Moonshot Project

A Moonshot Project is a highly ambitious, exploratory, and groundbreaking project undertaken by a company without any immediate expectation of short-term profitability or a clear path to commercial success. The term, inspired by the audacious goal of the 1960s Apollo 11 mission to land a man on the moon, perfectly captures the essence of these ventures: they aim for a giant leap forward, not an incremental improvement. Think of self-driving cars, drone delivery services, or finding cures for aging. These projects are characterized by immense technological uncertainty and a high risk of failure. For a company, a moonshot is a long-term bet on the future, one that consumes significant capital and resources for years, or even decades. While the potential payoff can be astronomical, transforming an industry or creating a new one entirely, the journey is fraught with peril, making it a fascinating and often challenging subject for investors to evaluate.

Moonshots aren't just big projects; they have a specific DNA. They typically share several key characteristics:

• Radical Ambition: The goal isn't to improve an existing product by 10%; it's to create something 10x better or invent a whole new category.
• Groundbreaking Technology: They rely on solving fundamental scientific or engineering problems that have not been cracked before.
• Long Time Horizon: Success isn't measured in quarters, but in years or even decades. Patience is not just a virtue; it's a requirement.
• High Uncertainty: The probability of success is low, and the path forward is often unknown. Failure is a more likely outcome than success.
• Substantial Investment: These projects are a massive drain on cash flow and require sustained funding without generating revenue. A famous example is 'X, The Moonshot Factory' at Alphabet Inc., the parent company of Google.

For a disciple of value investing, the term 'moonshot' can set off alarm bells. After all, we're taught to buy businesses we can understand and value, not to speculate on futuristic dreams. So, how should a prudent investor think about a company pouring billions into what looks like a corporate science fair?

On the surface, moonshot projects are the antithesis of a classic value investment. They are, by definition, speculative. The legendary Benjamin Graham drew a firm line between investment and speculation, defining an investment operation as one which, upon thorough analysis, promises safety of principal and an adequate return. Moonshot projects often fail this test spectacularly.

• No Profits, No Problem? These ventures lose money, often a lot of it. This drags down the parent company's overall earnings, potentially making a healthy company look expensive on a P/E ratio basis.
• Unknowable Future: How do you perform a discounted cash flow (DCF) analysis on a business that has no cash flows and might not for a decade, if ever? The inputs would be pure guesswork, violating the principle of investing with a margin of safety.

This is a classic trap. An investor might see a company's stock price fall due to mounting losses from its moonshot division and think it's getting cheap, only to find the core business isn't strong enough to sustain the cash burn, leading to further losses.

Despite the risks, ignoring moonshots entirely can mean missing the bigger picture. The key is to analyze the company with a 'two-part brain': one part focused on the stable, profitable core business, and the other on the speculative ventures.

First, put the moonshots in a box and set them aside. Analyze the main business as a standalone entity. Does it have a durable economic moat? Is it highly profitable and generating strong, predictable cash flows? Does it have a fortress-like balance sheet with little debt? If the answer to these questions is 'yes', then the company can afford to dabble in moonshots. The profits from the core engine are funding the experiments.

Once you've valued the core business, you have two smart ways to think about the moonshot portfolio:

1. The Sum-of-the-Parts Valuation Method: Value the core business. Then, look at the moonshot division. Often, the market punishes the company's stock for the moonshot losses, meaning the entire company might trade at a valuation close to or even below the value of its core business alone. In this scenario, you are essentially getting the entire portfolio of ambitious projects for free. You're buying a wonderful business at a fair price, with a collection of high-potential lottery tickets thrown in.
2. The Call Option Analogy: Think of each moonshot project as a long-term call option. The company pays a relatively small price (the ongoing R&D investment) for the option to participate in a potentially massive future industry. Most of these options will expire worthless (the projects will fail). But if just one hits, the payoff could be 100x or 1,000x the investment, more than covering the cost of all the failures. Your job as an investor is to ensure the “premium” being paid for these options isn't crippling the company.

Don't buy the hype, buy the business. A company's moonshot projects are exciting, but they are not a reason to invest. Instead, view them as an outcome of a fantastic core business that gushes so much cash it can afford to shoot for the moon. If you can buy that core business at a reasonable price, the moonshots become a free source of massive potential upside. The ultimate value play is getting a portfolio of world-changing options without having to pay for them.