sales curve. The production bottlenecks which plagued Tesla two years ago seem to have been overcome. Tesla’s Shanghai gigafactory was built in record time and is already delivering to the enormous Chinese market (though there is competition there in the form of Nio (NYSE:NIO) whose shares have tripled in the last two months). And Tesla’s Cybertruck will open a new market for electric commercial vehicles next year.

My good friend Evil Knievel has been a Tesla short seller for some time. His position is currently in the red for a figure that I would find eye-watering – but he is undeterred. He tells me that he expects to get all his losses back in due course; Tesla, he says, is the greatest short of my life. By the way, he says you can borrow the stock for as little as 2.5 percent per annum.

I’m inclined to wish Evil good luck – but I don’t think we should underestimate the allure of this stock. Yes, it’s remarkable that Tesla, at around US$300 billion, is worth more than Toyota, which has revenues eleven times bigger. But that shows that Tesla – Elon Musk – has succeeded in the original objective: to disrupt a mature industry which analysts said had impenetrable barriers to entry. And the SpaceX backstory lends Tesla the image not just of a technology stock which benefits the planet but a vision of the future too.

Sceptics point out that all the established automotive players will have a range of EVs available quite soon. VW (ETR:VOW) and Toyota (LON:TYT) have been investing billions here. But Tesla will continue to be in the vanguard, with competitive advantages in self-driving and battery technology, and software – not to mention branding. The Tesla model S Sedan is the first electric car to boast a range of 400 miles, thus demonstrating Tesla’s technological lead.

And so long as legacy automotive manufacturers continue to produce petrol and diesel-powered vehicles they will continue to be perceived as part of the bad old economy. The market for electric cars is going to grow exponentially over the next decade. What’s more, electric cars are cheaper to produce in large volume than conventional cars (their mechanics are simpler) – so margins are likely to be higher.

Further, there is currently a shift underway from active towards passive investment. Passive funds tend to favour lode-star stocks such as Tesla and the tech titans. This will further support Tesla’s share price.

On being Elon

Many analysts have cited corporate governance a reason to give pause before investing in Tesla – and prospectively in SpaceX. Elon Musk has a habit of ranting and has some controversial opinions. He rudely goads fellow billionaires on Twitter, not least Mr Bezos. At an investor conference in early May he spent much of the time complaining about the lockdown in the San Francisco Bay area (the location of Tesla’s Fremont factory), describing it as “fascist”. There are also issues around transparency and the firm’s HR policies. Yet many fans and Tesla afficionados hang on his every word.

Mr Musk has 33.8 million followers on Twitter – more than Barcelona Football Club though less than Donald Trump’s 80.3 million[iii]. (Barak Obama has 118 million.) Sometimes his tweets are counterproductive. For example, in mid-May he tweeted to the effect that Tesla’s shares were over-valued – causing an immediate 10 percent dip in the stock price. Shareholders were furious.

Fan forums such as the Tesla Motors Club on Reddit can be forthright in their views about him. Given Tesla’s official stance that electrification of transport is essential to stave off run-away climate change, Tesla’s fan base largely consists of well-educated liberals who live in America’s affluent coastal areas. Such people tend to be tolerant of lockdowns – it is the conservatives who oppose them in the US and who refuse to wear facemasks. Hence many Tesla fans have expressed disappointment in Mr Musk’s views on the management of the pandemic, which have been peculiar. (He predicted on March 19 that the virus would be entirely eradicated by the end of April. Not to mention that he tweeted recently that the pyramids were built by aliens – much to the consternation of the Egyptian government.)

What investors need to understand, however, is that Tesla owners, and many Tesla shareholders, believe in the product and its ultimate architect in a quasi-religious way. The Tesla brand exerts a unique degree of loyalty: and now that the company actually makes money, the nay-sayers have been discredited.

That said, the real downside for Tesla is not widely understood. That is that battery powered EVs may not be the optimal solution. Rather, a strong case is emerging for hydrogen powered transportation. Lord Bamford of JCBcertainly thinks so. It is battery cells versus fuel cells. (Mr Musk, typically abrasively, calls them fool cells.) I hope to explore that debate soon.

More glory to come

Thanks to his 18.4 percent stake in Tesla Mr Musk has now been propelled into the league of super billionaires, with a net worth of around US$70 billion. He frequently shares the following joke. Question: How do you make a small fortune in the rocket industry? Answer: You start with a large one. For a long time that seemed to be not only funny, but true. Now, the economics of space travel are evolving so rapidly that it is just funny.

I predict that there is going to be a massive rise in what the veteran commentator Matthew Lynn calls extra-terrestrial GDP. The US Bureau of Economic Analysis started work at the end of last year on a Space Economy Satellite Accountto quantify how much satellites contribute to economic output. Their initial estimate is that the space economy is worth US$400 billion – roughly the GDP of the Republic of Ireland – and growing fast.

I admit that the share price of Virgin Galactic (NYSE:SPCE) has been extremely volatile since its IPO on 28 October last year – but Galactic’s share price, as I write, has more than doubled since listing. (That must be a consolation to Sir Richard Branson in the week that his beloved airline Virgin Atlantic filed for bankruptcy protection). When SpaceX comes to market, given the Musk factor (like him or loathe him), we can expect valuations to rocket.

Mr Musk, who was behind the technology which later became PayPal (NASDAQ:PYPL) – another technology that has transformed our lives – has a record of having proved most commentators wrong for the last 20 years. Don’t underestimate him.

***

The other day I walked from Ely Cathedral – its majestic octagonal tower floating weightlessly in Fenland morning sunshine – from the Fens to the Brecks and to my village lair in Norfolk – a distance of some 16 miles. Apart from a few tractor drivers, and a kindly Eastern European who pulled over as I crossed the A1101 to ask if I needed a lift (he probably thought I was a tramp), I saw nobody at all.

Where has everybody gone?

[i] For more information on this see NASA’s Office of Inspector General Report of 14 November 2019, available at: https://oig.nasa.gov/docs/IG-20-005.pdf

[ii] See: https://www.space.com/42097-soyuz-rocket-launch-failure-expedition-57-crew.html

[iii] See: https://www.washingtonpost.com/technology/2020/05/28/trump-twitter-by-numbers/