The US stock market is gearing up for the biggest flotation in history. This week, Elon Musk’s SpaceX is set for an initial public offering of shares. Though this is the biggest thing to hit markets in decades, I’m deeply worried. Here’s why.
Dreams and nightmares
Elon Musk is like British food spread/yeast extract Marmite: you love him or hate him. Personally, I admire anyone striving to push the limits of science for the greater good. However, I think he often goes too far, making unfulfilled promises while spinning tall tales for an eager global audience.
For example, Elon wants SpaceX to build moon bases — possible using current technology. However, he also wants to colonise Mars — a preposterous task at present, given the cosmic peril of a 140m-mile journey.
Also, this issue needs addressing: Musk claims that SpaceX will put AI data centres in orbit. Sure, solar power will be plentiful, but what about dispersing waste heat from chips? Problem: conduction and convection are tricky in a vacuum.
In short, while Elon likes to dream big, his dreams can become nightmares when faced with the ineluctable laws of physics.
Elon-gated valuation
Turning to SpaceX, the company, this is actually four separate businesses. First, there is SpaceX itself, a highly successful and ground-breaking rocket-maker. Second is satellite-based internet service Starlink. Third is social-media platform X (formerly Twitter). Fourth is xAI, developer of artificial-intelligence service Grok.
My big concern is that all four businesses are unprofitable or barely make any money. Overall, SpaceX is hugely loss-making, partly because it must invest huge sums into R&D (research and development).
Space X plans to float $86bn of its shares at a market valuation of $1.78trn. At this level, it would immediately be the seventh-largest US-listed company, leapfrogging Tesla (Musk’s other public business).
Then again, only 4.8% of SpaceX stock will be available for trading on day one. This shortage will likely generate the first-day pop (price surge) common among popular IPOs. However, more shares will flood the market as employee lock-ups expire over the following six to 12 months.
Even worse, SpaceX will be valued at 92 times its revenues, not its earnings. This valuation is so unhinged and incredible that I must steer well clear of this overhyped float.
Crash course
As a lesson, here’s what Scott McNealy, co-founder of Sun Microsystems said to Business Week magazine in 2002 after the dotcom bubble burst (edited for brevity):
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 years in dividends. That assumes I have zero cost of goods sold. That assumes zero expense from 39,000 employees. That assumes I pay no taxes. That assumes you pay no dividend taxes. That assumes zero R&D spend. Now, would you buy my stock at 10 times revenues? Do you realize how ridiculous those assumptions are? What were you thinking?
Sun Microsystems stock peaked at $257 in September 2000. The business was sold for $9.50 a share in 2010. Ouch.
Of course, Musk could be right: SpaceX might become “the biggest, most profitable company ever” under his glorious leadership. After all, he did amazing things with Tesla (a business he bought into). Alas, I sincerely doubt it. Caveat emptor!
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Cliff D’Arcy does not own shares in any of the companies mentioned.
