Ship management company

Virgin Orbit: Space is the ceiling of the TAM (NASDAQ: VORB)

dima_zel

Insight

I believe Virgin Orbit Holdings, Inc. (NASDAQ:VORB) is vastly undervalued. I think there are strong tailwinds to support VORB’s expected growth over the next decade. It is true that there are risks associated with VORB today given that they do not generate significant revenue or profit, but their solid track record of execution gives confidence that they will be able to meet guidelines.

activity Descrition

VORB is a vertically integrated company providing small satellite launch capabilities. VORB has three key offerings:

  1. Commercial & civilian: serving both U.S. and international markets, offers dedicated launch and ride-sharing services. This includes the concept of a civilian spaceport, where a foreign country can purchase or lease the VORB Mobile Launch System ground equipment as well as the company’s aircraft, enabling the convenience of in-county launch capability. This way, any country can go space using its existing airport facilities.
  2. National Security and Defense: For U.S. and allied government customers, launch and national security mission services are offered. This includes Department of Defense agencies, the Intelligence Community, the Space Force, and the Air Force. Government squadron service is also in the works, where the entire air launch system is sold to the government for direct operation, allowing for increased responsiveness and flexibility. VORB also offers missile defense target applications and hypersonic research and development activities due to the availability of distinct features of the LauncherOne hypersonic system.
  3. Spatial solutions: end-to-end value-added services for “internet of things” and “earth observation” applications through the integration of company-owned satellite constellations and agreements with satellite operators. Under the satellite-as-a-service model, VORB plans to use its own satellites to serve government and commercial customers in the United States and around the world by 2023.

Investment thesis

Space is the ceiling of the TAM

By 2030, the total addressable market [TAM] of VORB should be worth $75 billion! The space industry is large and growing rapidly due to many factors. Thanks to recent technological advances, the manufacturing and launching costs of satellites have been reduced, allowing space-based solutions to reach multiple end markets such as communications, maritime, logistics, national security and defense. Advances in space technology in satellite bandwidth and throughput, enabling higher data transfer rates and miniaturization of satellite components over the past decade, have been driven primarily by the private sector. .

Euroconsult Research shows that 2020 marked a milestone in the journey of commercial satellite launches, with small satellites accounting for 95% of the market. VORB management estimates (per their S-1 filing) that the small satellite industry will become a $29 billion business by 2029. The United States and its allies must retain and improve their space capabilities as they increasingly dependent on space technology for national security and defense (communications, navigation, precise location information and global surveillance are major areas of interest).

Euroconsult Government Space Programs 2020 report predicts that the world’s governments will spend approximately $80 billion by 2024, investing heavily in research and development of military technologies as well as the maintenance of existing systems. National Defense Magazine also indicates that the hypersonic segment is also the fastest growing part of the DoD budget, with a compound annual growth rate of 21% from 2021 to 2025. This shows how the sector is more focused on technological innovation .

Proprietary launch technology

The company appears to have broken the ground-launch paradigm, which has remained virtually unchanged for 60 years, by launching rockets from a modified Boeing 747-400 aircraft flying at speeds around Mach 1. VORB estimates that this technology provides a 30% more efficient platform than ground-based technologies because it is more adaptable and responsive. Among the tiny rocket launchers, the company offers the lowest launch cost per kilogram. These rockets can reach any orbit thanks to the system’s mobility, which allows it to launch from any government-licensed horizontal spaceport that can accommodate a Boeing 747-400. The secrecy, responsiveness and durability of the VORB system also sets it apart and makes it a better deal for their military industry customers.

Another benefit is that ESG investors favor VORB’s technology. Normally, it was necessary to locate launch facilities away from densely populated places. The majority of conventional ground launch stations have been chosen from wildlife reserves. Due to the smoke and soot that is emitted, as well as the volume of the actual explosion that occurs at ground level during rocket ignition, ground launch systems often contribute significantly to pollution. air, ground and noise. All of these have a substantial negative influence on the pristine natural settings that our rivals use for launch operations. On the other hand, VORB air launch technology gives ground systems an advantage by having less influence on the surrounding environment. Their air launch technology only makes noise and harms the environment at a height of about 35,000 feet. This makes a big difference to the amount of noise and carbon emissions in the area and how they affect local species.

Vertically integrated model improves scalability

VORB can build rocket tanks in days instead of months thanks to its automated composite fabrication method. Moreover, thanks to their partnership with DMG MORI (OTC: GDMOF), VORB benefits from its sophisticated manufacturing technology, which has contributed to a cycle time reduction of more than ten times. Over 90% of every rocket is manufactured in their highly integrated processes. The VORB factory currently produces four rockets, with an annual manufacturing capacity of around 20 rockets. The plant is scalable, allowing for increased production capacity by adding a new work cell.

Operational effectiveness

2Q22 results

Strong government ties lend credibility to expand internationally

With contracts from the Space Force, Air Force and other organizations, in addition to being chosen for the “Orbital Services Program-4” IDIQ and participating in the exercise “Advanced Battle Management System” with USSPACECOM in September 2020, VORB has a proven track record of accomplishments with government and national security contracts. VORB management intends to continue to expand VORB’s participation overseas using the US government’s enormous reach and alignment with its allies.

As for overseas performance, VORB has already launched satellites for a variety of international clients. They have additional launches planned for a variety of other international customers. VORB said it has ambitions to launch from overseas civilian spaceports, including the UK, Japan and Brazil, illustrating its unique ability to also serve global customers from its home turf.

int scope

2Q22 results

The Virgin brand

The Virgin brand has a proven track record of innovation, reliability and excellent customer experience, plus a history of safe flights. Virgin’s reach has been pivotal in creating important connections with customers in the civic, commercial, national security and defense sectors. The Virgin Group family of companies have also provided important potential anchor partners for VORB’s targeted applications in the space solutions industry. For example, they might be able to connect ship management for Virgin Voyages and aircraft management for Virgin Atlantic

Provide

The main objective of my model is to demonstrate the significant benefit if VORB can achieve the long-term directions of management. First, the model is extremely sensitive to growth rates and margins since it is an 18-year DCF model. There are 2 steps in my model. The first stage (FY23 to FY30) is based on management advice, and the second stage is a declining growth pattern (up to 2% in FY40) to indicate VORB maturation. A key part of my model is a very high discount rate of 15% because the VORB business model is still in its infancy and as an investor I would need a higher rate of return to justify investing in it.

Using these assumptions, VORB could be worth 10 times more than its current price of 2.84.

Evaluation

Author’s estimates

red flags

Strong possibility of additional capital requirements

The company did not begin commercial-scale launch operations until 2021, generating limited cash flow. Currently, it is unclear when the company will be able to generate sufficient revenue or cash flow to support its operations and growth.

The adoption of small LEO satellites is still an unknown today

Low-Earth orbit satellite launch services are yet another new market that may not reach its full potential in the expected time frame.

Conclusion

VORB has the potential for 10x to its current share price (2.84). However, investors must believe that VORB can grow revenue from $35 million in FY22 to over $2 billion over the next five years. Underlying that is the hope that low Earth orbit satellites will be a big market, and there are enough tailwinds in the industry to believe that will be the case.