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On this episode of On The Tape Guy, Dan and Danny discuss D-MO’s Twitter thread about the market (0:00:58), European banks in turmoil (6:30), and stock market volatility (12:00). Later, Dan and Guy go “Off the Tape” with Michael Mealling, General Partner at Starbridge Venture Capital, to discuss investing in the space industry (16:00).
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Show Transcript:
Guy Adami: [00:00:01] First Monday in October, folks, a special edition of the on the tape podcast. Dan Nathan We’re also joined by Danny Moses, who was exercised over the weekend not because of football games, but because of what he was seeing in the markets and some of the headlines that dropped. Later, we’re going to go off the tape with Michael Mealling of Starbridge Capital early venture investors in everything space. It’s going to be a great conversation. I’m looking forward to it. But Danny, you were into it over the weekend and you’re clearly into it now. What did you see over the weekend that got you so animated? [00:00:35][33.9]
Danny Moses: [00:00:36] I guess after a crazy week in the markets, you get a rainy Saturday and I just had a lot of thoughts going through my mind. I figured, why not just put pen to paper or finger to keyboard however you want to think about it and just start to get some of those thoughts out. Really, for my own therapy at the same time, to make sure I wasn’t either nuts or that I’m looking at things the right way. And I think we’re past the denial stages here. I think we’re in the acceptance stages, and if we’re in the acceptance stages of where we are, what should you be looking for? What’s in front of us? I just think it was a pretty sobering last few weeks and I just started a thread and I think it was 18 parts long and then that’s hard to even put something like that together. But I just found myself going through my thoughts and my thoughts are we’re here now. We got to deal with what’s in front of us. And as it becomes clear to what’s in front of us and you see things today happening with Liz Truss kind of backtracking and trying to quote fix things. My feeling here is that things are in motion now and it’s a new, new and it’s again, I’ll just say this, I like to underwrite things in the moment and take a fresh look at them. And that means there’s buying opportunities, but it also means there’s selling opportunities and things. [00:01:41][65.2]
Dan Nathan: [00:01:42] Danny was a great thread and I think sometimes it’s really helpful to kind of see things in print up in big lives versus just the way we talk about them on a podcast. And sometimes some of the intent can kind of be lost in translation a little bit. So I thought that was really interesting. And you just mentioned Liz Truss and I think the headlines on FactSet or this morning or on CNBC is that Liz Truss, the new prime minister in Britain, is doing a U-turn. That was the term that was used a lot. She came in following Boris Johnson, what, just a few weeks ago and automatically just defaulted to what, tax cuts? I think that’s what it was. And again, the knock on effects of what a major developed nation was doing, flying in the face of what we were doing to fight inflation. Wasn’t that the issue that that was deemed to be very inflationary? So I guess the point, Danny, like you said, you like to underwrite in the moment. Do you think we are on the precipice of a major shift that would really be from us right now? We know the Chinese have been easing. We know that there’s parts of Europe that are just such in deep recessionary environments. It just seems like that’s the next shoe to drop. And I know that earlier this summer you thought we’d be by now possibly pivoting. Where are we on that timetable, in your opinion? [00:02:50][68.4]
Danny Moses: [00:02:51] Yeah. So things were going haywire already in the gilt market prior to Liz Truss making that announcement. But I think one of the threads that I wrote was that you’re now starting to underwrite on the sovereign level. You’ve got corporate debt, consumer debt and you have sovereign debt. I think the ability to just endlessly just print money to solve problems is over. And if that’s the case, then I think you’ve got to separate the stock market just one category of things and then the economy on another and your fiscal health on a whole nother and so do I think the Fed is overshooting 1,000%. Do I think that they will stop soon? I do. I think it will come in the form first of quantitative tightening, kind of backing off of that, because that will send a message to the markets that could calm the mortgage back market, that could calm the treasury markets a little bit. But again, Dan, to your question, I don’t know if it matters that much here where stocks are still valued, because I think things are in motion. Earnings provisions coming down, as we talked about last week on the tape, are going to even if it’s $220, $215 on the S&P number, I still think that there’s room for the downside here in the market so it can calm the markets here. And I said I think one of the other things I mentioned was that when you see a huge cannon being fired by the Bank of England prior to Liz Truss backtracking and it doesn’t work, it tells you all you need to know what’s in the market. So I think we’re going to have continued volatility. It’s huge economic numbers this week, including the job report. People obsess on it or a month away from the next Fed meeting. So I think a lot of volatility and pain, if you want to call it that, or opportunity between now and then. [00:04:18][87.1]
Guy Adami: [00:04:18] Everybody should go to your Twitter account and look at that thread without question. And I think you hit the nail on the head in terms of I think today this market rally is somewhat predicated on everything you just said, this bizarre hope that somehow our Federal Reserve is going to pause, pivot, announce that maybe they’re done for the time being. I think people are trying to front run that. Maybe that’ll last for a week or so. We’ll see how it plays out. But the bottom line is the Market Foundation is based on four things earnings, earnings growth, revenue, revenue growth. And we just don’t have it here to support the valuations that we’re currently seeing. So in this environment, whether the Fed comes in or not, I guess that will be take that headwind away. But it definitely does not create the tell when that earnings or earnings would growth would create Danny. [00:04:59][40.6]
Danny Moses: [00:05:00] And Guy ou just brought up a great point, because when you say earnings growth, revenue growth, revenue growth, earnings growth, now we’re starting to see the separation. It’s not just revenue growth anymore because you need to start making money. You need to not have to be beholden to the debt markets to fund your business. And that’s really what’s happening here. And again, I’ll say it, this is not a bearish I’m not overly overly bearish on everything. Things have opportunity. I think that the skill set of picking these stocks that can survive and thrive even in these type of markets, they’re always going to have those there. So that’s what I’m going to look for. And I think lists need to start being made here. And I don’t want to be the doom and gloom guy. I want to be opportunistic, but you just nailed it. And it’s not about revenue growth. That’s to me, it’s about cash flow and earnings growth. [00:05:40][39.1]
Dan Nathan: [00:05:40] Again, going back to the Twitter over the weekend where a lot of people now, if you think back to ’08, it was kind of funny. There was really no social network in which to go and do a thread and get people to share that thread or on that thread. Get things trending all weekend long. Credit Suisse, Deutsche Bank, Lehman, they were all trending at least as far as the things that I click on and the things that the algo was serving to me. But a lot of the people that I follow that I watch were talking about it. And it’s really interesting to me because and Danny, you’re the big short guy. I was at Merrill Lynch in 0708, early oh nine when it went under. I remember what September 2008 felt like. Guy You were, I think, at Drexel Burnham when that went under in the late eighties. And, you know, I don’t weigh in on those sorts of things. I remember the thousands and thousands of people whose livelihoods depend on this sort of stuff. And sometimes it’s like a snowball effect. It’s kind of like this self-fulfilling prophecy in a way. And yeah, I get it. History is rhyming a little bit. That Friday afternoon commentary from the CEO of Credit Suisse or a memo, it sounds a lot like the stuff that we saw in September of 2008. We know what happened after that. But again, I tend to be very cautious about those sorts of situations because they’re not that frequent when large financial institutions go under, I’m hard pressed to think that the leverage or the systemic risk is anywhere similar to what we saw in 2008. And I’ll just make one last point, and I know that you guys know a lot of people who worked at Lehman and Merrill and a lot of these other places back then. My experience was that there are thousands of people who are working very diligently, working very hard and take all of their responsibilities very seriously. But sometimes it’s a handful of people, and I think this is kind of the story of the financial crisis, too, that just they’re asleep at the wheel and then once things get set in motion, it’s really hard to turn it back after years of that overlooking of certain bad behavior or whatever. But that’s kind of my $0.02 here. Again, I don’t think we’re out of the woods by any means with some of these names, but let’s see how it plays out. [00:07:39][119.3]
Danny Moses: [00:07:40] Yeah, I think this is kind of like the game Whac-A-Mole. Things are popping up here and they’re nothing catastrophic. As a matter of fact, people were trying to extrapolate that there was going to be an emergency Fed meeting, which there is an unplanned meeting which happened today or is happening today that had nothing to do, I don’t think, with either cutting rates or any type. They had to announce that actually Thursday night, if you went back and looked at people, took it on Friday, but like, oh, I knew it. There’s an emergency meeting. Something’s blowing up. Well, there are things that are, quote, blowing up and breaking to a degree. But I don’t see anything systemic yet that we saw. And I remember where I was. I was on a flag football field, I think, with my kid when the Lehman News started to hit the wire. And it wasn’t overly shocking. What was shocking, again, I put it on my thread, was the lack of understanding that the government had in the depths, which they didn’t understand it. I don’t think that’s the case here. I do think that, again, we have not cleared free market prices of what we should have from 2009. And you’re seeing, I think, remnants of that. But thankfully the US banks at least appear to be safe and they will have losses and various things here and there, but they’re very well capitalized. I don’t see a run going on any of those big banks. If there is a European bank that does have some issues, hopefully can be solved without anything major. But again, I think it’s a sobering moment and wake people up that we’re in kind of a new era. So I know Guy saw a lot of things. I mean, I was at Oppenheimer in late nineties, early 2000, saw the tech bubble work. The Blodget You get a little piece of that. I was at Freeman Billings in 2000, three, four and five, watching them build a lot of these subprime companies. Then fortunate enough to be with Steve Porter and Vinnie in oh six to watch a front row seat, for better or for worse, a front row seat to what was happening again. I say that this cycle is a lot like all of these other cycles put together, and you just got to understand how investors will or will not react certain news items and they’ll overreact at certain times so. [00:09:25][104.8]
Guy Adami: [00:09:25] Got a little piece of everything obviously today. And I think you make a great point, Dan, but just let me say, you know, Drexel bankruptcy February of 1990 and everybody thinks it’s the entire firm. I think you made a great point. It’s not. I will tell you, think about AIG during the financial crisis. People want to put a bull’s eye on the entire firm. It was literally a half dozen, maybe ten people that were responsible for effectively the fall of AIG, the subsequent collapse of what we saw there, and all the ancillary knock offs around it. So it’s not entire firms, but you’re going to hear a lot about systemic over the next week or so. If you watch CNBC over the course of an hour, my sense is you’ll hear that word 12 to 15 times, and that’s probably right to ask the question. My concern about Deutsche Bank has been well-founded for years now. The fact that they probably have the biggest derivatives book in the history of mankind, and that seemingly is problematic, again, not necessarily systemic to other banks, but who knows what’s going on on the sovereign front. So there are a lot of things to be concerned about. I think this market bounce we’re seeing, again, maybe we’re bit oversold. Maybe there’s some hope that this Fed pause has a lot of things in the kettle. We’ll see, though, how things shake out at the end of the day danny. [00:10:35][70.0]
Danny Moses: [00:10:36] Listen, it’s one thing and one thing only. It’s leverage. You can really only have systemic problems if you have leverage, if you can’t lose more than what you put up. It’s not systemic. It’s the leverage in the system again, that’s out there and there is a lot of it. So we have to get through it. And heightened volatility creates that leverage to kind of bubble over and show in rear its head. And that’s really all we’re seeing. So again, if you own a stock in a company or you’re trading a commodity or sometimes it’s just counterparty risk that you might be dealing with, it had nothing to do with the fundamentals of that product. [00:11:04][28.6]
Dan Nathan: [00:11:05] Yeah, well, let’s bring it back to the stock market. We only have a couple of minutes left here, by the way. Stick around for this conversation that guy and I had with Michael Mealling. I mean, if you are into sci fi stuff and I think guy, we didn’t really kind of hit on this as much as we should have whether he was more of an Armageddon or deep impact guy. But these guys over at Starbridge, I mean, they are investing in some stuff that kind of the makings of sci fi movies that we are going to see in our lives in our lifetime, which is pretty cool here. So that was pretty cool. Let’s bring it back to the market here. There was that big up day last week, I think it was Wednesday, where I think the Nasdaq was up two and a half percent. The S&P was up 2%. And I think all of us were talking in our chat. We’re like, not particularly impressive Guy. You thought maybe we get going to four or 5% rally, but that might be the sort of thing that you lay in to take some profits. It’s interesting that today, given everything that we just talked about, all the doom scrolling that we did all weekend long about the banks and the systemic risk, and there was a lot of what felt like to me misinformation out there. I look at this gap opening today, but then I’m looking at the stocks that I look at, that I trade, that I’m thinking of that are going on my list. Danny And I’m looking a lot of these higher valuation tech stocks getting hit right out of the gate here. I’m seeing Netflix down, which had a huge week last week, things like Lyft and Airbnb. I’m seeing Snowflake down 4%. A lot of these SAS names are getting hurt. And I just wonder if we start to see that start to snowball a little bit. And then when you think about this, I think we mentioned this on Fridays pod, the fact that the ten year not only is not rallying, it’s now coming in. I have it at three, six three. It was at 401. And then on a day that we see crude oil up 6%, isn’t that, Danni, the definition of stagflation that you’ve been talking about for a very long time? And if you’re just looking at your main page, which I am of Factset, the things that are getting hardest hit are the things that you would think should get hardest hit in the stagflation environment. And then I’ll throw in your meme stocks, too, buddy. [00:13:02][117.3]
Danny Moses: [00:13:03] Yeah. Listen, I’ll keep saying it’s quality. Use rallies to sell the crap and to upgrade your portfolio. And I think you’re seeing that that’s somewhat healthy. But Dan, there’s so many things that have to go right to have a sustained market rally. Oil needs to be flat or down to feel good about inflation and the consumer rates need to come down but not crash down because that indicates something else. So that’s just what we’re in right now. And so you got to be nimble here and you got to be smart. And I think certainly you would people I think for the last six or seven Mondays, it feels like or four or five of the last 6 to 7 Mondays, it’s like, all right, is this Monday going to be it? Is this the crash Monday that’s coming in and maybe it’s not selling off so much? Because I think we had a lot of redemptions which had to get taken care of at the end of September for a lot of funds. And so people, I think, took down their net in gross positions. And so you’re right, people are probably under-invested, but they don’t know what to buy. And this is going to be like this for a while so. [00:13:54][51.0]
Guy Adami: [00:13:54] The relevance of OPEC is not lost on me. Again, obviously, you mentioned energy. I look at the market today and say, okay, it makes sense that gold is higher because there’s this thought that maybe the Fed is going to pivot. But the one thing that sticks out to me is fact that Bitcoin is actually lower right now that does not speak to a Fed pivot anytime soon. So we’ll see how it plays out. Still a lot of time in the day. I think this is a rally that you want to probably fade at some point, specifically today, if not over the next couple of days. We’ll see how it shakes out Danny. [00:14:21][26.5]
Danny Moses: [00:14:21] Yeah, just we need to mention it’s not a Tesla rant, but they did miss their delivery number. They’re blaming logistics and all that stuff. And that being the king of the memes and king of stocks that don’t trade on fundamentals Dan that’s going to add to that whole group you just mentioned about that’s not rallying. And so it’s worth noting and that is breaking down now. And again, maybe we’re getting better news now of this, because I’ve always said that needs to go Tesla in order to think that we’ve clean things up. So that’s a big deal, too, and I don’t think that should be lost on this market. [00:14:47][26.2]
Guy Adami: [00:14:48] When we come back, a conversation with Michael Mealling of Star Bridge Venture Capital. Michael Mealling is general partner at Starbridge Venture Capital. He’s also co-founded Masten Space Systems with CTO of Seed Stage, VC Fund Seraph Group and served as president of the Moon Society. Over his career has helped build several startups, ranging from telecom consulting to social media. We’re thrilled to have you here with us, Michael. So let’s get right into it. I mean, Starbridge is a fascinating company, but obviously a lot has gone into the founding of that. Can you speak to the founding of Starbridge, how you got involved? And let’s just talk about the company a little bit. [00:15:34][46.3]
Michael Mealling: [00:15:34] Sure. So Starbridge was founded by our founder, Steven Jorgensen, back in 2017. And he and I had met up at a conference that year, and I had just left a venture fund down Atlanta General Tech Fund. And we were looking around the industry at what existing VCs were investing in and were not investing in. And Steven and I had been investing at the angel level in the space sector going back to 2004. And we were seeing that existing VCs for not being able to do a lot of the due diligence that was kind of sector specific and were missing out on some deals and companies that we felt should be able to raise their series A’s weren’t with typical VCs. And so we looked at each other and said, maybe it’s time for a space focused but very typical venture fund focused on investor returns, nothing that really goes outside of our typical VC timeline, very prototypical VC, but focused on the sector because we knew how to do the due diligence we had the network and everything like that. And so we started in 2017, in our first two funds or second fund closed at the end of last year. And now we’re raising our third not getting too much into the details of performance, but we’re doing quite well. We’re in some of the headline companies, Axiom Space Building space stations link global doing cell phone towers and space direct to cell phone and doing it a full year and a half before Space X or have done it. And a company called Umbra was doing since Aperture Radar. And those are really top three performers. And we’re looking at 70 X multiples territory on each one of those. So yeah, we’re doing quite well and now we’re growing up quite a bit. [00:17:19][105.0]
Guy Adami: [00:17:20] You and I had the opportunity to speak and will link that interview because it was fascinating. But so much has changed not only obviously in landscape, the economic landscape here in the United States and globally, but in terms of space and all the investment opportunities around it. So much has changed over the last 11, 12 months. Can you speak to that? [00:17:40][19.8]
Michael Mealling: [00:17:40] Sure. There’s a lot of things have changed. This SPAC market that I think we discussed at the time is definitely changed. We actually see now some companies in the sector, there’s really a differentiation between the companies that that and the ones that are performing and the ones that didn’t. The sector is now getting into what I call hyper competitive hypergrowth. We are seeing some companies now really hitting the NE in the curve of their growth cycle and are seeing a lot of the same challenges that anyone going through a hyper growth phase of the company see. Access to talent is one of the biggest issues really across the entire economy, but especially in the space sector, having a hard time finding enough employees. That’s one place where our current market and recession has really helped some of our companies be able to acquire talent from companies that are doing layoffs. The Earth observation market is really starting to mature. Situation in Ukraine has created almost an insatiable appetite for Earth observation, both from the DOD, but also other countries around the world. The communications market has really started to change the announcements just in the past month from both SpaceX, T-Mobile, Apple and Globalstar. And then a lot of the deals that companies like LinkedIn, the ASCs mobile are doing, the direct to device market is really starting to heat up. So yeah, it’s becoming quite difficult to keep track of what’s going on. I’m doing our weekly newsletter right now and that’s turning into about 6 hours worth of work just to keep track of what’s going on. [00:19:13][92.9]
Dan Nathan: [00:19:14] Michael, we’ve checked out some of your newsletters and it really reads like sci fi stuff here. And it’s kind of fascinating to people like Guy Adami and myself who’ve spent the better part, let’s call it the last 15 years. And some of the stuff that we track for CNBC and we talk about daily. And when you put it in any sort of context relative to the businesses that you’re investing in talking about mobile social apps or, you know, some other kind of it just seems a bit goofy. And so how did you guys this is taking a step back, going back to the founding of this. What was so attractive about space to you? Because you really had an investment thesis, you really had to think beyond the here and now and the things that are on your smartphone or on your wrist. You’re thinking about an addressable market that most investors are not even considering yet. [00:19:58][44.4]
Michael Mealling: [00:19:59] So Stephen is a recovering hedge fund manager. I think there is an actual 12 step program. And I’ve came from the Internet business in the nineties and going back to The Innovator’s Dilemma and Clayton Christensen in Disruptive Technologies coming up from below. And in the late nineties and early 2000s, I kind of pivot away from the internet and was reading, looking at the hobby space industry and what was going on you know out in the BlackRock Desert with a bunch of crazy people flying rockets, and what I noticed was that lowering cost of technology was allowing not government companies and people to do things that just two decades earlier only governments were able to do. And it was that same thing, the technology curve. And what can be done was allowing the space sector to do the things at costs that made it something you can now do commercially. So it was a combination of two things the lowering of launch costs because of what SpaceX is doing and Rocket Lab and some of the other companies that are following along behind them, but also the miniaturization of the electronics and everything going into the spacecraft. So instead of building literally bus sized spacecraft from Boeing for Geo Sync satellites, we’re now doing spacecraft that are size of small refrigerators. And those two things together has caused an entire order of magnitude, maybe two orders of magnitude shift in the cost of doing things in space and going back to any kind of business research. Any time you change the fundamental pricing structure of a sector by an order of magnitude and even to. The innovation just flows. And so we were seeing that in 2017, especially with what space sector was doing exactly. We now’s the time to get in because we know what the capabilities are if you can just make it cost effective. And we saw those two curves kind of hitting and so that’s what got us into it. [00:22:01][122.7]
Dan Nathan: [00:22:02] Tell us a little bit about what will be a seminal moment for, let’s say, investors like us normies. Okay. You guys are obviously very focused on the space. You’re tracking it very closely. But at some point there’s going to be some pendulum shift where a broader set of investors, both institutional and then obviously retail. Will it be a SpaceX IPO or some sort of big M&A or some massive government contract or something? Give us a sense of like how we should track this space, because right now there’s not a whole heck of a lot other than some really megacap defense companies here that probably are doing things on the edges of this. But it’s not the core of the business driving their business. That’s something that investors are there for. So just curious, what are some things that, let’s say retail investors or listeners of this pod who are not focused on this area should keep an eye out for. And it will really mean that the space industry, if you will, and I know that’s a really broad concept, will be here to stay. This is going to be an investment vertical that both institutions and retail need to pay attention to. [00:23:05][62.9]
Michael Mealling: [00:23:05] I think you hit it. It’s the M&A and the exits that we’re looking for as a VC. You look at what you invest in, but you also then especially at this point, we’re getting in for fund one and two, especially for Fund one we’re getting into our harvest period. So I should be getting exits right about now and we are starting to see the movement around that. You’re starting to see some companies, especially Rocket Lab and some of the rocket companies, because the rocket business is very low margin, a lot of risk, a lot of capital. And so you’ll see companies go, now I’ve got the rocket, I’m in control of my own fate. I’m going to go acquire companies. You see Rocket Lab doing that? That’s one of the reasons why I think about all the stacks of the better performing ones. We’re also looking at Axiom, one of our portfolio companies has always said that they’re planning for a traditional IPO around the time they launch their first module, which could either be 2025 or six, which I think is actually now looking more like late 24, not putting words into the company’s mouth, but where I think you’re going. So I’m looking for that big IPO and I’m looking for some M&A and I’m starting to see some green shoots in that right now, especially given where the markets are at. I mean, nobody wants to IPO in a market like this, but there’s a lot of M&A opportunities. [00:24:19][73.2]
Dan Nathan: [00:24:20] One of the things that I find really interesting in our lifetime, NASA has had huge fits and starts go back to the eighties and when we’ve had manned missions that have very sadly blown up, it really set NASA’s back for many years. Is that continue to be the risk in the private sector here? And how close are we to getting to some manned private? And I know that there’s been some around the edges here, but really when we’re talking about to go back to the moon, is it going to be driven by the private sector ultimately? And what are the risks in investing in around these sorts of things? Because if there was a manned disaster, would that put a company out of business? [00:24:57][37.0]
Michael Mealling: [00:24:58] That’s a great question because it’s one that we sort of struggle with we think a lot about because VCs, because our fund timeline is ten years and we have to look at we’re not the where the market is at right now, but where is the market going to be in years six, seven, eight, when I’m expecting to sell these companies? And even then, in order to be able to sell that company, someone else has to be able to realize an additional gain once they acquire that company to go further. So we think in more decadal kind of timeframes. And so I’m looking at where the market is going to be in 2028 and even 2038. And we do see some risks around relying solely on NASA led anything beyond geosync and that’s anything really the moon. Currently, we don’t look at anything beyond geosync orbit for investment because I can’t currently see who’s going to lead those business models and how those business models work. And we’re out talking to NASA’s and talking to Congress and talking to these companies about this cannot be a government only project. And really what drives it is human spaceflight. That’s the key thing that needs those resources, that really inspires people. And there’s really a demand, if you look at Jared Isaacman and what he did in the inspiration for Flight and now doing in the Polaris Project within Space X, they just did a proposal to NASA yesterday to at no cost to NASA to have a space flight, a crewed space flight run by Jared as a pilot to reboost the Hubble into a higher orbit. And that’s the kind of thing that we’re looking at, is why is that happening? Who’s paying for it? Where’s the money going to be made in that? And that’s where we’re really thinking that the commercial Leo Destinations program with NASA that has both Blue Origin, which is Jeff Bezos’s company, Sierra SpaceX, building their space stations. Acxiom has their station. It’s those destination locations for where people want to go to and have the resources and the experiences and the facilities that are going to really engage that human spaceflight component that we’re looking at. One of the real drivers for developing what we call Cislunar Space, Earth and the moon and then beyond, because it really is the human experience that does drive this. [00:27:24][146.3]
Guy Adami: [00:27:25] This time last year, everybody was talking about Nvidia being the next trillion dollar company. Obviously, that didn’t come to fruition there, 65%, I think lower than that ish. Not that that’s all that interesting, but potentially. And there have been people that have said to us, I’m curious, your thoughts, is SpaceX that next trillion dollar company? Because if you think about all the things you’ve said over the last 15 minutes, it sort of lines up. [00:27:45][20.7]
Michael Mealling: [00:27:46] I think you have to separate SpaceX and StarLink because at some point Elon definitely intends on IPOing StarLink. He keeps moving the timeline on that because I think about six months ago he said it’s another two or three years before he does that because most of the investors are looking at him doing that right around now. When you talk to people who invest in SpaceX, they really do separate StarLink from SpaceX itself because they are investing to be able to get a return on that StarLink IPO and the cash cow that could end up being just by getting everyone connected, really high speed broadband speeds. But they’re also looking at, depending on how Elon decides to spin out StarLink, they still want some ownership stake in Space X because they’re also thinking in very long term ownership of that company. As several investors have said to me, I intend on passing this on to my grandkids. So it’s a different investor profile. [00:28:45][59.0]
Guy Adami: [00:28:46] We all watched Michael Strahan, Jeff Bezos go into space. I mean, it was really riveting television, without question. And I’m sure you guys watched and that was Dan mentioned seminal moment. I mean, that is a sort of seminal moment in the sort of good news, bad news. And you mentioned the hyper competition you’re facing, but that proof of concept also drives up valuations and it makes your life, I think, much more difficult. I think you have to be much more discerning in this environment. So, yes, it’s great that these things are happening, but holy shit, now we have a lot of people trying to get involved. Valuations are going up. How do you sort of wrap your head around that? I’m sure it’s challenging. [00:29:23][36.8]
Michael Mealling: [00:29:24] It is. It’s challenging to tamp down some of the expectations of seed. Most of these companies are very hardware. And today you can’t compare that to a SAS based company. This looks a lot more like the venture world, pre-internet. And because of that SAS model expectation of returns and multiples, you have to get nontraditional space investors to understand this is not like what you’re normally investing it. You have to understand that the valuations now, the SPAC situation that we had over the past couple of years is also caused a lot of premature expectations of exits and performance of those exits. And that’s become one of the challenges we have is getting people to understand you have to be patient, you’re not going to get returns on these things within a couple of years. And really, that’s more about investors looking at the space sector and realizing the only way to get access is to venture capital. And so we have a lot of investors who are not typically VC investors, and I think that’s where the challenge comes from. And I think this market correction is also flowing all the way down the capital tree down to the private side. People are realizing some of those multiples were a little unrealistic. So yeah, I definitely agree. It’s a challenge. [00:30:34][69.9]
Dan Nathan: [00:30:35] But as an investor, Michael, and again, you just spoke to the SPAC craze and how it was really going after some of these technologies where there weren’t profits and you had to have a long term time horizon. And so that worked great. And is your interest rate environment where there was plenty of exuberance about massive tams and no one was concerned about profits? But talk to us a little bit because again, this is seems like the sort of industry when you go back and I know you were again in VC during the financial crisis, think about the convergence of mobile and social and broadband and SAS capabilities in and around those technologies. And we’ve seen hundreds of billions of dollars of market cap kind of borne out of that period. Are you looking at a potential downturn economic global right now is probably a good thing. It’s going to bring some, I don’t know, rationality to valuations. It’s going to reset the minds of some founders here a little bit and what they think they can do. But for you as an investor, I have to assume that as an early investor in this related space, space, space, I just coined something. The space space. [00:31:41][66.2]
Michael Mealling: [00:31:41] No, it’s a. Quite a common thing that we all kind of chuckle about all the time. [00:31:44][2.6]
Dan Nathan: [00:31:45] Dang. But in the space space I have to think that ten years from now, 15 years from now, Guy just asked, will SpaceX’s StarLink be $1,000,000,000,000 market cap? What do you think the market cap will be of this space once you have these exits and you’re going to have defense companies spin out some of these groups and all that sort of stuff? Are we talking about a scenario where we could have the next Apple or Amazon or Alphabet? These are all multitrillion dollar market cap companies. Talk to us a little bit about that. [00:32:12][27.2]
Michael Mealling: [00:32:13] Even within our portfolio, we have one company that I think is going to be on the order of what, Raytheon or Boeing. There’s a lot of disruption and a lot of the larger primes and typical large aerospace companies that you think about really aren’t equipped. And this is really is a period of creative destruction going on and a lot of our traditional companies can’t really keep up. And so in the defense and the other types of signals intelligence and those applications, there’s a couple of companies that I think are going to tear through that market depending on what the inflation rate ends up being. When you say $1,000,000,000,000 company and you’ve got a 8% inflation rate over ten years, it’s a different number. But yeah, I definitely see that. One of the things that if we go back about four or five years, Merrill Lynch and Morgan Stanley put out these two projections for where the industry was going to be. And I think it was Morgan Stanley predicted $1,000,000,000,000 market cap for the entire sector by 2040. And when you did the math, actually, it turned out to be a fairly meager seven and a half, 8%. But the one that struck us was the Merrill Lynch. One way it’s a $4 trillion economy in the space sector by 2040. I think it’s actually more going to turn out, I would say, around a to two and a half trillion market by probably the end of the decade, middle of next one. That’s really going to be driven by some of these large IPOs that are going to happen. And there are a lot of companies that are almost in a given class. They all started around the same time. They’re all the same level of deployment. I’m looking at my own portfolio. I have got four companies all deploying constellations at the exact same time. I was in a strange situation of one SpaceX flight, had three of my companies on that one launch. And no, that’s not concerning when you’re looking at the launch. So yeah, I really do expect over the next 3 to 4 years, as those constellations get built out and some of these companies like Axiom, you start seeing hardware being flown in these new space stations from Blue and Sierra. Yeah, I really do expect $1,000,000,000,000, I think is the minimum. [00:34:22][129.1]
Guy Adami: [00:34:23] 24, 25 years ago, there were a couple of movies that came out Deep Impact Armageddon with Bruce Willis, which, by the way, I totally dig that movie. And you have Bruce Willis up there on an asteroid, basically drill in a hole and it seems preposterous, but as it turns out, it’s not preposterous. We have a lot of talk about drilling for rare earths and precious metals and stuff in space. But what we’ve talked about prior and what I’d love for you to sort of amplify is space is not necessarily what we think about Earth is part of space. And some of the technologies that are being deployed there are actually being deployed here. And you have opportunities right here on earth. [00:35:00][36.8]
Michael Mealling: [00:35:01] Right. And that’s one of the core theses of our fund. So bad use of the term, but we use dual use. So we like companies that have both terrestrial markets and space markets and we like companies where they test out their technology and they find markets on the earth that prove out their technology. But then they’re ready and waiting for the space markets to be able to develop enough that they can then move into that additional market. So a good example is a company called Offworld, the idea of mining an asteroid technically possible, but the costs of doing that make it noncompetitive. If you want to bring that material back to the Earth, it’s really difficult for space supply chains to compete with a hyper optimized, earthbound supply chain. But if you wanted to mine something in space, you would have a design that was built to be autonomous, no humans involved energy efficient and something that could be sustainable without human interference for a long period of time. And if you do a clean sheet design about what mining in that situation might look like, and then bring that back and look at the existing mining industry, you now have the ability to go in and say, I’m going to take a a mine and I can reduce the operational expenses for operating that mine by 40%, reduce the electricity input to running that mine by 60%, reduce the tailings and the environmental impact by over half. Because you’re not building a mine, you’ve got to have people in it. The mine may end up being only a meter. Hall because the only thing that’s inside of it is a robot, and that is allowing offworld to go into the mining industry and revolutionize things. And it’s using the environment of space to drive the engineering, the drive, the requirements. And then when you think about the Earth is simply just a planet in space like any other body, whether it’s the moon or Mars or whatever. You take those same technologies and you bring them back to the earth, and you can really revolutionize industries, whether it’s Earth, observation, telecommunications, position, navigation and timing. There are companies out there that are working on commercial versions of the GPS system that get you down to accuracies less than a millimeter. You can tell whether or not the location between something is less than the width of your own finger. And that’s revolutionizing a lot of things that we’re going to do in supply chains, automation, terrestrially. So, yeah, a lot of things, things are really, really dual use and that’s where we expect to get a lot of value. [00:37:45][164.5]
Dan Nathan: [00:37:46] All right, Michael, you just mentioned mining. And so when Guy and I think about some of these megatrends, especially the ones that are playing out in the private markets, we think about what are some ways to express a view through picks and shovel in the public markets? What are some companies that are already doing some of the stuff that will lead into the proliferation of a theme like this? So. Question Is it machine learning? Is it robotics, which you just mentioned? What are some other things investors in public markets could keep an eye on and think about as an investment theme in and around space? [00:38:13][26.8]
Michael Mealling: [00:38:14] The picks and shovels kind of discussion in this sector is a little difficult because you’re getting a trend where companies really do start vertically integrating to be able to reduce their costs. Space X really kind of demonstrated what vertical integration can really do for you. You’re essentially in charge of your estate. That said, one of the critical areas that people depend on are solar panels, because when you’re in space, you need electricity and the only way you’re going to get it is either through solar panels or we’re actually seeing a small trend toward nuclear as a way to be able to create dense power in space. One of the challenges for a lot of nuclear power companies in space is access to the raw materials, the uranium and plutonium, things like that. There are a lot of components, but one of the things that the industry is really trying to do is get away from bespoke space rated components and getting to really off the shelf stuff. So the drives back to terrestrial markets again, the existing companies, you know, of chip manufacturers, companies that make special alloys, specialized hardware, things like that. It’s really the same companies within the sector. Most of the opportunities when it comes to the picks and shovels is going to be private, but they’re going to be rolled up. I think Rocket Lab, the way they use the proceeds from their IPO is that to acquire parts of their supply chain to do that vertical integration. And so I think what you’re already seeing is some of those components within Rocket Lab they’re now making available to other people. So that’s an interesting play. I think that’s one of the reasons where a lot of people are looking at Rocket Labs numbers and seeing they’re making revenue from places other than launching rockets, which I think is a healthy thing for them. And again, some of the primes out there, the Boeings and the Lockheed and the Raytheon and those guys, I think they’re also going to be benefiting from a lot of this because it lets them do things that on their own. And the government really is encouraging the primes to start acting more commercial. I do have to give both Lockheed and Northrop Grumman a lot of credit for starting to think hard about how to do that. [00:40:20][126.0]
Guy Adami: [00:40:21] You think about the landscape right now, Michael, in the final couple of minutes we have. I’m not suggesting this is sort of an alternative investment, but definitely not correlated, I would think, to the market. So what do you want to say to some of the investors out there? How are they going to find you? What should they be looking for? Just sort of finish up with those thoughts. [00:40:37][16.3]
Michael Mealling: [00:40:38] Sure. The question we get a lot is how is the space sector performing in this kind of economy right now? And honestly, it makes it easier to hire employees. But beyond that, we’re so uncorrelated to the consumer facing rest of the public markets that it’s not really affecting us all that much. Our time periods for doing things, projects, going to market plans do also stretch over short term kind of fluctuations in the rest of the economy. So in that sense, it’s not affecting us that much. And so the easiest thing for people to get an idea of what the sector looks like, just go to our website, StarbirdgeVC.com and check out our portfolio. There are other central funds out there in the sector. There’s probably about six of us right now. We are now starting to see the first space venture funds in Europe, which is an interesting trend. It is a global market. We have investments in Canada, UK, and we’re looking for it in Southeast Asia and the rest of Europe. I would highly recommend if somebody is interested in the sector, learn a lot about it. It’s something that you can’t just jump into. There’s a lot of things out there that they sound good, they sound futuristic, but the markets for them simply don’t exist yet. So there is a lot of risk involved. And that’s why find somebody who knows what they’re doing and talk to them about it. [00:41:52][74.4]
Guy Adami: [00:41:53] Fascinating conversation, Mike. I’m glad we spoke again a year later. We look forward to see you in January at the AI Connections Conference and thanks for your time, Michael Mealing from Star Bridge. Great conversation. We’ll talk to you again soon. [00:42:04][10.9]
Michael Mealling: [00:42:04] Thanks a lot, guys. [00:42:05][0.4]
Guy Adami: [00:42:06] Thanks once again to CME Group and AI Connections for sponsoring this episode of On the Tape. If you like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we love hearing from you can also email us at on the tape at risk reversal. Dot com any time. Follow and connect with us on Twitter at on the tape pod and we’ll see you next time. [00:42:30][23.5]
Dan Nathan: [00:42:31] On the tape is a risk reversal media production. This podcast is for informational purposes only. All opinions expressed by me and Nathan Guy, Danny, Danny Moses and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [00:42:31][0.0]
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