Quarterly Capitalism Means Elon Musk Should Hold Off on SpaceX IPO
Can investors expect a SpaceX IPO in 2016? Maybe. But if Elon Musk were smart, he would probably hold off on going public for the foreseeable future.
We may have lost the map to the stars over the past decade. The crashes of the Russian Proton-M rocket in May over Siberia and SpaceX’s Falcon 9 over Florida, both on their way to the International Space Station (ISS), are the latest confirmations of the risks facing the space program, affecting both Moscow and Washington. Given the stakes of failure, it is not in SpaceX’s interests to pursue an initial public offering (IPO) in the short term. Indeed, it would be better to hold off until at least the first manned mission is completed.
Economic problems have curbed the ambitions of governments, forcing them to cut their spending on space exploration and turning the daunting challenge over to the private sector. The results have not been stellar so far and the risks are tremendous. Governments and private space explorers alike have discovered that the costs are huge and the rewards rare, even if awe-inspiring.
Russia’s Proton-M took off at 11:47 am from the Baikonur Cosmodrome in Kazakhstan, carrying a Mexican telecom satellite. It crashed eight minutes later because the third stage that was to take it to 110 miles above earth did not work out. Getting the rockets to work is just the first of many trials. Just a few weeks earlier, the Russian space agency ROSCOSMOS canceled the M-27M cargo mission to supply the ISS. A technical problem occurred after the launch, preventing it from docking safely.
In 2012, Moscow canceled the Phobos-Grunt mission, destined to reach one of Mars’s moons and a frustrated Prime Minister Medvedev replaced Vladimir Popovkin, the head of ROSCOSMOS with Oleg Ostapenko, only to replace him with Igor Komarov just months later.
The latest incidents may have been affected by Russia’s economic crisis and the decline in oil prices and sanctions over Russia’s dispute in Ukraine. Indeed, ROSCOSMOS has seen its budget cut by 32%, also raising questions about the new Vostochny Cosmodrome; the new Russian spaceport currently under construction north in the Russian Far East and Outer Manchuria. The Russians may also have to delay or cancel plans to send a new space station in orbit by 2023 and to land on the moon by 2029.
Memo to Investors: No SpaceX IPO in 2016
The American program, which has an increasing private sector component, is not faring any better. In October 2014,Antares, a rocket belonging to private company Orbital, exploded in Virginia shortly after takeoff, while Virgin Galactic’s space tourism “airplane”–which has the less daunting task of not having to supply the ISS or send satellites and astronauts into orbit–was also hit hard when the SpaceShipTwo crashed in the Mojave Desert, killing one of the pilots.
NASA has been forced to deal with major spending cuts starting even before the 2008 economic crisis and the cancellation of the Space Shuttle. The U.S. government was increasingly willing to entrust space exploration to private companies.
Space X, for example, was commissioned to supply the ISS in cooperation with the Russians. The idea was to promote technological and economic competition between privately funded technologies using private groups interested in entering the business of space. Not surprisingly, billionaires were the ones who had the necessary funds and risk aversion necessary to go for the stars. Elon Musk with SpaceX, Richard Branson with Virgin Galactic, and Jeff Bezos with his Blue Origin have been the first to enter the race.
Perhaps Google might also get involved in the contest to provide the most reliable and efficient vehicle to perform human and cargo missions to existing space projects like the ISS while leaving NASA the freedom to target its more limited resource to more ambitious missions. So far, even while SpaceX has had some success in sending capsules to the ISS, the ultimate goal is far from being reached.
Manned Mission to Mars May Have to Be Postponed
If both private and public sector space explorers are still having trouble with rocket launches–let alone re-usability, NASA’s dream-like goals of landing on an asteroid, and perhaps returning to the moon by 2030 seem more distant. Let alone the idea of landing a human being on Mars by 2030. To that effect, The Boeing Company (NYSE:BA) has even signed a $2.8 billion contract to develop the new Space Launch System (SLS), the rocket that should enable future human exploration in space.
The first SLS is scheduled for 2017; but this is highly optimistic. Not only has the failure rate of private and public sector launches been high, there is also an overall shortage of enthusiasm. In the 60s, the race to the stars was a matter of tremendous national pride, as well as part of the effort to develop the technology to win the Cold War.
It is better for SpaceX to delay any IPO plans until well after the next Falcon-9 launch, which is rather optimistically set for December 2015. (Source: “SpaceX just announced their next historic rocket launch, and it’s ridiculously soon,” Business Insider, Oct. 15, 2015.) Indeed, given the risks of exploration, it is best for SpaceX and other private exploration companies to avoid going public altogether. If SpaceX were public now, investors would advise against launching soon after the crash of its Falcon-9.
The Space Exploration Technology Corporation, or SpaceX, was founded in 2002 by Elon Musk, founder of the online payment system PayPal and CEO of Tesla Motors, Inc. (NASDAQ:TSLA). SpaceX’s goal was and remains to build a (almost 100% reusable) space launcher that can revolutionize operating costs downward while developing the technological and financial capital to reach Mars within Musk’s lifetime.
SpaceX is the first space exploration company to have set out its goals completely independently from the demands of the public sector (in this case, the United States Government). In order to continue unhindered in its goals, it must be able to remain independent of the travails and responsibilities of a publicly traded company.
SpaceX’s ultimate goal as a company remains to build a private space transportation system which will travel to Mars on a regular basis to support a human colony. Evidently, this project is still being studied, but the ambitions of SpaceX’s founder Elon Musk may well be beyond the risk appetite for most investors, considering claims that in 2035 hundreds of vehicles will shuttle between Earth and Mars. (Source: “SpaceX’s Elon Musk: Nasa? 2035? I’ll put man on Mars in the next 10 years,” The Independent, June 18, 2014.)
SpaceX Has Had Some Success, But Far From its Goals
The company’s Falcon series rockets made their debut in 2006. It was the fourth flight of the Falcon in 2008, which allowed SpaceX to achieve its first Earth orbit, repeating it with the fifth launch in 2009 when it deployed the Malaysian satellite RazakSAT. The Falcon was made entirely in house at SpaceX, powered by a Merlin rocket engine for the first stage and a Kestrel for the second stage.
The real breakthrough for the company came with the development of the Falcon-9. This rocket uses nine Merlin engines. The current 1.1 version is able to carry up to 13.15 tons of payload intolow Earth orbit (LEO) and up to 4.85 tons ingeostationary transfer orbit (GTO). The Falcon-9 is also addressing the goal of reusability. The latest attempt as the first stage of the Falcon-9 landed after a successful mission to the International Space Station failed, ending in a crash.
The objective is to make the first stage of the rocket reusable in order to lower costs further, and consequently, the launch price for customers. To launch payloads of greater size and weight, and to go beyond the Earth’s orbit, SpaceX is working on an upgraded Falcon. The so-called Falcon Heavy should be capable of handling up to 53 tons of load capacity. The upgrades include a first-stage powered by 27-Merlin 1D engines, generating 4.5 million pounds of thrust on takeoff; the second stage will have a Merlin-1D engine instead of the Kestrel. The first stage is intended to be recovered and reused in its entirety.
SpaceX has also developed the Dragon capsule. The latter was developed as part of the Falcon-9, with funding from NASA’s Commercial Orbital Transportation System (COTS). The cargo version of the space vehicle is designed to carry supplies to the ISS. The Dragon flew in June 2010 for the first time and managed to dock while the ISS took place in 2012. Despite being able to return to Earth via parachuted landing, the capsule has not completed the reusability component of its mission yet. Still, SpaceX is developing a version of the Dragon able to transport up to seven astronauts in orbit and will be available for use by NASA and other customers.
Elon Musk Should Postpone a SpaceX IPO for Now
While SpaceX has changed space exploration, introducing an unprecedented level of entrepreneurship and competitiveness within the U.S. and internationally, it should continue as a private entity. SpaceX has managed to achieve the lowest rocket launch costs in the market (excluding those in China and India), beating the U.S. consortium backed by The Boeing Company and Lockheed Martin Corporation (NYSE:LMT) known as United Launch Alliance (ULA) and Europe’s Arianespace.
It should be noted that SpaceX’s competitors are not publicly traded. ULA is a separate and not publicly traded entity, funded by Boeing, and Lockheed Martin. Amazon’s Bezos runs his space company Blue Origin as a private entity. There is no need yet for a SpaceX IPO. The risks of failure are still too high and ultimate success will take perseverance and more incidents.
ULA relies on Russian-made RD 180 rocket engines and their supply has been limited by U.S. sanctions on Russia over the latter’s involvement in Ukraine. The European Ariane program, funded by EU governments, has expanded the role of private sector companies in commercialization, but remains in control of the final product. It is now developing a new medium-heavy launcher, Ariane-6, which should lower costs compared to the last of the range Ariane-5.
SpaceX is vying for ULA’s monopoly on launches contracted by the U.S. military (USAF) as part of the Evolved Expendable Launch Vehicle contract. ULA recently brought in a new CEO, Tory Bruno, who will face the daunting challenge of a reduced budget, a state of limbo over the RD-180 rocket engines and competition from SpaceX, which has been certified by USAF to perform military launch missions last May. (Source: “USAF Certifies SpaceX for Military Launches,” Defense News, May 26, 2015.)
Bruno will lead ULA’s effort to offer a new rocket while cutting costs, based on new assembly techniques, even as the issue of the rocket engine remains uncertain. The Pentagon has not granted the United Launch Alliance a waiver to bypass a congressional ban on Russian-made engines, which the company needs to compete in the multibillion-dollar national security launch market. Bruno said ULA has four engines in its inventory that it could use for national security launches, The ULA chief executive recently told reporters. But he said ULA needs at least 14 to compete to launch national security payloads before it can consider the new, American-made engine it is developing with Blue Origin. (Source: Christian Davenport, “Pentagon denies ULA waiver on Russian engines,” The Washington Post, Oct. 9, 2015.)
Bruno warns that ULA’s inability to run the RD180 engines leaves the Pentagon “yet again with a single launch provide.” SpaceX is the only other company certified to launch military payloads into space. (Source: Pentagon denies ULA waiver on Russian engines, last accesses November 9, 2015.)
Space Exploration Needs a New Propulsion System
The issue of engines is critical. Indeed, perhaps the very idea of advancing space exploration begins with finding alternatives to the rocket itself, which presents so many of the issues that any company, private or public, SpaceX or ULA, must confront. In this sense, Reaction Engines has focused its research on an engine that can operate as a jet in the atmosphere and as a rocket to reach orbit and beyond. Reaction Engine’s SABRE concept is preparing a test flight by 2019, taking off from a runway like a regular airplane, reaching space and then returning to the runway.
Perhaps SpaceX might participate in the Reaction Engines’ SABRE project. SABRE, or Synergistic Air-Breathing Rocket Engine, has achieved remarkable results in 35 years of research with minimal government financial support. The giant defense contractor BAE Systems plc (NASDAQ:BAESY), now trading at yearly high levels, has signed a major partnership deal with the privately held Reaction Engines, allowing investors looking for a way into the space exploration race a chance to invest in it.
The SABRE engine is a hypersonic precooled engine designed to earn SIXTH (single-stage-to-orbit) capacity, for a prototype reusable aircraft known as Skylon; a potential next generation Space Shuttle. Rockets took more than a few decades to become fully developed. Critics of the hybrid jet-rocket approach being developed by Reaction Engines cite complexity. But if successful, they offer the most tractable option in achieving the simplified space travel that SpaceX needs to achieve its goals.
As more engineers become convinced, Reaction Engines will attract more and more interest and money. SpaceX may well consider the SABRE option, even if it has focused on using existing and proven technology to ensure reliability and low costs.