Sometimes a big stock market listing comes along that captures many people’s imagination. Space Exploration Technologies (NASDAQ: SPCX) has done that lately. The rocket company’s blockbuster public offering last week helped catapult its valuation into the stratosphere, with strong early gains in the SpaceX stock price helping boost investor enthusiasm.
When looking at a newly listed stock like SpaceX and considering whether I ought to buy some for my portfolio, here are three questions I typically ask.
Do I understand the company?
Billionaire investor Warren Buffett has often emphasised the importance of staying inside your circle of competence when investing.
Is SpaceX inside my circle of competence?
In short, I have my doubts. It can be seen as a space transportation company but, given the importance of its Starlink wifi network to the current business model, I think it is fair to think of it as a telecoms company to some extent.
I understand telecoms better than I understand space exploration. But do I feel comfortable that I have a proper handle on this business area, the firm’s competitive landscape and what its competitive advantages are?
No. I see some of the picture, but would want to feel more comfortable with my understanding before investing. It is possible to do that as an investor, for example by doing more research.
Is the business model attractive?
One of the challenges when investing in a company that has only recently been brought to the public stock market is that there can be limited financial information available about it.
Usually during the listing process, a company provides some recent financials. This is not always as helpful as the more detailed, long-term information that an investor can consult when a company has already been publicly traded for years.
SpaceX’s listing documents did provide some helpful information. For example, revenue last year was $19bn. The company is loss-making and is also burning cash.
Part of the reason for that is its mix of businesses. Its connectivity division (Starlink) made a substantial operating profit last year, unlike the company’s space and AI divisions.
AI seems like the ugly duckling to me here that may one day prosper. I think the space division is necessary for the connectivity division to thrive. Overall, though, I think the business model remains unproven in terms of long-term profitability potential.
SpaceX clearly has some strong competitive advantages that could help give it pricing power, such as its technological know-how and existing array of satellites that underpin Starlink.
But, as a fast-growing tech company, it also has high expenditure. That is likely to last for a while. I think time will provide more clarity on how attractive the business is financially.
Is the valuation appealing?
Based on those two questions alone, I feel SpaceX stock does not seem like the right fit for my portfolio at this time.
But even if it did, what about valuation? That is a question I always consider if I like a company.
With its $2.1trn market capitalisation, SpaceX is selling on a price-to-sales ratio of over 100. That strikes me as costly for any company, even one with brilliant growth prospects. I will not be buying.
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Christopher Ruane has no positions in any of the companies mentioned.
