To be a really successful business “innovator” or “disruptor,” you must imagine a task that has not been accomplished previously...and invent the means to perform it better, at a much lower cost, with a very attractive rate of return. Like Jeff Bezos has done with Amazon; Steve Jobs with Apple; Reed Hastings with NetFlix; Mark Zuckerberg with Facebook; Larry Page and Sergey Brin with Google; and, we believe, like Elon Musk will soon achieve with Tesla and SpaceX.
One disruptive idea of Elon Musk and of Jeff Bezos, with his Blue Origin as well, is Musk’s effort to develop a SpaceX rocket that can travel into space, return safely and be used over and over again in future missions. That would make space flight dramatically more affordable.
For example, just think how much it would cost for a 747 airline ticket to London if after each flight the airline had to throw away the airplane it used...which happens to be what America and other nations have been doing since the 1960s with orbital rockets! Since then the United States and the rest of the world have been launching rockets and discarding them after only one space flight! The rockets we and everyone else use were designed more than 50 years ago; cost hundreds of millions of dollars each to build; and, remarkably, burn only several hundred thousand dollars worth of fuel for each trip.
Elon Musk founded PayPal in 1999 and, at the request of PayPal’s other shareholders, sold that business to eBay in October 2002 for $1.5 billion. (PayPal is now worth $90 billion!) Soon after Elon sold PayPal, he told his friend, venture capitalist Peter Thiel, that he planned to invest $100 million of the $160 million proceeds Elon had received as his share of the PayPal sale to found SpaceX...and to invest the balance in Tesla, a startup electric car manufacturer! When Elon informed Thiel of his plan to design a reusable rocket ship for SpaceX, Thiel was skeptical. “Rocket reusability was just inconceivable. It would be more difficult than dropping a pencil and expecting it to land upright on its eraser,” Thiel thought. Nevertheless, Thiel became an early investor in SpaceX. “I’ve known Elon for 18 years, and you never want to bet against him,” he concluded.
According to several of his friends, Elon does not have a “fear gene.” Musk invested in SpaceX knowing that it would cost hundreds of millions more than his initial investment to complete the design of a Falcon rocketship. In the midst of Musk’s SpaceX design efforts, NASA awarded his privately owned SpaceX a $300 million contract to design the Falcon I rocket! SpaceX then won a follow on $1.6 billion contract to service the International Space Station! Musk’s newest Falcon Block 5 reusable launch vehicle represents another milestone in commercial space exploration. According to Musk, “The rocket can be reflown with zero hardware changes. The only thing that changes is you reload the propellant. The rocket can be reflown at least 100 times.”
“Elon Musk Impresses China” proclaimed The Wall Street Journal’s editorial column on February 19, 2018.
That editorial expression of admiration for Musk’s remarkable success with his February 6, 2018 SpaceX Falcon Heavy rocket launch and return to Earth was an unusual compliment. Not just by the Editorial Board of The Journal but, its Editors wrote, SpaceX’s success was so remarkable that it even “captured considerable interest and some envy from the Chinese.”
An article in the China state-run Global Times, which typically takes a nationalist line, also complimented SpaceX’s technology. Remarkably, it regretted that “we (China) are almost ten years behind; more importantly, what our country has to desperately catch up with is actually a private U.S. enterprise!” If you want to see for yourself why China and others find the achievement of a reusable rocket so remarkable, you can watch that mission on YouTube or on the SpaceX web site.
We believe the opportunity for SpaceX is large. Baron currently has $134 million invested in SpaceX, approximately 0.49% of our firm’s $27.1 billion assets under management. Were SpaceX a publicly traded business we believe it would be valued more highly and Baron Funds would become a much larger shareholder. Our present investment is relatively small since, while SpaceX is valued at $28 billion in private markets, it is a privately owned company. At the present time, SpaceX is one of only two privately owned businesses in which Baron Funds has invested.
One more thing. When Tesla (NASDAQ:TSLA) announced it planned to begin producing a large, electric powered, semi-truck in 2019, a senior Mercedes Benz engineer scoffed after reviewing its specifications that, “It defies the laws of physics.” Tesla, soon after demonstrating its prototype semi, began to receive small orders from numerous shippers, logistics providers and trucking companies. Included among those who want to be the first to test a Tesla semi are Walmart, Pepsi, FedEx, Sysco, UPS, DHL, Midwest supermarket chain Meijer, beer company Miller Brewing, food distributor Asko, the Norwegian Post Office Posten Norge and logistics and trucking companies Ryder and J.B. Hunt. We would be surprised if large truck manufacturers who believed such a vehicle could not be manufactured had not placed orders as well ...presumably to disassemble Tesla’s semi-truck in order to try to reverse engineer that vehicle. There are approximately 1.5 million semi-trucks sold per year globally. Prices for the Tesla semi will range from $150,000 to $180,000.
From Ron Baron (Trades, Portfolio)'s first quarter 2018 shareholder letter.
