The SpaceX (NASDAQ: SPCX) IPO, set to happen today (12 June) is undoubtedly going to garner a lot of attention. Some will consider buying the stock to tap into Elon Musk, or as an AI play. However, there’s clearly also a pureplay angle around space activities. But does it make sense to buy the stock just for this?
Why space is exciting
SpaceX is often described as a rocket company, but that is increasingly an outdated way to view the business. The bigger picture is that SpaceX is becoming a space infrastructure firm. What I mean by this is one that builds rockets and launches satellites, along with all the related operations in between.
One way it makes money is through launch services. Customers pay SpaceX to send satellites and spacecraft into orbit. It has a big advantage from reusable rockets. Instead of discarding a rocket after each launch, the company can recover and reuse major components. That dramatically lowers costs and allows it to price launches competitively while maintaining attractive margins.
However, the real financial transformation has come from Starlink. This is a satellite internet network made up of thousands of small satellites in low Earth orbit. Customers pay monthly subscriptions for broadband service, while SpaceX also sells user terminals and provides connectivity.
Talking numbers
Starlink has become the company’s largest revenue driver, with estimates putting it at roughly half of SpaceX’s revenue and a key source of operating profit. For perspective, the latest figures show the connectivity division generating $11.4bn in revenue, with operating income of $4.4bn. By contrast, the AI division generates $3.2bn but lost $6.4bn in the latest accounting period.
Some are concerned that other operating divisions of SpaceX make the overall IPO less attractive. They want exposure to space as a theme, but this company might not be the best way. Further, some could simply be put off by the valuation. The offering price is about 95 times sales, which is a lofty ratio by any means, let alone for a business that isn’t profitable yet.
Alternative option
Rocket Lab (NASDAQ:RKLB) is one of the closest public-market comparisons to SpaceX. The stock is up 283% over the past year, showing the space theme is doing well. It has built a business around launching small satellites using its Electron rocket and has expanded into satellite manufacturing and space systems.
Like SpaceX, Rocket Lab is trying to lower the cost of accessing space, which could unlock new markets that currently do not exist because launch costs are too high. The company’s bigger opportunity comes from its planned Neutron rocket, which aims to compete in larger launch markets and to move Rocket Lab beyond small-satellite launches. I like the stock as it offers similar exposure to SpaceX without the risk of IPO volatility and sky-high valuation.
If space becomes a major commercial industry, launch providers like RocketLab could become critical infrastructure businesses. However, investors should be aware that rocket failures can be costly and competition is intense.
Overall, I’m not ruling out buying SpaceX, but I think other sector picks like Rocket Lab could be more attractive for investors to consider.
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Jon Smith has no positions in the shares mentioned.
