Space stocks to explore

A short time ago in a galaxy not so far away (this one, actually), the US Space Force didn’t exist. Now, it’s got $30 billion within the US Defense Department’s 2024 budget, up from $26 billion in 2023. Most industry watchers expect US and other nations’ space spending to accelerate—along with commercial spending. But there have been some bumps on the ride thus far.

If you’re exploring the trajectory of space stocks, here's what this investing universe looks like now.

Space stocks blast off, course correct

The skies opened up for space investing in recent years. In addition to some established industrial and communications companies, multiple space-focused firms hit the ignition during the 2021 SPAC boom. Many of those new entrants debuted with what might now be considered out-of-this-world valuations—more on that shortly.

It’s easy to see why investing in space generated a lot of energy. Total investment in space infrastructure by the US, China, Japan, France, Russia, and other countries has taken flight in a very short period of time. Clayton Pfannenstiel, manager of the Fidelity^® Select Defense and Aerospace Portfolio (), highlights space funding as one of the fastest growing segments within the US Defense budget. “Moreover, NASA (an independent agency of the US federal government) is expected to be funded at similar levels, not to mention commercial investment,” notes Pfannenstiel.

Bloomberg reports that the global space economy grew 8% in 2022 to $546 billion, with Space Foundation (a space nonprofit organization) forecasting it to climb another 41% by 2027. Morgan Stanley had previously estimated the global space economy could reach $1 trillion by 2040.

Despite that excitement, dynamics have changed a bit over the past year or so. Valuations for many new entrants have crashed since their debut, and the lone space ETF to date—Procure Space ETF ()—has tailed off from its 2021’s highs (click on the UFO ticker symbol link and log in to see the top holdings and standard performance). In fact, as of early November 2023, UFO traded below the 2019 inception price (see Space stocks have sputtered chart below).

While many of these new companies have been trying to get off the ground, a cash crunch amid rising rates has made obtaining needed capital harder. Also, 2022 was tough for riskier investments—the space industry is highly unproven with tremendous investing uncertainty—leading to most space stocks getting throttled last year. And space is not buffered from growing regulatory oversight and inflation, making launches and other related activities more expensive.

Space investing universe

Despite some turbulence, some of the biggest companies in the industrials and communications sectors are getting in on the ride. Aerospace and defense firms have been among the early beneficiaries of space spending, along with technology hardware and telecom. Think satellites, reusable rockets, and space logistics.

Low-earth satellite producers in particular have helped propel the space infrastructure buildout. For example, the US is building out its Proliferated Warfighter Space Architecture, and low-earth satellites are a key infrastructure component for this program. Morgan Stanley estimated that low-earth satellites would represent at least half of their $1 trillion global space economy projection by 2040. There are already about 8,000 operating satellites in space.

It's worth noting that there are relatively few pure-play space stocks (companies whose predominant revenue stream derives from space-related businesses). More narrowly space-focused investing opportunities include companies that facilitate:

• Launch services for rockets. More launches took place in 2023 than ever before, as costs have decreased over time. Examples include SpaceX, United Launch Alliance, Astra Space (), and Rocket Lab ().
• Earth observation and communications. Examples include Globalstar (), AST SpaceMobile (), Iridium (), Viasat (), and Spire ().
• Space delivery. An example includes Momentus ().

Some established players that are getting in on the space race include more diversified industrial companies like Boeing (), Lockheed Martin (), and Northrop Grumman (), all of which derive most of their revenues from non-space industries.

Selective space investing

Pfannenstiel thinks that, while private space spending represents an intriguing development, it remains a somewhat unproven booster for space investors.

“I think the commitment of public spending represents a more attractive space for investors to explore,” according to Pfannenstiel. “The commercial market is seeing robust growth, but business models still need to prove out. The majority of public space companies do not generate free cash flow today, and existing defense companies are relatively more proven.”

Pfannenstiel is looking at established companies that are targeting the satellite business and winning government contracts. “Defense strategy calls for a proliferated network of smaller satellites, a shift away from a few large, expensive systems. And I think some entrenched industrials are best positioned to win new space contracts. My fund is positioned in Lockheed Martin, Northrop Grumman, and CACI () due in part to their space exposure, along with their defense revenue streams.”

The future of space investing

To be sure, these early days of space investing involve new industry risks and unknown factors. With that said, exploring this mostly uncharted investing territory has many investors excited. Space investing enthusiasts believe that, at some point, space construction and space mining could be on the investing trajectory, not to mention new opportunities that we may not even be aware of yet.

If your portfolio is orbiting space stocks, may the space investing force be with you.