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SpaceX: Elon Musk's Big Ambitions Face Harsh Reality

Oct. 08, 2018 9:56 AM ETSpaceX (SPACE)TSLA191 Comments
John Engle profile picture
John Engle


  • SpaceX plans to launch Starlink, a network of satellites to provide broadband Internet to Earth-bound consumers; it projects Starlink revenues will dwarf its launch business within a few years.
  • SpaceX raised $500 million from investors in April to, among other things, fund Starlink to the launch stage; but the cash appears to be going exclusively to other projects.
  • CEO Elon Musk's focus on his BFR manned rocket program is claiming all of SpaceX's engineering resources and is projected to cost between $2 billion and $10 billion to complete.
  • Hiring for Starlink appears to have ceased, while resources are diverted toward BFR; the income potential of manned spaceflight is extremely dubious.
  • Both Starlink and BFR have questionable economics and might end up as money-losers if they ever get off the ground; for Starlink, that prospect appears increasingly unlikely.

Space Exploration Technologies (SPACE), or SpaceX as it is generally known, has lofty ambitions for transforming the spaceflight industry. The brainchild of Tesla (TSLA) CEO Elon Musk, SpaceX has led a pack of hungry startups eager to shake up a moribund sector and usher in a new Space Age.

But SpaceX is no longer a startup. Indeed, it claims one of the largest valuations of any private company: $27.5 billion. That valuation has been fueled in part by the success of SpaceX's efforts to create cheaper, but still reliable, rockets. But the satellite launch business, where SpaceX has cut its teeth, is getting increasingly competitive.

Even dominating the growing space launch sector would not likely be enough to fund SpaceX's plans. To justify its valuation, as well as fund Elon's overpowering dream of manned spaceflight and interplanetary exploration, SpaceX has another program in mind: Starlink.

Starlink is a proposed constellation of Internet satellites SpaceX plans to launch within the next couple years and is supposed to swiftly become a source of massive revenues for the company.

There is just one problem: It looks like the Starlink story is already falling apart.

Let's discuss what has been happening with Starlink and why its precarious future could spell serious trouble for SpaceX.

Failure to Launch

SpaceX has made its mark already in the field of commercial space launches. As a low-cost alternative to existing private launch providers, such as the United Launch Alliance ("ULA"), SpaceX has carved out a niche for itself. It is an important position, since it is SpaceX's sole source of income other than capital markets.

While its exact finances cannot be known due to its status as a private company, SpaceX has made numerous allusions to being cash flow positive, if only breakeven, thanks to its launch business. Unfortunately, it is

This article was written by

John Engle profile picture
Investment professional specializing in deep value opportunities, growth plays, special situations (long + short) across a range of asset classes and industries.Current Role(s): President, Almington Capital Merchant Bankers; Chief Investment Officer, The Cannabis Capital Group.Asset Classes: publicly traded securities (stocks + fixed income), private equity, real estate, venture capital, cannabis, fintech.https://subscriptions.seekingalpha.com/lp_premium_beat_the_market_4/?source=affiliate:42612986Education: MA, Trinity College Dublin (economics + philosophy); Diploma (finance), London School of Economics & Political Science; MBA, University of Oxford.

Analyst’s Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (191)

Nick Cox profile picture
Oh dear, even Space X,a private company, gets the full anti-Musk treatment from certain SA writers.
You gotta laugh :-)
Key part here:
It seems unlikely that the Air Force would pick Blue Origin and SpaceX in phase 2 because that would effectively put ULA out of business, he said. “You pick ULA because you know they won’t be around if you don’t pick them.”


This part about the ULA in particular has been an open secret for about a year now. If they want arrays and are getting two companies for large payloads (SpaceX and Blue Origin, NGIS is making an ICBM) then it's a pity they didn't give the money to Rocket Lab, Virgin Orbit or someone else who is also competent.
Regarding NGIS it is a respectable company with some nasty maintenance (seekingalpha.com/...) and payload (Zuma adapter) issues lately. But giving them this contract was probably a good idea, they've a strong history, and Cygnus is a decent cargo craft (even if a distant second to the Dragon in capabilities and (until recently) cost), they just need to fix their QC.
Regarding BO, New Glenn is only aiming for a reusable 1st stage. With the size of their payload it may be hard to get it below 100mn, let alone 50. The FH right now is at 150.

Wish them the best of luck, though this is somewhat worrying. Regardless they'll provide competition by being the only other super heavy lift rocket which doesn't come at an insane 1bn price after an 18bn development budget.
In full: WASHINGTON — The immediate reaction to the news on Wednesday — that Blue Origin, Northrop Grumman and United Launch Alliance won over $2 billion in Air Force contracts to develop launch vehicles — was “what about SpaceX?”

The Air Force’s top procurement official Will Roper told reporters that SpaceX is a “key member of our launch team” but would not discuss why the company didn’t get a contract or even if the company bid at all for the Launch Service Agreement awards. SpaceX did not respond to requests for comment.

The LSA program was started in 2015 to nurture domestic launch providers as the Air Force faces a 2022 deadline to stop using the Russian RD-180 engines that power ULA’s Atlas 5 rocket. SpaceX received funding in the initial phase of LSA to develop propulsion technology.

For the current phase of LSA — the actual development of rockets that can be certified to fly national security missions — the Air Force awarded Blue Origin $500 million for the development of the New Glenn rocket, Northrop Grumman $792 million for its OmegA rocket and ULA gets $967 million to develop the Vulcan Centaur rocket.

SpaceX, considered by some to be a shoo-in for an award because it’s already proven its mettle by launching national security payloads, was the odd-man out.

But SpaceX’s exclusion isn’t so odd considering that the current phase of the LSA program is focused on bringing new launchers into service. Falcon 9 has flown more than 60 missions since its 2010 debut and has begun routinely recovering the rocket’s reusable first stage. Falcon Heavy, meanwhile, made its successful debut in February

“SpaceX does not need development money for Falcon 9 or Falcon Heavy,” said Charles Miller, a former NASA adviser and president of the NextGen Space consultancy. SpaceX development efforts are now focused on the Big Falcon Rocket and that is not a vehicle that has much appeal to the Air Force, Miller said.

There is a strong probability that SpaceX was a no-bid because it already has what the Air Force wants, which is a reliable, low-cost rocket, Miller said. The BFR is too big for what the Air Force needs, especially as the military tries to move away from huge satellites to disaggregated constellations, he said. “They want reliable low-cost access to space,” and SpaceX has two vehicles that don’t need to be developed.

The strategy behind LSA is to bring new domestic competitors into the market. The three companies that got development funds are expected to be ready to compete for launch procurement contracts in the next phase of LSA, which the Air Force calls phase 2.

Phase 2 will be an open competition. All the LSA winners have to bid for launch contracts, or return their development funds to the government. SpaceX presumably would bid as well.

An Air Force official who spoke with SpaceNews on Thursday said phase 2 will be a procurement competition for a yet-to-be determined number of missions over five years. Only two suppliers will be selected and they will split the work 60/40.

“Anybody can compete,” he said, but under the agreement with the three LSA winners, “anybody that is not chosen for phase 2 procurement will have their OTA funding terminated.” OTA, or Other Transactions Authority, is a cost-sharing agreement that the Pentagon can use for the development of new systems instead of traditional cost-plus contracts.

“All three are required to pursue phase 2 procurement as part of the arrangement,” the official said. If any of the three LSA winners fails to bid for phase 2, they will have to pay the OTA money back.

“We chose three LSA partners to guarantee that there are three to compete for phase 2,” the Air Force official said. He did not mention SpaceX but insisted that phase 2 would be wide open.

If only two companies are selected for phase 2, what happens to the losers? Can their rocket ventures survive without the Air Force as a customer?

The Air Force did think of that, but decided that the procurement block buy is best with just two providers sharing the launches, he said. “While we want competition, we also need stability in the launch marketplace.”

National security launches are very complex, he said. “We do a great deal of mission assurance to ensure we put our missions on a good path for success. Stability is important. Having a well understood partner to work with during that five-year period is important.”

At the end of the five-year phase 2 procurement, the Air Force would reassess the industrial base and decide if there is sustainable competition for phase 3.

The Air Force is working on a draft solicitation for phase 2 that could be released later this year or early in 2019.

Miller speculated that the Air Force would have to pick ULA or SpaceX in phase 2 because they are the only two with a track record in national security launches.

The calculus would be that if Blue Origin does not win phase 2, its billionaire owner Jeff Bezos would continue to develop the rocket at his own expense and keep the market competitive.

Similarly, Northrop Grumman could keep OmegA alive even if it does not win phase 2 by drawing on funds from other government programs.

“If I were the Air Force, I would want Bezos in the background putting competitive pressure on the two companies I did select,” said Miller.

It seems unlikely that the Air Force would pick Blue Origin and SpaceX in phase 2 because that would effectively put ULA out of business, he said. “You pick ULA because you know they won’t be around if you don’t pick them.” ULA is a joint venture of Boeing and Lockheed Martin established to serve the government launch market.

Mike Laidley, vice president of the OmegA program at Northrop Grumman, told SpaceNews that the company expects to fly the rocket in 2021 and will be ready to compete for phase 2.

“We’re going to be hiring a lot of new people at all of our facilities,” Laidley said.

Northrop Grumman’s strength is that it’s a “stable supplier that can handle fluctuating demands that are pretty typical in the space industry,” Laidley said. The $792 million OTA contract will help accelerate development and certification, he said. All three companies have to meet pre-established milestones in order to get the funds.
More News Today on EELV: spacenews.com/...


Also, where are the bashers in the Seeking alpha news update on the EELV or even this thread? Seriously, its been two days, and this is massive launch industry news for all the players involved! You really only care if its related to hating on Tesla, huh.

Key quote: “SpaceX does not need development money for Falcon 9 or Falcon Heavy,” said Charles Miller, a former NASA adviser and president of the NextGen Space consultancy. SpaceX development efforts are now focused on the Big Falcon Rocket and that is not a vehicle that has much appeal to the Air Force, Miller said.
The air force itself did not give any explanation, but it should become more apparent in the months ahead.
In related news, the Soyuz which built itself gradually into an incredibly reliable rocket, but continues to fail with increasing regularity due to lack of basic maintenance (stemming from corruption): www.reddit.com/...
This is the first time since 1975 there's been a problem with a crewed Soyuz though, the recent issues the last few years have been with cargo launches. (edited)
Further news on the NASA report ripping into the SLS: www.space.com/...
Further evidence the author has no knowledge of the space industry beyond googling for surface level articles mainly from 2 years ago, this report may have come out just today, but it's something anyone in the space launch community knew about:

A NASA report sharply criticizing the current development of the SLS:

"SpaceX plans to launch Starlink, a network of satellites to provide broadband Internet to Earth-bound consumers; it projects Starlink revenues will dwarf its launch business within a few years."

Right off the bat this analysis starts with a false premise. While a portion of Starlink revenue will come from "provid[ing] broadband Internet to Earth-bound consumers", the bulk of its revenue will come from use of the network for backhaul and backbone (or core) Internet. While SpaceX is projecting the network will have capacity for 10% of projected worldwide local traffic, it will have capacity for more than 50% of projected worldwide long-distance traffic and the capability to move that traffic much more quickly and at lower cost than existing terrestrial connections. Laser communication in the vacuum of space will be far faster than even dedicated Earthbound microwave. SpaceX could probably cover the entire cost of the network with just what it can earn from traders shaving milliseconds off arbitrage trades in New York and Chicago and Starlink can make available time advantages on arbitrage among New York, London, Tokyo, Johannesburg, and every other market.

The development of the BFR at the same time as Starlink is synergistic because the Starlink network will be so big and the BFR will be so efficient. Eventually the Starlink network may grow to 12,000 satellites, but the initial FCC authorization is for 4,425. It requires that SpaceX have 2,213 satellites operational by March 29, 2024, with the remaining 2,212 operational by March 29, 2027. To put that in perspective, according to the Union of Concerned Scientists the total number of operational satellites on April 30, 2018, was 1,886 of which just 495 were American commercial satellites. We do not know how many Starlink satellites can be put in orbit by a single F9 launch, but Iridium Next missions have placed 10 satellites. Even if it is 50 that is at least 44 launches per phase. With in-space refueling, two or three BFR launches would be able to place the entire 2,212 satellites for the second phase of the network. The cost to SpaceX of an F9 launch is about $36 million, while the cost of a BFR launch is projected at about $7 million. (The price to customers will not have that steep a reduction because SpaceX plans to greatly increase its margins.) So launching the second phase using the BFR could save more than $1.5 billion. It is possible that the BFR will be ready in time to place most of the first phase satellites as well.

"The Chinese nation will be able to study the widespread damage that is causing the Gobi desert to spread at an alarming rate and reverse that and many other negative cycles."

The Chinese need Elon Musk to orbit an Earth resources sat? They have launched their own space station and astronauts....
"They have launched their own space station and astronauts...."

Yes, they are but they are way behind. This tariff was is not a frivolous event and it will have repercussions that will impact the Chinese economy for decades. Japan has yet to fully recover from the hit they took in the 90s.

China has embarked on a number of dead-end initiatives causing billions of dollars to their economy. Picking a fight with the USA is equivalent to a self-inflicted wound and it is probably too late to turn it around. Trump is going for the jugular. Once Germany is in the bag, China will fall like a piece of lead in water. That space station will fall way down the list of priorities. China will open up their markets soon enough but the damage is already done. Companies like Apple and others have already started planning their exit and Amazon will be forced to rebuild some of their datacenters if they want any government contracts.

"Yes, they are but they are way behind."

Behind who? They're ahead of SpaceX and certainly don't need any outside help in launching satellites to study their own land...
@John Engle,
"With limited resources and manpower, SpaceX appears to have chosen the BFR and manned spaceflight over the Starlink system."


StarLink will move forward with or without the BFR! The space force to protect those assets will need the BFR.

Remember when Elon Musk asked for volunteers for the journey to Mars? A good number of those volunteers will become part of the Space Force Donald Trump is in the process of putting together. You can see the playbook right in front of you but you refuse to believe it.

Betting against Elon Musk is like betting against the Chief Technology Officer of the United States (CTOOTUS); Jeff Bezos is interested but won't be the one. The decision was made way back in 2009. Just imagine a global healthcare system where the best doctors in the world will be able to perform the most sophisticated operations from a remote space station and will be able to get back home at the end of the day.

This is the real promise of the BFR.

The Chinese nation will be able to study the widespread damage that is causing the Gobi desert to spread at an alarming rate and reverse that and many other negative cycles. The knowledge learned from those events will serve as a baseline of what we may have to do to terraform the moon and other planets close to earth.
@John Engle,
"Meanwhile, the value of the BFR, other than as a launch vehicle in an increasingly competitive and commoditized, is highly questionable."

The BFR is the equivalent of a commercial spaceliner. You will be able to reach any point on the planet within 30 minutes and less time if you are trying to get to a space station. The next big project will be the Elon Space Station (ESS) with over 25 thousand people working in outer space and will include the so-called Space Force. Their main job will be to maintain and protect the health of the satellites but will grow exponentially to include every facet of technology.
John Engle profile picture
I'm not sure even Elon has said anything even remotely THAT delusional. In public, anyway.
@John Engle,
"Yet, despite being the supposed lynchpin of SpaceX's growth story, there are recent signs that Starlink has been put on the back-burner in favor of the BFR."

What a ridiculous statement!

Did not hear Donald Trump talk about the Space Force? SpaceX can make a killing just putting up satellites for the government and various other clients.

They have been offered a ton of government funds to help with the BFR and that option is still open. That fact right there blows your entire theory out the water since there is no way that Elon would slow down or jeopardize the StarLink initiative because it will represent 90% of their future income and they DO NOT need the BFR to get it done.

The BFR is critical in that it will save SpaceX billions and billions of dollars to put up all the StarLink satellites. The extra 18 months to get the BFR up and running will be used to make the best and most advanced satellites on the market. If they succeed, even the government will stop making their own satellites and just use and protect the StarLink assets.

The Starlink project will entail putting up 11,200 satellites. If Tesla was able to put up 100 satellites for every mission, the fairings alone will cost almost a billion dollars. With the BFR, that cost will completely disappear. After about 40 missions, the BFR will pretty much pay for itself.

Each one of those satellites will probably have huge amounts of solid-state storage making the entire constellation cluster a huge data center in the sky capable of competing with Google and Amazon all at once with zero electricity bills.

StarLink will be a major player in global broadband services and that includes cell phone services with zero blind spots. Tesla and SpaceX already make their own hardware (GPU and CPU) so no worries about a Chinese Trojan horse hijacking your personal data.

This project will change your concept of a data center and basically usurp the existing business model of the entire industry.
Arkham profile picture
How is Starlink different from Irridium? I think Irridium still exists in some form. They barely make money and they charge high prices on internet connection, because very few people actually need satellite internet and are willing to pay for it. It's not like this business has no comps.
John Engle profile picture
That is an excellent question. Starlink is Iridium on a much larger scale. Color me skeptical it will be able to generate much of a profit (if it ever exists).
It is an embarrassment you've ignored everyone's criticisms regarding the cost and capability of SpaceX, the factual innaccuracy of calling them a niche player, the linked study by NASA on the commercial excellence of the CRS program (arstechnica-com.cdn.ampproject.org/...) and the horrendous laziness of not even addressing the fact that the SLS is the worst jobs program in NASAs history, preferring instead to toe around the accurate fact that pre-buyout Iridium was a disaster.

You can't even bother to answer this article: media.thinknum.com/...
Arkham profile picture
Iridium had addressable market problem. Economics doesn't work, but it looks like something people would say they want until they have to pay for it. It's very Musk like to do non economic projects. Lots of people lost a lot of money on Iridium in the 90s. They went ch 11, and since then the tech hasn't been updated meaningfully, and they milk shareholder funded network.
SpaceX product and operations is exponentially more expensive, technically advanced and complicated than Tesla.
Which makes the con ever so much sweeter.

It's actually the opposite. Orbital spaceflight is far simpler than profitably mass producing a $35K automobile. This has been known for decades....since General Motors took on Grumman fighter plane production in WW2 and showed Grumman how it's done, making far more units than the parent company despite no prior experience. Decades later GM bought Hughes aerospace division looking for synergies and found few. Honda has launched a successful small business jet and a new engine despite existing aerospace makers' decades of experience. Even Boeing doesn't develop new airframes and engines simultaneously. Spaceflight is a small industry, using the same fundamentals as used 60 years ago. We're still waiting for a breakthrough in propulsion or materials that will make it pay.
Honda's jet is ten years late and barely delivering even now, unless I've missed something.

I suspect that the problem with BFR is that Elon's move-fast-and-break-things proved insufficient for SpaceX and now they move a lot slower because it's no fun breaking fifty million dollar things carrying astronauts. So all their previous budgets and schedules are now replaced by far more slow and expensive ones. Still fast by 1965 NASA standards, I hope, but not drop kick quick either.

4,000 satellites sounds like a lot to me. Just the sky-glitter might cause unanticipated problems.

Why doesn't Elon combine his other interests and start building out orbital solar power? I'd buy a few shares of that, just for laughs.
Is 5G technology a lot cheaper than the Starlink system for internet use?
Since Mr. John Smarty Engle has given himself the mission of taking down Musk with whatever means possible, let's take a look at the track record of Mr. Engle, President of Almingtom Capital, with 2 employees including Mr. President himself who was writing student press 3 years ago. Engle on March 25, 2018 on PGNX: "this is just the beginning" at $8.13. today PGNX: $5.92. you can't even find a few days with higher prices than when "it just got started". Engle on June 5th: DVAX "shows great results" at $15.95. today: $11.05. not even once is the price higher than his pump piece. Engle pumped SGYP on May 2 at $2.17. now: $1.47. not even once was the price higher than his pump piece. Pumping OMER at Nov 20 ($18.52). Now: $14.74. Engle says KMI is "a growth story stock" on Sep 06, 2017, at $22. Now: $18.21, again not seeing much time above his pump piece. It looks like following Engle would be worse than throwing a dice.
Engle pumped sgyp on May 2 at $2.17. now: $1.47. not even once was the price higher than his pump piece
So by your criticism of Mr. Engle....Suppose I publish an SA piece tonight and predict that 20 stocks tomorrow over the next year will will increase. Suppose then a year from now it is observed that 18 of them increased and two of them decreased. If a person then types out in the comments section the two stocks that decreased - Does that somehow make me a bad investor? Which successful investors can you reference (Buffett?, Graham?, you?) that flawlessly bat 100%?

I do not know your occupation blackqqt, but I do know one thing:
You are definitely not a a professional statistician.
of course I did not just look at this one position. just my post below listed 4 absurdly wrong predictions from Mr. Engle. positions that you would not have a chance to get out of. I am not in the job of being a statistician for Mr. Engle, but by browsing through his other predictions, it occurs to me he is no better than random walk. perhaps even worse than random walk. I was counting 5 wrongs out of 7 predictions. not sure how he achieved this feat!
Engle on June 5th: DVAX shows great results ($15.95). today: $11.05. not even once is the price higher than his pump piece.
Almingtom Capital of John Engle: 2 employees including Mr. president who was writing student press 3 years ago
Engle March 25, 2018. PGNX: this is just the beginning ($8.13). today PGNX: $5.92. you can't even find a few days with higher prices than when "it just got started"
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