Space X: The Final Frontier of Investing

Are we ready for the final frontier of investing? The successful launch this week of the first commercially owned and operated passenger spacecraft has the media all atwitter. There has been talk of possible passenger flights to the Moon and orbiting hotels, conjuring up images of 2001: A Space Odyssey.

But Tuesday’s launch shouldn’t be viewed with such lofty expectations – at least not yet. Without strong government support this flight might not have never happened, and it is yet to be determined if there is a commercial market for space travel. Years of underinvestment in technology and aeronautics means we are probably a ways away before space ever becomes a destination for tourists or even a sound investment for your portfolio.

Dragon: An Intergalactic Airline

The space program has fallen on hard times in recent years. Since the end of the Cold War, cosmic spending by the pioneers of space travel, The United States and Russia, has dropped dramatically with the end of their ideological battle in the early 1990s. Russia’s space agency seems to have frozen in time, while the US keeps busy with smaller projects.

Enter: commercial space travel. In 2008, NASA felt that it was time for the private sector to play a bigger role in the space program. That year, the agency signed a contract with Space X, a private company founded by billionaire Elon Musk (of Pay Pal and Tesla fame), to build a reusable space shuttle capable of transporting equipment and people to and from space.

On Tuesday, Space X successfully hurled its prototype, Dragon, into orbit for an unmanned test flight. Eventually, Dragon will be used to ferry astronauts to the orbiting International Space Station, acting sort of like an intergalactic private airline.

The Most Expensive Flight in the Universe

But while Space X should be congratulated for building and launching Dragon, it is still way too early to start getting excited about potential business and investment opportunities in outer space. The trouble is, there have been little, if any, major technological breakthroughs when it comes to space travel since the launching of the shuttle program in 1975.

That means that it is still prohibitively expensive to do almost anything space-related. For example, NASA is paying Space X $1.6 billion for just 10 roundtrip flights with Dragon, which works out to a whopping $160 million a flight.

Unless the price of space travel falls dramatically, then the only customer for commercial space companies, like Space X, will be confined to governments with manned space programs and satellite companies that need repair work. That’s a small pool to draw from.

Who Eats the Loss?

There appear to be some similarities between Space X and other NASA subcontractors like Boeing, Northrop Grumman and Lockheed Martin. While Space X may be “independent”, it is seemingly almost entirely dependent on NASA for business and will probably continue to be for the foreseeable future. Space X didn’t even take on all the risk associated with Dragon; it got monetary assistance from NASA in the form of $400 million, leaving some wondering if Dragon would have ever been built if it weren’t for that aid.

The only major difference between Space X and many other NASA subcontractors is that instead of working for a fixed rate with a guaranteed profit, as is currently the case with other NASA subcontractors, Space X will only be paid a flat fee with no guarantee. So if there is a cost overrun, Space X would have to eat the loss. That could end up saving NASA some money, but if Space X is upside down for too long, it’s possible the company would need to declare bankruptcy, leaving NASA in a lurch.

The New Dawn of Space Travel

So what’s the future of commercial space flight? There are potentially lucrative things that businesses could do in orbit, many of which have yet to be discovered in fields like energy and medicine. But at $160 million a flight ($200 million if you count the NASA subsidy) it is most likely still too expensive for most companies to even contemplate what could be out there.

It took over a decade to construct the tiny International Space Station – so you can forget about seeing a Hilton orbiting overhead in the night sky in the near future. Also, recent budget cuts means the pool of money NASA has to dole out to Space X and others start ups won’t be growing anytime soon.

So while Dragon may have launched us into the new dawn of space travel, it’s goanna be a long time ’till morning.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati