Investing in Space

How Morgan Stanley's 'mad scientist' became the top Wall Street analyst on the space industry

Key Points
  • Morgan Stanley's auto analyst Adam Jonas has been leading a steady research effort at the Wall Street firm.
  • "Folks I think were saying 'alright Adam, we're used to this kind of stuff. But what are you trying to get out of this?" Jonas told CNBC in a recent interview.
  • Morgan Stanley has a space team made up of 11 analysts covering sectors from aerospace to the internet.
Morgan Stanley headquarters in Times Square, New York.
Source: Morgan Stanley

Adam Jonas became famous – and to some, infamous – on Wall Street when he called for Tesla's stock to more than double to $70 a share.

He made that call in 2011 as Morgan Stanley's auto analyst, saying Tesla was set to "shake-up" the "complacent" auto industry. He continued to follow up with bullish price target increases as the electric automaker's shares rose. While Tesla has been a volatile stock in the years since, it now trades at around $350 a share.

The prediction earned Jonas a reputation inside Morgan Stanley as "kind of a mad scientist," he said in a recent interview. Now he's doing it again – but with the space industry.

His interest in Tesla naturally led him to SpaceX, Elon Musk's other ambitious transportation venture, which Jonas believes is bound to affect the future of the electric car maker. SpaceX is getting into broadband technologies at the same time the auto industry and Tesla are pushing into advanced technologies like autonomous driving.

"We didn't start out one day thinking 'hey, let's do space,' necessarily," Jonas said. While visiting Tesla in 2010, Jonas stopped by SpaceX. After that, Jonas started gathering other Morgan Stanley analysts to help him research the space industry.

His early efforts may be about to pay off. This year has been "very, very active in terms of capital formation and then technological advancement" in the space industry, he said. And Morgan Stanley has been talking to many of the new space companies, including: OneWeb, Rocket Lab, Vector, FireFly Aerospace, Spaceflight Industries, Planet Labs, Spire Global, BridgeSat and NanoRacks – to name a few.

'Auto boy' discovers space

Jonas told CNBC "they called me auto boy" when he joined the Wall Street firm. Raised in the Rust Belt of northern Ohio, Jonas says he was surrounded by auto industry: His uncles worked at car businesses, his classes at the University of Michigan were taught be retired auto executives, and his first job at brokerage Dean Witter focused on industrial clients in Chicago.

Jonas shifted into equity research after Dean Witter was acquired by Morgan Stanley in the late 1990s and spent a dozen years in London as a European auto analyst.

Read more: Morgan Stanley predicts space industry will triple in size: Here's how to invest

His more recent shift to space came after "[We started] realizing there's a hell of a lot going on," Jonas said. But there was an early disconnect: Investors didn't seem to care. Jonas said he and the firm's space team were looking at "dozens and dozens of companies" but when they talk to the bank's clients about it "they giggle.'"

This small-rocket unicorn wants to be the FedEx of space
Small rockets: The FedEx of space?

Jonas wanted to dive deeper. Higher-ups at Morgan Stanley were "open-minded but needed to be sold on the idea" of putting time and resources behind assembling a team of space analysts, Jonas said. He paired up with Armintas Sinkevicius, who has a background in telecommunications.

Sinkevicius remembers "the constant delays" and, in some cases, bankruptcies of satellite communication and broadband networks over the last 20 years. And that experience is a good foil to Jonas.

"Adam is the much more exciting storyteller and I'm the much more dry, sort of 'in the numbers' person," Sinkevicius told CNBC. "I played more of the role of reeling Adam in a bit and saying, 'you know, there's a lot of people that have scars from things like Iridium and Teledesic and Globalstar.'"

The Elon Musk connection: Tesla to SpaceX

"Our work on Tesla brought us into the Elon Musk sphere," Jonas said.

Morgan Stanley's autos team was "very early and quite aggressive" in researching how autonomous technologies could change the auto industry, Jonas said. But six years ago, before nearly every major tech company and automaker was pouring billions of dollars into the field, Jonas said Morgan Stanley's "clients didn't care" about autonomous.

"They said it's a science project and there's nothing in the market to play," Jonas said. That has changed, and now the space industry is poised for similar growth, Jonas believes.

Read more: Morgan Stanley sees 'a pattern forming' of the space industry developing like self-driving cars

Musk's many projects, notably SpaceX, fueled Morgan Stanley's interest in the space industry, for several reasons.

"First, we think that the future of SpaceX will affect the future of Tesla," Jonas said. "A potential combination of Tesla and SpaceX is something we've written about many, many times."

"[Second,] SpaceX is getting into broadband" satellite technologies, Jonas said.

Take a look inside SpaceX's rocket factory
Take a look inside SpaceX's rocket factory

SpaceX is currently testing its first two of more than 4,425 small satellites for the planned Starlink network. The plan puts SpaceX on a collision course with the world's biggest telecom and satellite manufacturing companies, as Starlink aims to cheaply offer broadband speeds comparable to fiber optic networks. This could quintuple SpaceX's valuation, as the network would be able to provide bandwidth to under-served, and even unserved, parts of the globe.

Morgan Stanley has not met with SpaceX since Jonas has been publishing near-monthly notes about space, he said. "That's not because we haven't tried," Jonas added.

Deploying Morgan Stanley resources for space

Jonas emphasized the collaborative nature of Morgan Stanley's space team, which is made up of 11 analysts covering sectors from aerospace to the internet. As the the firm speaks to different company boards, Jonas said the team has found that space has been one of the industries "deeply important to various members" of companies such as Alphabet, Facebook, Amazon and Honeywell.

Along with the firm's October 2017 report, Morgan Stanley released a "Space 20" list of stocks best poised to benefit from exponential growth in the space industry.

Beyond Morgan Stanley's existing contacts, Jonas said his firm's wealth management division has also helped them get to know the companies in the industry. "So we would ask people involved wealth management 'Hey, you know anyone that has as an astronaut?' Next thing I knew we had tons of different astronaut clients," Jonas said.

"The [Morgan Stanley] network allowed us to sort of learn from our research and have conversations with people in the industry," Sinkevicius said.

The billionaire effect

Many within the space industry view the 21st century as a rebirth: Companies building rockets, satellites and more are flush with cash from private wealth and venture capital. Several billionaires are responsible for a large part of that private space revolution, such as Jeff Bezos' establishment of Blue Origin in 2000, Musk's founding of SpaceX in 2002 or the group of companies Sir Richard Branson owns as a part of his Virgin Group, including The Spaceship Company, Virgin Galactic and Virgin Orbit.

Bezos ranks highly in Jonas' view, as the Amazon founder accelerates his investments in Blue Origin. The company has quietly expanded its breadth of capabilities, from space tourism to massive rockets to propulsion to lunar landers.

"You have a company led by a guy who folks like Warren Buffett hugely respect," Jonas said.

Read more: Amazon's rising stock gives Jeff Bezos 'financial muscle' in outer space equal to whole countries

"Bezos has a very aggressive and spirited philanthropic approach to space," Jonas said. "He's willing to go in and not be worried about making a profit right away."

Bezos is playing a necessary role in building the industry's growth, according to Jonas, and has the ability to rally Americans around space like they did during the Space Race in the 20th century.

"I think [Blue Origin is] his way of trying to help the country have an Apollo effect, create a sense to have more second graders want to do math and sciences, with a view on sustainability and advancement of civilization and technology – rather than just allocating capital and doing bitcoin or other things that might be slightly less noble," Jonas said.

Amazon's Jeff Bezos on why Blue Origin is his 'most important work'
Amazon's Jeff Bezos on why Blue Origin is his 'most important work'

"Jeff could really influence lawmakers, budget allocators, the president himself, to help accelerate what maybe without him would have taken 15 years but with him maybe takes five."

Additionally, there are few with more credibility than Bezos on both Capitol Hill and Wall Street, in Jonas' view.

"It's who he is and his ability to change thinking and maybe accelerate what are necessary collaborations between private industry and regulatory bodies," Jonas said.

Tackling the space industry means not being afraid to be wrong

While Morgan Stanley's clients are slow to embrace space as a place to invest, the group has pressed forward.

Read more: Morgan Stanley can't get clients to care but it thinks investing in space will be a very big deal

"We're just not afraid to take views. We're not afraid to be wrong," Jonas said. "And if we're wrong then maybe you derive some value from the conversation. But if we're right – and we're the only ones talking about that topic or one of the only ones – then we [own] the market."

Even Morgan Stanley's sales team is beginning to grasp the change happening in the space industry, Jonas said. He says the firm's sales representatives told him "listen, when you published this stuff a year ago we were thinking: 'What's going on here?' But we see it. We see it forming and we're with you.'"

Blue Origin to make rocket engines for Lockheed and Boeing
Blue Origin to make rocket engines for Lockheed and Boeing

The prioritization of space among "competing economic superpowers" is a common theme according to the national security experts who Morgan Stanley talks to regularly, Jonas said. He said the space team has asked Morgan Stanley's intelligence contacts whether the U.S. or China "is more likely to put boots on the moon the next time."

"We usually hear China," Jonas said.

Jonas laid out a thought experiment for what the U.S. response might be "if China went to the moon in five years, planted a flag and said 'we're staying and we're mining water to make fuel.'" He doubts the U.S. would just brush it off, saying "you guys are slow."

More likely, China putting astronauts on the moon would be "Sputnik on steroids," Jonas said, a reference to the U.S.'s 1950s-era competition in space against the Soviets.

Read more: Air Force general says China is advancing in space five times as fast as the US

The space industry needs a catalyst or two if it is going to become the exponential growth driver Morgan Stanley thinks it will be. A well-executed China lunar mission would be one such inflection point, Jonas thinks. Additionally, the launch of a satellite constellation by "an Apple or an Alphabet or an Amazon" would also "go a long way to accelerating the market's appreciation of this stuff," Jonas said.

"Space is more real than autonomous right now," Jonas said. "It exists, it functions, it generates revenue."

The multiple broadband satellite constellations in development could have a massive second order impact for the industry, according to Sinkevicius.

"If you get more eyeballs on the internet then you know what happens to the likes of Amazon," Sinkevicius said. "When you start attaching the Amazon, Facebook, Google effect to putting more eyeballs on to the Internet you know that was roughly a third of our $1 trillion-plus-based economy."

Overall, there's a steady realization that the space business is "very interesting and frankly fun," Jonas said.

"When we published the piece [in October 2017] we had some folks internally say 'do you realize what you've just done' but they said that in a way like 'this is phenomenal, you've just opened Pandora's Box here," Jonas said.

"It was almost like the more we looked, the more we found." Jonas added.

Read more: Morgan Stanley says 2019 could 'be the year for space,' led by the likes of SpaceX and Blue Origin