Terran Orbital Stock: SmallSat Company Big on Defense

Just when you thought it was safe to go back into space, there’s been another SPAC attack. NewSpace company Terran Orbital just announced plans to go public by merging with a special purpose acquisition company (SPAC). We had finally finished slogging through a dozen shiny investor decks, starting two years ago with space tourism company Virgin Galactic, and culminating in September with our coverage of Satellogic, which is one of several companies trying to turn a profit by collecting and analyzing Earth imagery from space.

We could finally publish a nice, clean table with two columns:

Virgin Atlantic AST SpaceMobile
Momentus Astra
BlackSky Rocket Lab
Spire Global Redwire
Arqit Planet Labs
Virgin Orbit Satellogic

Now we’re up to a baker’s dozen of space SPAC deals with Terran Orbital stock.

About Terran Orbital Stock

Click for company website

Founded in 2013 and based in the very kosher town of Boca Raton, Florida, Terran Orbital Corporation has only raised $43 million in disclosed funding from just a few names. But there are a couple of heavyweights among them – Goldman Sachs (GS) and Lockheed Martin (LMT). The latter is especially noteworthy because the defense giant is an investor, customer, and major strategic partner. The partnership with Lockheed is also related to Terran Orbital’s connections to the U.S. government and particularly the Defense department, with several of the company’s leaders retired military. That’s both a pro and a con for us, as we’ll discuss further below.

Tailwind Two Acquisition Corp. (TWNT) is one of more than 500 SPACs fishing for a merger. It dangled $345 million at Terran Orbital, which was good enough to land a deal. Lockheed and other existing and new investors, including AE Industrial Partners, are kicking in another $125 million. The “new” company would be worth about $1.6 billion at closing.

The Small World of Outer Space

AE Industrial Partners is a private equity firm that founded another space company called Redwire (RDW) that went public through a SPAC merger earlier this year. The Florida-based company is acquiring its way into the commercial space race with a diverse portfolio of companies focused on in-space manufacturing. Case in point: Just this month Redwire acquired Techshot, an aerospace biotech company whose 3D bioprinter is used on the International Space Station. 

Why is any of that relevant? Well, AE Industrial Partners is also more than an investor in Terran Orbital: Redwire and BigBear.ai (another AE Industrial acquisition that does AI-powered analytics) are entering into a commercial partnership with Terran Orbital to “develop and enhance next-generation artificial intelligence and space solutions offerings.” While we’re not given specifics, presumably Terran Orbital would leverage that technology to produce smart satellites and to power its geospatial intelligence solutions (more on that below). Space may be big, but there’s a relatively small number of companies with an outsized influence in the industry.

Which brings us back to Terran Orbital, which we profiled a couple of years ago in a list of smallsat companies. It is actually the parent company of two separate corporations – Tyvak and PredaSAR – both focused on the small satellite market but in different ways.

The Ford Company of SmallSats

Tyvak is actually headquartered on the other coast in Orange County, California. It specializes in “spacecraft development, launch services, and on-orbit operations” for the small satellite market. In effect, it is Terran Orbital’s smallsat factory, which is about to get a whole lot bigger. In September, the company announced plans to develop a $300 million, 660,000-square-foot space manufacturing facility on the Space Coast of Florida that will reportedly be capable of producing more than 1,000 satellites and space vehicles annually. Basically, we’re talking a Ford-like assembly line for satellites.

Terran Orbital satellites.
Satellites platforms. Credit: Terran Orbital

We’re written before about the knock-on effects of smaller and cheaper satellites across industries with space-based assets, enabling everything from global internet to tracking everything on planet Earth and beyond. About 3,000 smallsats, defined as anything less than 600 kilograms (about 1,300 pounds), have been launched over the last decade. Most of them have gone up in just the last two years, largely driven by SpaceX’s Starlink constellation and OneWeb.

Number of satellites launched since 2011.
Credit: BryceTech

Both of those satellite networks are for beaming the internet across the world. Other constellations are focused on providing geospatial intelligence.

Radar for Geospatial Intelligence

Geospatial intelligence provides insights using Earth imagery from satellites, drones, manned aircraft, or other sensors. This includes everything from infrastructure assessments for insurance to monitoring crop health and supply chains to just good old-fashioned spying. 

Use cases for Earth-observation data.
Use cases for Earth-observation data. Credit: Terran Orbital

Geospatial intelligence as an investment theme has taken off like a rocket among space companies. Planet, Satellogic, BlackSky, and Spire (SPIR) are among the Earth-observing (EO) companies that have or will be going public through SPACs. Now we can add Terran Orbital to that list as well. Its other company, PredaSAR, is developing a constellation of 96 EO satellites that use a technology called synthetic aperture radar (SAR). The thing to know is that SAR-equipped satellites can penetrate clouds and see at night, unlike optical-based satellite sensors. Other companies are also launching space-based radars for tracking Earth with varying levels of capabilities: 

A partial list of space-based geospatial intelligence companies.
A partial list of space-based geospatial intelligence companies. Credit: Terran Orbital

Terran Orbital claims that the PredaSAR constellation can outcompete all others based on unlimited coverage with a less-than-10-minute revisit rate. Such capabilities would be particularly attractive in sectors like disaster recovery, maritime tracking, and defense.

Should You Buy Terran Orbital Stock?

That brings us to the value proposition for Terran Orbital stock. The company estimates its total addressable market at north of $360 billion, split between smallsat manufacturing, operations, and service and its EO space radar constellation:

Terran Orbital total addressable market.
Credit: Terran Orbital

Currently, the company is only capturing a fraction of that. It hauled in $25 million last year and expects to make $35 million in revenue in 2021 – all from its satellite solutions business through Tyvak. In addition, Terran Orbital claims a backlog of $75 million in funded contracts for its satellite solutions. PredaSAR isn’t expected to start generating revenue until 2023, but then quickly grows and overtake its smallsat business.

chart showing Projected revenue Credit: Terran Orbital
Credit: Terran Orbital

Of course, the true financial picture is a black hole that sucks away any credibility behind projections that the company will make more than $2.6 billion in 2026. The EO constellation would account for about $1.7 billion and smallsats for more than $900 million. 

Let’s sanity check these numbers against the current satellite market, valued at $271 billion by BryceTech, a consulting and market analysis firm focused on the space economy. Global revenues for satellite manufacturing currently stand at $12.2 billion. That means that in five years’ time, Terran Orbital would own about 7.5% of the market segment (assuming relatively flat growth), which actually seems low given that 1,194 satellites launched in 2020. But here’s the thing: Most of those satellites were deployed by SpaceX and OneWeb. The former manufactures its own satellites, while the latter hired Airbus to build its constellation. It’s unclear who is going to buy up all those satellites that Terran Orbital plans to churn out of Florida, though the deck mentions a possible 1,000 satellite opportunity for the Department of Defense. Just how long can they produce 1,000 satellites a year before they run out of customers to buy them?

Global satellite market.
Credit: Terran Orbital

Meanwhile, Terran Orbital’s projection of $1.7 billion for its EO business by 2026 is as believable as William Shatner’s acting, considering that the entire remote sensing market is worth just $2.6 billion today. And, as we’ve already noted, the market is already crowded with competitors and solutions that have already captured customer share. The best technology doesn’t always win.

Conclusion

Based on our simple valuation ratio, using Terran Orbital’s projected 2021 revenues and its estimated value if the deal goes through, the company is too richly valued at 45 against our threshold of 40. Also, the company’s reliance on government work through NASA and the Department of Defense is something we generally avoid, given that priorities change with elections. We do like the fact that the company is generating real revenues; we just don’t have much confidence in its prognostications given that about half of its business has yet to take off. If all goes as planned, Terran Orbital will trade under the ticker LLAP by the first quarter of 2022.

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