Everywhere I go these days, I get asked the same question: “What do you think about SpaceX?”
It was the biggest IPO in history, from a company founded and run by the world’s richest man. On the day it began trading, Elon Musk briefly became the first trillionaire ever recorded. So the stock has generated a ton of interest.
Yet most investors seem surprised by my answer. “It’s too late to short SpaceX but too early to buy.”
In a Clubroom call – just days after the stock hit an all-time high of $225.64 – I explained the reasons for my skepticism to Oxford Club Members.
When you invest in a stock, you are not just buying a company. You are also paying a particular valuation.
If you buy right, your profits may come quickly. But if you overpay, your profits may be greatly delayed.
If they come at all.
SpaceX is not yet profitable. It lost $4.9 billion last year and another $541 million last quarter. Since there are no earnings, we cannot depend on the most widely used valuation metric: the price/earnings ratio.
However, unprofitable companies with revenue can be valued on a price/sales basis.
Right now the average stock in the S&P 500 sells for roughly 3.8 times sales, near the highest level on record.
During the dot-com bubble, Sun Microsystems chief Scott McNealy famously wondered aloud what investors could possibly have been thinking when they paid 10 times revenue for his stock. Cisco, at its March 2000 peak, fetched about 30 times sales, before losing 85% of its value over the next couple years.
SpaceX finished its first day of trading at 115 times sales.
As I said at the time, “SpaceX has stratospheric ambitions… and a valuation that is out of this world.”
The stock has fallen 49% from its June 16 peak, erasing $1.3 trillion in market value in under two months. Musk surrendered the trillionaire title he held for about five weeks.
And that decline came despite good news on the top line. On Tuesday, in its first quarterly report as a public company, SpaceX said revenue rose 92% to $7.81 billion, beating Wall Street estimates. Starlink subscriptions doubled to 12 million.
With the big dip in the share price and the sharp rise in revenue, SpaceX now sells for about 66 times sales. But that is still a lofty valuation by anyone’s standard.
Yet some investors don’t seem to care.
On Friday, The Wall Street Journal ran an article titled “SpaceX Believer’s Faith Unshaken.”
One of them, Galileo “Gali” Russell – who has 75% of his portfolio in this one stock (not recommended, incidentally) – remains optimistic even though the stock has shed more than $1 trillion in value.
“How exciting is the idea that I could go to Mars?” he said. “That my grandkids could be living in space?”
“Not very,” is my answer.
I hear there are very few good restaurants on Mars. And I generally prefer an atmosphere that is at least 20% oxygen.
I don’t mean to belittle anyone who’s invested in SpaceX.
Knowing Musk’s track record, I’d be willing to bet that the stock will be a long-term winner, even for those who bought at much higher prices.
But there are a number of short-term hurdles.
The first is the sky-high valuation on the stock, even after its recent plunge.
The second is the supply of shares. Last week, 911.5 million shares came unlocked – 20% of the insider shares eligible for early release – more than doubling the stock available to trade.
Many of those holders bought at a small fraction of today’s price and may prefer cash now versus potentially more, or substantially less, later.
The third is the sheer cost of the plan. Over the past year, SpaceX spent $42 billion on capital expenditures and burned through $33 billion in cash.
Starship is part of that. The larger part is artificial intelligence.
SpaceX absorbed Musk’s xAI in an all-stock deal in February and is now funding data centers, a chip venture with Tesla called Terafab, and satellites designed to run AI compute in orbit.
(It was the AI spending, not the cost of the rockets, that spooked investors.)
Also, just how do you project future sales and earnings when your business plan includes asteroid mining, space-bound data centers, and Mars-based manufacturing?
That involves a lot of technical risk, execution risk, cost risk, regulatory risk, environmental risk, business-model risk, government-program risk, and competitive risk.
Of course, SpaceX shareholders already know all this because they spent hours reading the disclosures in the public offering prospectus before risking any money.
(Kidding, obviously.)
Look, Elon Musk is the most visionary entrepreneur of our era. And I’ve no doubt that many of SpaceX’s eventual accomplishments will shock and astound us.
But the long haul can turn out to be a lot longer than the 12-month mark that separates a short-term capital gain – or loss – from a long-term one.
The most successful investors don’t invest in just a narrative. They invest based on the numbers.
And not only prospective numbers – those are just part of a narrative – but actual ones.
When it comes to profits at SpaceX, those are still distant.
With the stock already down over 40%, it’s probably too late to short this one. And at 66 times sales, it’s still too early to buy.
But this remains one of the most fascinating companies of all time, so I will keep you posted.
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