Podcast: Space, The Next Frontier?

​ Rudy Majid: Hello, I'm Rudy Majid and you're listening to The Alger Podcast, Investing in Growth & Change. Space has been getting a lot more attention lately, especially following SpaceX’s IPO. Here to help me unpack the space industry, where we are today, and some of the longer-term shifts that could help create potential opportunities down the road, is Andrew Gustin, Senior Vice President, Senior Analyst, and Head of the Industrials Sector. Andrew, thank you so much for joining us.

Andrew Gustin: Rudy, it's great to talk to you today. Thanks so much.

Rudy Majid: It's my pleasure. Before we get into the industry itself, can you explain how space fits into your work at Alger, and why it has become such an important area for you to follow?

Andrew Gustin: Sure. I am part of the industrials team. Historically, I have covered aerospace and defense, capital goods. My team also covers AI-empowered infrastructure, and because of my coverage of the aerospace industry, I had a little bit of a background in the space market and I got the exciting assignment to cover SpaceX. It's been incredibly interesting to learn about space and it really seems like an area of incredible disruption and innovation, in my view.

Rudy Majid: Looks like we are in for a fascinating discussion. So, when we talk about the space industry, what are we actually talking about?

Andrew Gustin: So, the space market today, I think we can categorize into three or four buckets, and there's a growing handful of public and private companies playing in these areas. I mentioned SpaceX, which completely disrupted the launch market, so they are providing access to space to other companies in addition to launching their own payloads. Then you have a whole bunch of other companies who are trying to get into the launch market as well as developing new business models once in orbit. So, other companies that are trying to offer launch and are a bit behind SpaceX but making progress include Blue Origin, which is private, Rocket Lab, which is public, Firefly is another public one, and there are also incumbent launch providers such as ULA, United Launch Alliance, which is the JV between Lockheed and Boeing, and there are some international launch players as well, including the Chinese.

Andrew Gustin: Aside from launch, once you're in space, some of the key markets are defense, imaging, and communications. So, we believe there is a rapidly growing market for defense-related space operations and this includes surveillance, missile defense, and space-based communications. There are also commercial communications businesses. You have Amazon trying to get into orbital communications with their own constellation. You have a company called AST SpaceMobile, which is trying to do a direct-to-device network. And of course, you also have SpaceX, which has built a constellation of 10,000 satellites and has an offering called Starlink, which provides broadband internet and they are also moving into the direct-to-mobile-device market.

Andrew Gustin: Then you have Earth-imaging, so there is a company called Planet Labs and they basically take pictures of the Earth and monetize those, selling images to consumers, enterprises, and governments. Then you have the manufacturing supply chain, companies that manufacture satellites and other key components. A couple of the public companies there are MDA Space, which is a Canadian company, and York, which is a relatively recent IPO. In addition to that, Rocket Labs, SpaceX, and some of the other big players also do satellite manufacturing for themselves as well.

Rudy Majid: You mentioned launch as one of the first major parts of the space economy. And it seems like so much of the industry depends on getting into orbit more reliably and at a lower cost. Why are launch economics so important to understanding where space may be headed?

Andrew Gustin: About 10 years ago, SpaceX pioneered the concept of reusable rockets, and that was a radical departure from how all space rocket launches had previously worked. Previously, rocket launches basically meant that the rocket was used once and then it was expended, and it was extremely expensive because essentially, the vehicle was thrown out after one use. And Elon Musk had the vision that it doesn't have to be this way, and when we fly on an airplane from New York to Los Angeles, we don't throw out the aircraft after one flight. And by reusing the rocket and amortizing the cost of that rocket over many launches, we can dramatically reduce the cost of launch per kilogram relative to how it was done in the past.

Rudy Majid: How difficult is all of this, and where are we at today?

Andrew Gustin: It's incredibly difficult. The existing SpaceX vehicle is called the Falcon 9. And the Falcon 9 is partially reusable, the booster stage, which is like the bottom part where the propellant is, gets reused. It actually comes back down and it typically lands on a drone ship or it can land on land and then get refurbished and sent back up.

Rudy Majid: Is there anything in development right now aimed at reducing the cost of launching into orbit?

Andrew Gustin: We believe SpaceX is continuing to move fast and SpaceX has a much larger and fully reusable vehicle called Starship, which they're on the cusp of deploying commercially, and that has the potential, in our view, to significantly increase their domination of the launch market.

Andrew Gustin: Starship, they think they're going to be able to have it fully and rapidly reusable, so that you're going to be able to refuel, refill it with cargo, and take off again.

Andrew Gustin: The idea with Starship is, you could actually have multiple takeoffs and landings in one day, and it's a much larger vehicle than the existing one and they're going to have a whole bunch of launch sites. So, we believe you have the potential for just a tremendous amount of mass to go into space, and with reusability, that brings down the cost per kilogram another order of magnitude.

Rudy Majid: So, Andrew, do we have any stats on the cost to launch into orbit and how that's changed?

Andrew Gustin: Most of the estimates you see for the current cost to launch for SpaceX are in the neighborhood of $2,000 a kilogram, which is down 85 percent from the way it worked 20 years ago with the old one and done launches. With Starship, the potential is another order of magnitude reduction, so potentially $200 a kilogram, possibly even less.

Rudy Majid: Are other companies using reusable rockets?

Andrew Gustin: Well, everyone has seen what SpaceX has been able to achieve and they're all trying to do the same thing. There's only one other company that has actually succeeded in reusability and that's Blue Origin, and they did it 10 years after SpaceX did it, so I think it's safe to say SpaceX has a 10-year lead, but others are trying to copy SpaceX.

Rudy Majid: So, if orbital launch costs are expected to fall, what opportunities does that unlock?

Andrew Gustin: It's a really exciting possibility. We think the demand for compute right now is just exploding and the proliferation of AI and agentic AI has the hyperscalers clamoring for as much capacity as they can put online. So, you have just a tremendous boom in data center construction and there's not enough power and there are all kinds of constraints around construction and interconnections and labor.

Andrew Gustin: So, if Starship is successful, one of the things SpaceX is talking about doing is launching AI satellites. You may have heard of a so-called space data center. I think that's a little bit of a misleading term. The idea is not like there's going to be some huge building up in space that looks like a data center like we might have on Earth, but SpaceX is talking about launching AI satellites.

Andrew Gustin: The coolant and the solar manufacturing that would enable this are difficult problems to solve, but with the cost of launch coming down by that much and with scaled manufacturing of these satellites, SpaceX thinks that they can make the cost competitive with terrestrial data centers.

Rudy Majid: When might that happen?

Andrew Gustin: At some point, the cost of an orbital data center is going to cross the cost of a terrestrial data center. And there's a lot of debate right now as to whether that's three years away or ten years away or maybe longer, but when that happens, we believe you potentially have a new vector for deploying AI compute.

Rudy Majid: And if orbital compute does become more practical, what parts of the supply chain could benefit?

Andrew Gustin: You're going to need tremendous solar cell manufacturing. You're going to need radiation-hardened components. You're obviously going to need the compute. You're going to have other chip suppliers supplying compute.

Rudy Majid: And are there risks involved?

Andrew Gustin: Well, there's a lot of risks. For one thing, they have not yet actually demonstrated full reusability with Starship. They have landed the booster, they have caught the booster, but they have never actually caught the upper stage.

Andrew Gustin: But it's important to emphasize this has not been demonstrated before and Elon Musk actually says that doing this is the single hardest engineering challenge in the history of humanity, so you really can't overstate how difficult it is.

Rudy Majid: We talked about the near-term impact on data centers, but if these developments do progress, and the cost of getting into orbit continues to come down, what longer-term markets could potentially open up?

Andrew Gustin: There are a whole host of really interesting longer-term markets. One is getting to the Moon and developing a lunar base. The Chinese and the U.S. are basically in a race to develop a lunar base and establish a presence back on the Moon.

Andrew Gustin: There is resource extraction. There's something called helium-3, which is very scarce on Earth but highly abundant in the lunar soil and used in critical applications such as semiconductor manufacturing and other specialty applications.

Andrew Gustin: There's point-to-point terrestrial travel, so with Starship, SpaceX is talking about being able to transport people basically onto the other side of the Earth in an hour or less.

Andrew Gustin: There's also zero gravity manufacturing. In our view, without gravity, there are whole new possibilities for manufacturing and chemical engineering that aren't possible on Earth, including pharmaceutical formulations and other types of advanced manufacturing.

Rudy Majid: Andrew, this has been a fascinating discussion. Before we wrap up, what is the key takeaway for investors? And how does this relate to Alger's investment philosophy?

Andrew Gustin: Yes, there's no question that we believe space represents a classic Alger investment opportunity because you have a way of operating that has been completely disrupted. You have a lot of capital flowing into an ecosystem, and you have enormous TAMs that are only just now being understood.

Andrew Gustin: I do think we are on the cusp of a new frontier and it's not only related to AI but even more broadly than that. It looks like our kids and our grandkids someday are going to live in a world where space is an important part of humanity, where we have a presence in space, where we're exploring farther than we've ever been before and we think there's going to be new businesses and new opportunities for humans in space.

Rudy Majid: Andrew, thank you so much for being on the podcast.

Andrew Gustin: Oh, my pleasure. Thanks so much, Rudy.

Rudy Majid: And thank you for listening, for more insights please visit Alger.com.​