Reddit Traders Took Space Stocks To The Moon. Re-Entry Could Be Ugly. – The Wall Street Journal

What has funneled cash into these startups, though, might be less a rational calculation of profit than the fickle desires of retail investors to discuss cool space gadgets on the internet.

In 2021, amateur traders baffled professional asset managers by coordinating in forums such as Reddit’s WallStreetBets to propel unloved companies such as videogame retailer GameStop to absurd highs. Data by fund tracker VandaTrack confirms that space companies rode the same “meme stock” wave—particularly Virgin Galactic. Its highs in February of 2020 and summer of 2021 were linked to strong retail inflows and highly correlated with mentions on the irreverent forum. At its 2020 peak, Virgin Galactic was the fourth favorite stock among users, receiving 31% of all mentions.

Since late last year, however, recently-listed startups have come crashing down, just as Virgin Galactic’s share of mentions has shrunk to 2.6%. Its stock has lost 50% of its value from three months ago. Expectations of higher interest rates have steepened its plunge in 2022.

Other space startups, while not as fashionable, also have online fan groups backing their stocks, especially on video platform YouTube. VandaTrack shows their popularity waning too as their share prices have dropped.

Space is exciting, but it has been hard to invest in directly: Contractors Boeing, Lockheed Martin and Northrop Grumman aren’t pure plays. The market leader, with a $100 billion valuation, is SpaceX: Its Falcon rockets have slashed launch costs and opened space to commercial applications, including 2,000 Starlink satellites. But it is privately owned by Tesla chief Elon Musk.

As a result, startups have become the avatar for all the enthusiasm of Reddit investors, for whom feelings of community and adventure can matter as much as turning a profit.

The risk isn’t just more tough lessons for novice investors. High valuations themselves could be crucial for these moonshots to have a shot at success. Virgin Galactic still needs extra cash to start operating, and its stock’s slide makes funding more expensive: After a $500 million stock sale last year, the firm recently announced a $425 million convertible-bond issuance. Talent retention also is harder with shares falling below the strike price of employee stock options.

Mr. Branson’s other space venture, Virgin Orbit, is another victim: Despite expecting to raise $383 million from “blank check” backers in August, it only managed to hang on to $68 million when the merger completed in January.

Underneath the ebbs and flows of hot money, though, there is genuine technological disruption. Swiss bank UBS believes the space economy will double to $900 billion by 2030.

With SpaceX having announced no plans to list its shares, those committed to the new space race might be tempted to dabble in startups. They should try to remain relatively grounded, though. As much as Blue Origin taking Star Trek’s Captain Kirk to space has ignited the popular imagination, space tourism remains an unproven market of limited potential that could come to an unceremonious end if there is a single deadly accident.

What drives the bulk of Wall Street’s forecasts are satellites. Even with satellite-TV revenues declining, broadband, navigation and observation services should offset it many times over. The move away from large devices in geosynchronous orbit and toward constellations of simpler, small satellites in low earth orbit, such as Starlink, has opened the door to many entrants. Greater economies of scale can push potential profit margins to about 14%, versus 10% for traditional satellites, Bernstein Research estimates. Listed specialists include Redwire, Swedish nanosatellite maker AAC Clyde Space and, prospectively, Terran Orbital.

Rocket Lab, Virgin Orbit and Astra are successfully launching smaller rockets that more readily take these smaller payloads to their dedicated orbits, though at a higher cost per kilogram than a Falcon. Momentus and D-Orbit focus on innovative technology for deploying them into orbit once in space.

The turning tide of market sentiment, though, will probably punish big, ambitious ideas, such as pitches from Redwire and Terran to do in-orbit manufacturing and servicing, and players struggling with constant delays, such as Virgin Galactic, Astra and Momentus. Those companies aren’t expected to make any earnings before interest, taxes, depreciation and amortization, or Ebitda, until 2025, with positive cash flow taking an extra year. Bridging that gap may prove hard.

By contrast, ACC, which gets little love from Reddit, could have positive Ebitda this year. Rocket Lab, which is forecast to do so in 2023, has a leg up on the competition. It has a $793 million cash buffer that is eight times its expected outflows before breaking even on cash. Markets may suddenly find this appealing.

Unless it reaches escape velocity, what goes up must come down.