Chamath Palihapitiya On Virgin Galactic: IPO vs A Direct Listing

CNBC Exclusive: CNBC Transcript: Social Capital CEO Chamath Palihapitiya Speaks with CNBC’s Seema Mody Today

Chamath Palihapitiya

Image source: CNBC Video Screenshot

WHEN: Today, Wednesday, November 20, 2019

WHERE: CNBC’s “Closing Bell

The following is the unofficial transcript of a CNBC EXCLUISIVE interview with Social Capital CEO Chamath Palihapitiya and CNBC’s Seema Mody on CNBC’s “Closing Bell” (M-F 3PM – 5PM) today, Wednesday, November 20th. The following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2019/11/20/full-interview-with-chamath-palihapitiya.html.

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SEEMA MODY: Morgan, thank you. Chamath, great to have you on “Closing Bell” today.

CHAMATH PALIHAPITIYA: Thanks, Seema.

SEEMA MODY: Morgan was just looking at the chart of Virgin Galactic. Since its listing, down 20%. Do you think the performance would have been different if it gone the route of an IPO versus a direct listing?

CHAMATH PALIHAPITIYA: Not really. In fact, I think the story of virgin is just so new, it hasn’t even been written yet. The reality is that we’ll start commercial operations in the middle of next year. And so, the full-fledged business value will become apparent a lot more quickly at that point. And so, everything that happens between now and then, quite honestly, a lot of people hedging, some people speculating. But it’s really, the there-there will begin in sort of six to nine months.

SEEMA MODY: But the performance does invite some speculation as to whether this direct listing model really works.

CHAMATH PALIHAPITIYA: Yeah. In fact, I mean, you know, like we went public to a reverse merger, which is slightly different from a direct listing. And, in fact, I think you’re bringing up a good point. Which is that we’ve only had one traditional model to go public, which is a traditional IPO. We know that one doesn’t work. There are a handful of us, myself, Bill Gurley and others, who are advocating for different approaches. A direct listing is one. SPACS and reverse merges are others.

And I think what you’ll see over the fullness of time, so the next three to five years, is how well these things will perform. And I think what you are going to see is a lot less volatility, a lot more value to employees, a lot less speculation from buy-side hedge funds, a lot more value to retail investors and just a more methodical way of company building, which I think is better.

SEEMA MODY: Taking a step back and looking at a broader market, you run a $2.5 billion fund. There’s a new report that phase one part of the U.S./China trade deal may not be completed this year. What do you think is worse for the market, a trade deal doesn’t happen or an Elizabeth Warren presidency, which hedge fund manager Leon Cooperman said would lead to a 25% drop in the broad market?

CHAMATH PALIHAPITIYA: I think, respectfully – I think Leon has built an incredible life for himself. But I think he’s wrong. I think the reality is a Warren presidency, Buttigieg presidency, or a Bloomberg presidency, they’ll all be fine. Just like a Donald Trump presidency has, thus far, economically speaking, has been fine. And so, I think the alarm is somewhat unwarranted. The much bigger problem would be lack of a U.S./China trade deal.  Because that kind of indecision is unnecessary volatility in a time where we already have so much political churn. We have an impeachment process that, frankly, is turbulent and scary as a citizen. And so, watching that, I would like to minimize as much other noise as possible while this plays itself out.

SEEMA MODY: But, back to the 2020 election, Silicon Valley tends to lean left. But these more progressive policies that are being proposed, like the wealth tax from Elizabeth Warren, seems to be gaining traction. What’s your view on it?

CHAMATH PALIHAPITIYA: I love it.

SEEMA MODY: Is it good or bad?

CHAMATH PALIHAPITIYA: I love it.

SEEMA MODY you love the wealth tax. Why?

CHAMATH PALIHAPITIYA: Look, here’s the thing. Ten years ago, we looked over the cliff of a great abyss that we had nothing to really comprehend, because of that great financial crisis. It was created by a small group of people that benefited a small group of people. But the global community at large had to come to the rescue. And the only toolbox that we had was to basically take rates to zero or negative, which then gave rich people the ability to take a lot more money and put it into things on the hope that it would trickle down to everybody else. That trade, that grand bargain, has turned out to be not productive.

Rich people have bought things like art. Rich people have bought other unproductive assets. Individuals that should be making more are not. And so, there’s a very small sliver of people who will be deeply and completely affected by a wealth tax, which is not rich people but specifically rich people who own unproductive assets or rich people who have concentrated stock positions. So, we should make sure that that’s clear. Everybody else, all you’re faced with is a decision, which is, if you have to pay 4% or 6% a year, can you compound at 4% a year or 6% a year to tread water?

SEEMA MODY: Sure.

CHAMATH PALIHAPITIYA: And I can. So, I’m not afraid.

SEEMA MODY: So, you’re not afraid of it?

CHAMATH PALIHAPITIYA: And I’m not trying to protect something that, frankly, may be something that represents a more substantial part of what I actually need or deserve in order to thrive.

SEEMA MODY: So, you’re not worried about the effect it could have on the economy?

CHAMATH PALIHAPITIYA: I mean, this is the grand fallacy as well. If you look at marginal tax rates, top tax rates, as a function over time and the impact on GDP, there is virtually no correlation. People were starting companies when the top tax rate was 90%. People were starting companies when the tax rate was 70%. They started companies at 50%. They start companies today at 30 or 35%. Because these are young, industrious people who want an alternative other than working for, quote, unquote, the man and that is independent of tax policy. And so, I think the idea that all of a sudden, the United State stops on a dime because we go back to a large tax basis for the rich is kind of not true. It’s not supported by facts at least.

SEEMA MODY: Interesting perspective. Morgan has a question back in studio.

MORGAN BRENNAN: I do. I have a few questions for you, Chamath. It’s great to see you. And I want to go back to space for a minute. So, let’s start with Virgin Galactic. I know you mentioned the fact that service is expected to start next year and you’re not necessarily that phased by the sell-off we’ve seen in the stock right now. But when service does start, I mean, you’ve emphasized in conversation with me the path to profitability, growth margins. What do you think investors are going to want to see given the fact that space tourism is largely unproven, for them to buy into the vision?

CHAMATH PALIHAPITIYA: So, I think you’re right that space tourism is unproven. But the demand has existed for decades. It’s just that the supply hasn’t been there to meet the demand. So, an interesting thing to know. When America pioneered travel to the moon in 1969, the two years after that happened, there were more than 93,000 people that called, at the time, Pan-Am Airlines trying to book a flight to the moon. And Pan-Am took those reservations.

This is in the late 1960s, early 1970s. We have 600 odd reservations already, another 3500 or 4000 people who have asked to make reservations, and an order book that has been closed for five years. So, I think the thing is that historically, over time, this is a thing that has captured the curiosity and imagination of many tens of thousands, hundreds of thousands and probably millions of people around the world. And starting in the middle of next year, we will start to service that demand.

For many years, it will be supply constrained. And so, I think what you will see is businesses, ours and others who decide to get into this business, huge gross margins, long-term profitability, competitive dynamics that give us 10, 15, 20 years of durability. It is sort of the kind of quintessential high-value asset you would want to own for many, many years.

MORGAN BRENNAN: Yeah. And Virgin Galactic is certainly getting all the attention right now, especially because it did recently go public. You’re invested in a number of other space companies too. Why are you putting money to work in the sector more broadly right now, and what do you look or in terms of investments?

CHAMATH PALIHAPITIYA: Right. So, broadly speaking in space, I have two other meaningful investments. The first one really has to do with helping advance the rate of communications and bringing high-speed communications all around the world. You know, just to use somewhat of a sad example, but when that Malaysia Airlines flight disappeared off the face of the planet, you know, I’m sure that there were some people, me of one, thinking how is it possible in this technological age that something as large as a plane with so many people can just disappear off the face of the planet.

And the reason is because our telecommunications infrastructure is relatively brittle, it’s very costly, and it only covers an enormously small part of the world. And so, I set out with some people that I was able to meet on trying to solve that problem. So, this is a group of people that are building ultra low-cost satellites. They cost a few thousand dollars at a time. They can create ultra-fast communications very cheaply. And it will allow us, with thousands of satellites, to blanket the earth so that things like that never happen. So that cargo all over the world can be tracked.

And so, that’s an investment. The second major investment is one that acknowledges the fact that we want more companies to get us off the planet by being able to take rockets, build machines and get to planets or orbits or what have you. In order to do that, one amazing thing that you can do is actually take all the advantages of 3D printing and apply it to rocketry. And so that’s what we’ve been doing, which is in an enormous warehouse in Los Angeles, we’ve been 3D printing, rocket fuselages. It turns out, these make that endeavor a fraction of the cost that anything that’s come before it. And so, for tens of millions versus hundreds of millions or even billions in the case of NASA, you can get many hundreds if not thousands of rockets in the air.

WILFRED FROST: Chamath, I just wanted to quickly go back to Elizabeth Warren, if I may. I thought absolutely fascinating, what you were just saying there, in defense as it were of the idea of a wealth tax. I wondered whether you would go any further than that, to say you actually support Senator Warren specifically? Would you lend her your support verbally or even financially?

CHAMATH PALIHAPITIYA: So, when all of this started -- you can see the S.E.C. Filings. But I donated to Elizabeth Warren in June. And you know, I was very clear when I did that, I said I don’t necessarily support all of her policies but there was one thing she did which at the time no other candidate had done, which was actually write things down. And sometimes, especially as an investor when you’re trying to think many, you know, years and decades out into the future, it’s frankly very helpful when you can take things from the state of being unknown to the state of being known.

Even if I disagree with things that she says -- some of them I do disagree with, some of them I agree with. But knowing where she stands is much more useful and helpful than having someone who can, you know, be somewhat volatile, unpredictable and change their mind constantly. Because that sort of indecision is not helpful for the process of capitalism and democracy to really flourish. You tend to want to know where you stand. And so, I supported her in June.

Now, what’s interesting is since that, you’ve see two specific people really emerge, one in Pete Buttigieg, who I can’t say I really understand his policies as well, but that’s my fault not his. And the second is Mike Bloomberg, who I’ve been a huge fan for a very long time who has come out and said he’s actively considering a run. I don’t know how I would re-underwrite my decision of June to be honest. I think Mike is an exceptional leader. And, you know, thoughtful and purposeful. And I think Pete seems to have captured the imagination of the young and people who want somebody with a complete fresh face and who is also moderate.

But Elizabeth Warren’s proposals, some I think are a little far-fetched and likely, like Medicare for all, but I think the wealth tax actually is representative of a growingly modern and centralist point of view, which is that the ultra-rich have probably captured too much of the wealth without putting it into productive enough assets to help others.

WILFRED FROST: Chamath, thanks so much for joining us. We appreciate it as always. Seema Mody, our thanks to you as well for bringing that to us.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver