Tuesday, July 20, 2021

Jeff Bezos' 'Best Day Ever'

By Berna Barshay (View Archive)

► E-commerce titan Amazon (AMZN) founder and world's richest man Jeff Bezos traveled to space this morning...

Bezos brought three people with him: his brother and best friend Mark Bezos, 82-year-old flight instructor Mary Wallace "Wally" Funk, and 18-year-old Dutch teenager Oliver Daemen, whose father, who works in private equity, had bought him the seat in an auction – presumably for many millions of dollars. When they landed safely in West Texas in the capsule built by his 20-year-old space company, Blue Origin, Bezos proclaimed it the "best day ever."

The trip 60-plus miles into the sky lasted 10 minutes and 10 seconds. Bezos' investment to date in Blue Origin is estimated to be at least $5.5 billion... So this joy ride cost about $550 million per minute – or more like $1.4 billion per minute for the time actually spent in space.

Bezos' trip comes just a week after billionaire and Virgin Galactic (SPCE) founder Sir Richard Branson traveled to the edge of outer space for a few minutes on a spaceship built by his company.

The billionaire space race has been met with a mix of awe and ire...

On the one hand, it's hard not to be inspired by the culmination of decades of work. Who hasn't looked up into the stars at some point and wondered what's up there?

On the other hand, given persistent concerns about income inequality, no shortage of problems on Earth that money would go a long way toward fixing, and the recent revelations of how little many billionaires pay in taxes... plenty of people were quick to write off the billionaire space race as egomaniac folly.

Last month, investigative journalists at ProPublica unearthed IRS data revealing that Bezos paid no federal income taxes in 2007 and again in 2011.

From 2014 to 2018, Bezos reported $4.2 billion in income and paid $973 million in taxes, but at the same time, his wealth soared by $99 billion. Any investor knows that you only pay taxes on realized gains, so the 23% federal tax rate that Bezos incurred on reported income pales in comparison to the 1% that he paid on his wealth increase. But 23% is still low versus the top marginal tax rate at the time of 39.6%.

But that's the tax code... It makes you wonder where Bezos gets the cash to spend on Blue Origin without selling more stock and taking gains. The answer there probably lies in Bezos' taking out loans from big banks against his stock to avoid selling it, a technique employed by the ultra-wealthy to put off paying taxes for years.

It's no surprise that the ostentatious display of wealth in pursuing a private space voyage juxtaposed against low taxes paid has inspired displays of outrage like this one, which showed up in Washington, D.C., in May...

Source: The Nation

Working conditions at Amazon distribution centers ("DCs") have long been a source of scrutiny, so it's also probably not a coincidence that news site Vice decided that today would be a good day to drop a story about a 23-year-old Amazon DC worker who miscarried after begging her manager and human resources for lighter duty.

And as usual, the Internet has (dark) jokes...

Source: Twitter/@TheDailyShow

Today also happens to be the 52nd anniversary of Neil Armstrong and Buzz Aldrin becoming the first humans to set foot on the moon during the Apollo 11 mission...

History makes this a poignant day for Blue Origin to take off and for Bezos to win his hard-earned victory. This journey was more than 20 years in the making and suffered plenty of setbacks along the way, including a booster rocket that crashed in 2015.

Also paying homage to history, the Blue Origin ship that went up this morning was named the New Shepard – a nod to Alan Shepard, the first American astronaut to go up in space.

But the anniversary also raises questions about the billionaire space race between Bezos, Branson, and Tesla (TSLA) and SpaceX founder Elon Musk. As inspiring as it is to accomplish these flights and as much as they talk about doing this to advance science... how close are they to really advancing anything?

I'm no aerospace engineer, but if we could get a man up onto the moon more than 50 years ago, how is getting a few people into space – or the edge of it – for less than five minutes in any way revolutionary?

The awesomeness of what those early NASA missions accomplished within the context of the time period really hit home for me when I visited the Johnson Space Center outside Houston last Thursday. One place you can see there is the Apollo-era Mission Control Center room, where you listen to an audio recording of the actual communications between on-the-ground NASA engineers and the Apollo 11 astronauts during the moon landing. Meanwhile, large screens and computer terminals flash what engineers were seeing at the time.

Trust me, these computers and screens do not look anything like the ones we use today...

If the green typeset against the black screens weren't enough of a reminder for me that the moon landing happened before I was even born, then the ashtrays built into the back of every seat in the observation era drove it home!

Of course there have been advancements made by Blue Origin and Virgin Galactic... Ships, capsules, and rockets designed by these companies are designed to be reused, as opposed to disintegrating or splashing down into an ocean somewhere. The reusable nature of them offers the promise of making space tourism a reality... But talking to the folks at NASA, it's pretty clear cutting-edge scientific exploration of space is likely to still happen at government-sponsored entities.

Beyond tourism, there's reasonable hope that these private ventures will ultimately bring efficiency to space travel – allowing governments to do more in space while spending less money.

But there's one unanswered question that needs to be considered with commercial space travel...

We have no idea what these rocket launches will do to the planet.

Blue Origin touted its minimal impact on the ozone layer, in contrast to Virgin Galactic's, on its Twitter account earlier this month...

Source: Twitter/@blueorigin

Blue Origin bases its assertions about minimal ozone impact on a 2018 report from nonprofit research group The Aerospace Company. But according to tech site Protocol...

The co-authors [of the report] don't actually share the confidence of Blue Origin. Instead, they postulate that more-frequent rocket launches could result in their atmospheric impacts being reassessed as "significant."

The actual environmental impact of increased rocket launches – which is the stated goal of these companies – is unknown... But some researchers are concerned. Protocol spoke with Avis Lang from the Hayden Planetarium, to whom "space tourism represents the antithesis of the mindset we need to address the climate crisis."

As Lang explained...

In the era of climate change, do we not need to find ways to cut back on our use of exhaustible resources? Do we not need to find other solutions – and not merely technological solutions – but a revolution in the mindset of the consuming nations and the consuming individuals?

At a moment when we should be and need to be celebrating moderation in all things, there is the emblem of excess – the guy on this exciting little individual trip into orbit.

Putting aside, for now, its impact on the ozone layer... does space tourism even make sense as a business?

I caught NYU professor Scott Galloway on TV this morning after the flight, and he decidedly answers this question "no." Galloway does not think the numbers add up. He offered the example of Virgin Galactic aiming to offer 400 flights per year, taking up four paying passengers at a time. Galloway suggested that at $40,000 per seat, that's only $64 million in revenue per year, a paltry sum versus Virgin Galactic's $7 billion enterprise value ("EV").

I think Virgin is actually charging $250,000 to reserve a spot and hoping to bring that price down eventually. But even at that higher price, we are talking about revenue potential of just $400 million for the foreseeable future. This means SPCE shares are priced at a very optimistic 17 times future potential revenue... with a lot of execution risk between here and there.

But this is a valuation argument, and people who accomplish big things don't worry about valuations. Nor do aggressive growth investors seeking multi-bagger stocks, which these space companies offer the promise – but nothing like a guarantee – of being.

Some investors are comfortable with these kinds of aggressive growth plays – paging Cathie Wood of ARK Invest! – and will be the sources of capital for businesses that really propel humankind forward.

Meanwhile, other investors – like me – can't stop worrying about valuations and are more likely to find their multi-baggers looking for turnarounds or small-cap, emerging-growth companies in less innovative industries.

Galloway's valuation argument resonates with me, but it isn't necessarily a deal-killer for growth investors looking at these companies.

And yet, Galloway also raises the important point of risk. Of the 550 individuals who have gone into space, 11 did not come back. To me, this is the biggest question overhanging the commercialization of space travel... What happens to the business model when the first rich person ends up dead? Galloway asserted that space travel offers 10 times the fatality risk of climbing Mount Everest or base jumping. This strikes me as a potential barrier to growth.

Moving past debates over business models and motivations, it's hard not to unabashedly celebrate the triumph of Wally Funk today...

The second episode of the documentary series Space Explorers: The ISS Experience opens with female American astronaut Anne McClain marveling at the opportunity to live and work in space, contrasted with a 1960s television interview given by Jerrie Cobb, an aspiring female astronaut who had been part of the Mercury 13.

The Mercury 13 was a group of women invited in 1959 to undergo NASA's physiological screening tests for astronauts. Cobb was the first of the women to pass these tests and outscored many of the men who went on to become astronauts. Cobb actively lobbied for the rights of women to go into space, yet her efforts fell on deaf ears in America.

The Russians sent cosmonaut Valentina Tereshkova into space in 1963... But the U.S. wouldn't send a woman up until 1983, when Sally Ride became the first American woman in space.

Cobb died in 2019, but fellow Mercury 13 participant Wally Funk was on the New Shepard this morning. She became the oldest person to travel in space at 82, breaking the record the late Senator and astronaut John Glenn set at 77 in 1998.

After being one of the Mercury 13, Funk went on to be the U.S. Federal Aviation Administration's ("FAA") first female inspector and the U.S. National Transportation Safety Board's ("NTSB") first female air safety instructor. She has logged more than 19,600 flight hours and trained countless pilots.

Funk has been trying to get to space for 60 years. By the time NASA was sending up women, she was over 40 years old and was rejected three times when she applied. Funk was one of the first people to put down a deposit for space travel with Virgin Galactic, but at 82, she got the call from Blue Origin first.

In the words of Blue Origin's Instagram account: "No one has waited longer."

You can watch a delightful video of Bezos welcoming Funk to the crew on Instagram by clicking here.

In the mailbag, readers – like the market – are worried about inflation, plus a question about where to find past issues of Empire Financial Daily...

Do you think the billionaire space race is about egos and folly... or truly advancing science and humanity... or a bit of both? Do you think we need to restructure the tax code for the ultra-wealthy, or are they already paying their fair share? If someone else was paying for it, would you want to travel with one of these companies into space for a few minutes? What if you had to pay for it? Share your thoughts in an e-mail to [email protected].

"Since year-over-year data is obviously "transitory" because of COVID, I would like to see more consideration given to month-to-month changes. Those have much more impact on real inflation than comparison to a period when the economy was almost shut down. Just because the Fed does it, does not make it right." – Earl F.

"I agree heartly with your view of the Inflation issue. I do not agree that it is transitory." – Robert K.

"Berna, Per usual, another great analysis.

"I'd like to pass on some of your past articles (particularly those focused on retailers) to a friend. Is there a place I can access those? I tried the Empire Financial site but to no avail. Not sure if I was looking in the right place though?

"Thanks for all your terrific work!" – Tom C.

Berna comment: Tom, you can find all past issues of Empire Financial Daily on our website under the "Newsletters" drop-down menu, or by clicking here. They are organized chronologically by month.

If you want to search for a particular topic or company, you can enter a keyword in the search box in the upper right corner of the page.


Berna Barshay
July 20, 2021

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Berna Barshay

Berna Barshay is editor of Empire Financial Daily and a contributing editor to the Empire Stock Investor and Empire Investment Report newsletters. She graduated cum laude from Princeton University and earned her MBA from Harvard Business School in 1997. Following her graduation, Barshay spent 20 years on Wall Street. She began her career in equity derivatives at Goldman Sachs and later worked as a buy-side equity analyst at Sanford Bernstein, where she covered global consumer cyclicals and conglomerates. Later, Barshay spent five years working as a portfolio manager of the Ingleside Select Fund, a long/short fund with a focus on value and event-driven stocks. She later was a portfolio manager at Swiss Re, where she managed the Consumer long/short book on the equity proprietary trading desk. She has additional experience as a buy-side analyst at several long/short hedge funds – including Sky Zone Capital, Metropolitan Capital, Buckingham Capital, and LaGrange Capital – where she primarily covered consumer and technology, media, and Internet stocks in the U.S. and Europe, with some additional work in financials and energy. Barshay is a fashion enthusiast, a pop culture addict, obsessive indoor cycler, and prolific social media user. She currently lives in New York with her husband, daughter, and three dogs.

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