George Ferguson, Bloomberg Intelligence Senior Aerospace & Defence analyst, discusses the SpaceX IPO

George Ferguson joins this special edition of the podcast to discuss the upcoming SpaceX IPO, the challenges facing the business and the thorny issue of valuation. He also talks through the surge in European defence procurement and in investor interest.

Transcript

SPEAKER_01 0:05

Hello and welcome to the latest special edition of the Shares of I podcast. I'm delighted to be joined by George Ferguson. George is senior aerospace and defence analyst and team leader at Bloomberg Intelligence. George, pleasure to see you. Thank you for having me.

SPEAKER_00 0:22

Thank you for letting me join.

SPEAKER_01 0:24

Absolutely great. You guys cover something like 2,000 companies across the globe in aerospace, defence, and airlines. So you have a really wide mandate. And I mentioned off camera that I watched your interview on Visual Approach earlier. For anyone who isn't into aerospace and defense, that's a pilot's in joke. And first of all, I have to say it was a lot of fun. But secondly, you said, which I thought was really interesting, when you first started at Bloomberg, nobody was that interested in talking about defense companies, particularly in Europe. But I guess that's changed an awful lot in the last few years, but not just since Ukraine, but I imagine in the last three months, even, you've seen a big uptick in interest.

SPEAKER_00 1:17

Yeah, absolutely, right. So yeah, when I used to come to Europe, I would sort of take my defense hat off, right, and just be aerospace and just talk Airbus and Boeing and that competition. But uh yeah, lately, especially, you know, if I'm talking to clients in uh the middle of Europe, right, in Germany, Poland, or up in Scandinavia, a heavy, heavy interest in defense. Uh obviously the world has gotten a little bit uh it seems like shakier, maybe riskier. And so uh, you know, with the US administration talking about uh their needs other places and potentially pulling back some of uh US capabilities in Europe, there's uh a very keen interest uh on the continent.

SPEAKER_01 2:04

Yeah, yeah, absolutely. And one thing I noticed is a lot of this defense spending in Europe seems to be going on satellites. So Germany was talking about spending 35 billion euros, about 40 billion dollars on military space, military space capability. And the UK and France are also increasing their spending. Now, some of it's to replace US systems, as you say, where they might be withdrawn. But do you get the impression that space might be the future for some European defense companies?

SPEAKER_00 2:36

So I think there's definitely more room for European space companies to get involved in in defense. And so there's, I think there's opportunity. Much like you said, uh, you know, traditionally the US has sort of come in and provided a lot of the backbone to NATO. It helped provide communication systems, intelligence systems. And of course, when they're providing that backbone, they're leaning on systems that have been built by the US Department of War, DO Department of Defense, whatever it was called at the time. Uh, and so uh look, I think as Europe moves forward and moves forward, hopefully in a more integrated fashion, I think that Europe will want its own communication systems. It'll want its own earth observation and intelligence systems, and the Germans are showing uh that desire with the money they put towards it. So, yes, I think there's some opportunities. There's some startups down in Munich uh that I know are into defense. And so I think you'll see not the bulk of defense money spent there, but you'll see some sizable amounts being spent there.

SPEAKER_01 3:45

Yeah, that's interesting. I mean, I've been looking at uh we've got a company called Seraphim Space Investment Trust, and they have a lot of very interesting stuff going on in satellites like geothermal imaging satellites and communication satellites and so on. Uh, they're not investors in SpaceX, actually, which is interesting, but obviously that leads us on to the big beast. Um, and again, I just watched your uh webinar earlier today on the company and the challenges it faces. Um, you mentioned that you thought the Lyft business or the satellite launch business probably wouldn't be the main value driver. Could you just talk us through that a bit? Sure.

SPEAKER_00 4:24

Yeah, so I mean, when we look at SpaceX and and their launch business, first, uh, you know, I should say, and I said on the webinar, they've they've come a long way, right? And so to be reusable on space uh lift equipment is, you know, it helps lower costs dramatically. Uh, and it's going to unlock more and more opportunity in space. I think the challenge will be um, you know, it's a really heavy investment to uh to put up uh satellites, especially low Earth orbit satellites, right? There's some of these constellations will have 10 plus thousand satellites circling the earth. Um, and so, you know, already Elon Musk's Starlink is there, right? It's got 9,600 satellites in orbit. So we already know one of our big Leo providers, right? And I I feel like given the cost, uh, you can only have maybe five of these things in the next couple decades. I feel like the US has got Starlink, it's already, you know, pretty much in place. You'll see Amazon Leo uh lift a low Earth orbit constellation into space, which probably goes to 10,000. I think the Chinese will want to be here. They've talked about it. I could see them doing a couple of those uh constellations. And I think Europe will want their own constellation in time. So maybe there's five, maybe India's in there, maybe there's six constellations, but I think you have to have pretty deep pockets and a desire to push through losses to do it. And I just don't see India, Europe, even Amazon Leo wanting to lift their uh constellation into orbit with SpaceX rockets. And so I think that look, that there's there's other business to do for SpaceX, you know, and launches business, government satellites, it will be a lower cadence. But my guess is they're gonna drive uh, or most of what's gonna drive their lift is going to be supplying Starlink um you know satellites as satellites wind down and come out of orbit, things like that. That's the majority of it. And I don't see that being a big big growth business, right?

SPEAKER_01 6:37

Right. Um, again, on the presentation, we were talking, um, Mandeep was talking, your colleague Mandeep was talking about um the AI, XAI and Groc. And and there's there's a that has to do a lot to make up the sort of the valuation of the business because I think last year did it make $3.2 billion. Um, and he was saying, you know, long run, including obviously they've done this deal with anthropic and there's a deal with Google coming through as well. So you could get to 50 billion, or you know, long, long run, you could maybe get 300, 400 billion. But I think there was a figure given of 3.2 trillion. And he said, that that needs some heroic assumptions, I think, were his exact words.

SPEAKER_00 7:23

Yeah, I think you're talking uh largely revenue, right? There's still there's still the big loss-making uh um division inside SpaceX is that AI business. There's heavy, heavy investment. So, you know, look, Starlink is that communication business, they make some money. Yeah, and really the AI business sucks the money all out by investment. And and you know, I think Mandeep was speaking to some of the astronomical revenue projections that we've seen come out of companies like Morgan Stanley or JP Morgan. I mean, they're going out to 2040. I I think, you know, I think what it reminds me is a couple things. So one is that um, you know, first of all, there's a lot of investment in AI right now and a lot of a lot of money being spent on that investment, that capital expenditure. We all don't know where AI is going to come out. So to project it to 2040, I think is really, really difficult, right? Even when we have a company that's fairly stable, projecting it out three or four years is still a bit of an edgy business because there's so many twists and turns that can occur. A lot of investment. So you got to believe in AI and believe on Elon Musk's business's ability to be at the forefront of AI. And I think the space launch business that I talk about is all about getting that AI infrastructure, computing uh centers, uh data centers into space. And I think you got to be a believer in that business, the data center in space, the AI, the Grok takeover, to really get, you know, sort of to be a believer and be involved in the SpaceX IPO. I think that's really where Mandeep would sort of go with that. It's the numbers are just crazy.

SPEAKER_01 9:07

Yeah. Yeah, yeah, yeah. I mean, the other thing that uh surprised us all was that first of all, we heard last week that the uh IPO would go straight into the index uh rather than having to wait to go into the index. So there was talk of, I don't know, up to 500 billion of passive money having to buy into it. And then late last week we heard that SP Dow Jones has said no, they weren't going to get fast entry into the index. So not just SpaceX, but that could be the same with anthropic and open AI. And then you'd have by market value, if the valuations you know pre-the-money are accurate, you'd have like 10 biggest stocks in the SP, not in the S P, if you know what I mean. And that that's what do you make of that?

SPEAKER_00 9:58

You know, I I look, I'm I'm not the index guy, but from my professional opinion, and I've been inside the investing business for 30 years. Um, it doesn't hurt to maybe be a little bit slow and bring things into the index, right? Because again, I don't think we understand there's a lot of investment AI. We don't understand sort of how viable these business models are gonna be in the long run. I hate to see the SP load up on all these new businesses and potentially have a bust on their hands, and then you get investors that are invested in the index that turn around one day and lose a lot of value. Um, I'm not saying that's what's gonna happen, but you'd hate to see it happen. You don't want to see people sort of load the boat, if you will. And so I personally think to go a little bit slow in this, especially the SP 500, which is a broad market index, right? It's one thing if you're gonna pull this into maybe a tech heavy index, like a NASDAQ, but an SP 500 broad market index, I think it does pay for them to go a little bit slow and take their time to put things inside the index. So I I'm okay with it, but I'm uh again, I'm not a tech guy. I'm uh I'm uh industrials, aerospace defense kind of guy.

SPEAKER_01 11:14

So yeah, I mean, I think I think you're right. Um, I tend to agree that leave it up to the individual if they want to own it. But if you if you put it in the index, then by default, everyone's 401ks almost are gonna own these companies, and you know, you're taking away that choice almost from people. Yeah, um, brilliant, George. Thank you ever so much. I don't I know you're an extremely busy guy, and I don't want to take up too much more of your time, but uh thanks ever much for ever so much for coming on the show. Really appreciate it.

SPEAKER_00 11:44

All right, enjoyed it, thank you.

SPEAKER_01 11:45

And um, I say thank you to our audience as well. We will have another special edition of the podcast for you um very soon. So take care. And George, thanks again.

SPEAKER_00 11:56

Thank you much. Goodbye.