Winter is coming (12/23/22)

Good morning. That’s a wrap for 2022. Thanks so much to all of you for joining on this weird, fun, and never-boring ride. While this is the last Payload newsletter of 2022, we’ll be publishing a Pathfinder episode next week and a few stories on our website. We’ll also be posting occasionally on social media, so follow us there to stay up to date if you can’t wait till 2023.

Enjoy the holidays! And get some sleep. You deserve it.

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The Markets: Year in Review

Editor’s note: We enlisted Mo, who used to work on Wall Street, to temporarily put his analyst cap back on to deliver a year-in-review analysis of the space markets. Enjoy!

The key theme for aerospace within financial markets has been the bifurcation of performance between the traditional aerospace and defense (A&D) sector and space SPACs.

Despite the broader market’s abysmal performance this year, traditional A&D companies have outperformed phenomenally. Companies like Lockheed Martin, Raytheon, Northrop Grumman, and BAE Systems are trading 15%–37%+ YTD. The sector has strengthened on increased demand in response to Russia’s longer-than-expected war in Ukraine and the growing threat posed by China, a military and space near-peer adversary.

Commercial space companies, meanwhile, that SPAC'd…have been decimated. The entire group is down 60%, market cap-weighted.

What happened?

• Space is still new: Pure-play space companies are a new area of investing for the public markets. Most investment banks have scant research coverage of the industry, so it's hard to see how broader market participants would know how to trade them.

• R&D isn't meant for public markets: The public markets are no place to build your first product—especially when your financial projections were based on technical milestones that were ambitious to begin with. By our estimates, only one company that has gone public via SPAC actually came close to its original projections. Fee-driven investment bankers led companies astray as they built comp tables and valuation models that were inherently flawed.

M&A Activity

There were two major A&D acquisitions this year, and they both happened in the last week.

• Maxar agreed to be acquired by global private equity firm Advent International in a $6.4B all-cash deal ($4B excluding debt), representing a 129% premium to its last closing stock price.

• Aerojet Rocketdyne agreed to be acquired by defense prime L3Harris Technologies for $4.7B (a 7% premium to Lockheed’s original offer in late 2020).

The recent M&A activity is no doubt an indicator that there is institutional capital focused on the space. The Aerojet transaction alone had many interested buyers, including GE, Textron and a number of PE shops. The Maxar deal has a 60-day “go shop” period running through Valentine’s Day that allows the company to find a more favorable deal for shareholders. We could easily see a competitive process heading into Q1.

• The Aerojet transaction falls into the broader trend of consolidation among the few large defense contractors. Remember, there were 51 prime contractors in the ’90s. Now, there are five: Lockheed Martin, Raytheon, General Dynamics, Northrop Grumman, and Boeing.

• The Maxar deal is a reminder that high-margin, cash-flow generating businesses continue to be a focus for private equity firms that are willing to pay hefty premiums over public multiples, or what defense primes are used to paying.

Circling back to space SPACs, we think that there will almost definitely be some consolidation or take-private transactions that occur next year. We’re already seeing a number of deals in broader tech SPACs and a number of the existing public space companies are starting to look like ripe targets for both financial and strategic buyers. Our popcorn is ready.

Fundraising trends for space has followed the broader tech sector.

Both deal count and total capital raised are down considerably YoY. Relative to historical trends, starting in Q4 2020, all stages have seen a significant dislocation of deal activity. This is most pronounced in growth and late-stage businesses. Companies that didn’t need to come back into the market to raise capital either A) didn’t need to, or B) were able to meaningfully reduce opex and burn. This is why down rounds this year were fairly limited. We think this will change next year.

Two key predictions for 2023

• We expect a number of high-profile down rounds next year. For example, there are many launch companies with significant valuations from prior rounds that will have to come back to market. We don’t see how those companies will be able to maintain their prices without substantial technical progress (i.e., orbital success). The new reality of higher interest rates and stricter deal terms will set in quickly.

• Seed financing and valuations should remain strong. There’s still a significant amount of cash sitting on the sidelines. That cash will need to be put to work and seed-stage startups tend to be more insulated from public market volatility (particularly because their time to exit typically extends beyond the current market cycle). We expect the seed stage to remain healthy both in terms of size and valuations.

Bottom line: It’s been a turbulent year for the markets. Space companies aren’t exempt from this trend, and we haven’t seen the end of this shakeout. Winter is coming, as is more consolidation and companies shutting their doors. Still, the space industry has strong secular tailwinds. Those who can weather the storm will come out stronger than ever on the other side.

+ Grading the space SPACs…Case Taylor, a friend of Payload and author of the Case Closed newsletter, put together a report card that assesses space SPACs on a number of KPIs. Check out his full report and sign up for the newsletter, if this type of analysis strikes your fancy.

A Busy Year in Low Earth Orbit

Rocket launches may be the most high-profile—and sexy—aspect of space, but satellites make the world go round. Here’s our roundup of some of the key themes from the satellite industry this year.

EO…where do we even start? A lot of new sensing modalities—such as infrared, multispectral, and hyperspectral—are coming online for commercial fleet operators. As the field gets even more crowded, operators are looking to differentiate by moving up the stack into analytics and insight-based products.

Ukraine…As Quartz notes, Russia’s invasion of Ukraine was not the world’s first “space war.” That ignominious title goes to the Gulf War, where the US debuted precision-guided missiles using GPS. Still, commercial EO operators have played a massive role in piercing the fog of war, showing the world a pretty close approximation of what’s happening on the ground, and enabling open-source intelligence and analysis. Images from Maxar, Planet, BlackSky, and other companies have regularly been splayed across the top fold of newspapers and all over social media feeds.

Satellite-to-smartphone…Still in its infancy, satellite←→cell technology was one of the defining commercial space storylines of the year. Lynk and AST SpaceMobile have the first-mover advantage, technologically speaking, but not necessarily the war chests to match the heavyweights entering the arena. iPhone is partnered with Globalstar on Emergency SOS; SpaceX and T-Mobile are working together (and the former could soon begin launching V2 Starlink satellites to support the capability); and in China, Huawei announced a satellite texting-capable handset back in September. Oh…and Iridium is cooking something up, but they’ve stayed mum on the details.

Megaconstellations…SpaceX has launched 3,600+ Starlink satellites to date and may begin launching V2 birds very soon, per FCC filings. The company has quickly rolled out business lines for their broadband services—most recently Starshield—and just passed 1M active subscribers. OneWeb’s planned constellation, meanwhile, is 80% complete and the firm is placing big orders for terminals. Finally, Project Kuiper is waiting in the wings, with Amazon making the biggest commercial bulk buy of launch missions in history.

It’s not all rosy…The increasing congestion of key LEO orbits poses new problems. Read our space debris series for more—and look out for a story from us next week recapping a recent debate on debris and other constellation risks that Payload moderated.

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Want to go quarter by quarter?

ICYMI, read Payload’s quarterly recaps from the year:

• Q1

• H1/Q2

• Q3

• Q4

In Other News

• Iridium ($IRDM) debuted a satellite IoT messaging transport service.

• USAID paid $1,500 apiece for 1,333 Starlink terminals, per a FOIA request from Quartz’s Tim Fernholz. SpaceX itself donated 3,600 terminals to Kyiv.

• Manufacturing has begun on NEO Surveyor.

• The Senate approved a $1.7T omnibus spending bill, which includes $25.4B for NASA.

• NASA astronauts completed a 7-hour spacewalk and installed a roll-out solar array on the ISS.

• Thomas Zurbuchen, NASA’s outgoing science chief, penned a farewell essay in Nature. Thanks for everything and congrats on a great run, Dr. Z!

The View from Space

Spectacular images from NASA of yesterday's spacewalk to close out the year.