What rising interest rates mean for the cluster of newly public space stocks

Published Sat, Jan 15 20229:37 AM EST

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

The past year saw a flurry of space companies go public through SPAC mergers, giving investors new options to trade the growing industry. But the beginning of 2022 has not been kind to the stocks of many newly public space companies, with several down 20% or more in the first two weeks of the year. Technology and growth stocks – especially companies whose profitability is years away, as is the case with several space ventures – have been hit hard . The Federal Reserve expects at least three interest rate hikes this year . These high-growth stocks are being punished because rising interest rates reduce the value of the companies' future cash flows . Here is what analysts told CNBC on the changing market environment and its impact on the space sector. "All stocks benefit from low rates, but pre-revenue companies especially so," Renaissance Capital senior portfolio manager Matthew Kennedy told CNBC. Renaissance is an investment bank that specializes in emerging markets and public listings. "These same companies have been getting hit especially hard as that trend reverses … [and] unprofitable companies really live and die on the availability of capital," Kennedy added. Six newly public space stocks are down at least 15% this year: BlackSky , Virgin Galactic , Astra , Spire , AST SpaceMobile , and Rocket Lab – all of which are years from profitability. While not hit as hard, Mynaric , Momentus , and Virgin Orbit represent three more space companies that are similarly speculative trades. "They're pretty much all going to need funding," Cestrian Capital Research founder Alex King told CNBC. He is the founder of the Newport Beach, California-based firm, which focuses on analyzing technology and space companies. In connecting space stocks to the changing rate environment, King emphasized that he sees the largest factor as "the tightening of hedge fund leverage," which he said "probably has caused, and may continue to cause, pressure on growth stock valuations." "You've got a bunch of space companies that even three or four years ago would be venture capital portfolio businesses," King said. "In red-hot markets, everyone wants to be a venture capitalist. And then when markets turn, nobody wants to be a venture capitalist." Likewise, Kennedy emphasized that investors in space companies "need to expect these ups and downs" due to speculative trading. The upside While "a lot of these companies made some very bold claims" about growth, Kennedy said "I don't think they were lying about the market opportunity." "The size of the market is still there," Kennedy said. "The space sector isn't going away." For King, rising interest rates are a secondary concern at best for space investors. Extending the venture capital analogy, King sees the fresh batch of space companies as likely to have "a small number of big, big winners" and "a long tail of underperformers." "If you pick the right companies, now is not a time to be afraid of [rising rates] – now is the time to seize the opportunity and accumulate those stocks at low prices," King said. King's firm Cestrian has Rocket Lab and satellite specialist Spire Global as two top picks. Like Morgan Stanley, which earlier this week called Rocket Lab "a SpaceX alternative," King sees the rocket builder as having a strong foundation and an innovative management team. "If SpaceX was public and it had been beaten up, it would be a great time to be hoovering up that stock with both arms," King said. Additionally, Renaissance's Kennedy said that "a bit of fear can be a good thing in the market." A more challenging environment for raising capital "forces companies to operate as efficiently as possible." But that is a double-edged sword for some businesses that went public when capital was easy to access. "The weaker players will go out of business or be acquired," Kennedy said.

Virgin Orbit's modified 747 jet "Cosmic Girl" releases the company's LauncherOne rocket for a mission on January 13, 2022.

Virgin Orbit

The past year saw a flurry of space companies go public through SPAC mergers, giving investors new options to trade the growing industry.

But the beginning of 2022 has not been kind to the stocks of many newly public space companies, with several down 20% or more in the first two weeks of the year.

Technology and growth stocks – especially companies whose profitability is years away, as is the case with several space ventures – have been hit hard. The Federal Reserve expects at least three interest rate hikes this year. These high-growth stocks are being punished because rising interest rates reduce the value of the companies' future cash flows.

Here is what analysts told CNBC on the changing market environment and its impact on the space sector.