While SpaceX (NASDAQ: SPCX) stock has shot up recently, Amazon (NASDAQ: AMZN) has pulled back. It seems investors are far more interested in the ‘shiny new thing’ on the Nasdaq.
Both companies offer exposure to space, however. And I reckon that there could be bigger gains from Amazon shares over the next three years, given these companies’ valuations today.
Similar market caps, wildly different sales multiples
At present, SpaceX and Amazon have relatively similar market capitalisations. As I write this, the former is worth $2.4trn while the latter is worth $2.6trn.
Where things differ massively, however, is their price-to-sales ratios. This metric compares a company’s market cap to its revenues, giving us a snapshot of how much we’re paying as investors for every dollar or pound of the company’s sales.
At present, SpaceX has a price-to-sales ratio of around 130 as its revenues last year amounted to $18.7bn. That’s a really high multiple and it could be hard to sustain.
By contrast, Amazon has a ratio of just 3.6 as its revenues were $717bn last year. That’s quite a low ratio, meaning that the stock isn’t expensive.
These price-to-sales ratios are the main reason I believe Amazon shares will outperform SpaceX’s over the next three years. Ultimately, one stock is very expensive today while the other looks relatively cheap.
It’s obvious but I’ll say it anyway — when a stock is expensive, it can limit gains for investors, but when a stock is cheap, there’s potential for an upward valuation re-rating.
Very different risk/reward profiles
I also want to touch on the risk/reward propositions on offer though. Because it’s not just about potential gains here – it’s also about potential losses.
The way I see it, SpaceX is priced for absolute perfection at its current market cap. With a price-to-sales multiple of over 100, everything needs to go right with Starship, Starlink, and AI over the next decade and it may not.
Looking at Amazon, there’s far less risk with the valuation. Even if growth was to slow down, or space growth was underwhelming, the stock might not fall too much.
So, to my mind, Amazon offers a far more favourable risk/reward skew. In other words, I see the potential for higher gains with less risk.
Both have growth potential
It’s worth pointing out that both companies have a lot of long-term growth potential. Both should benefit from the growth of industries such as satellite broadband and AI.
However, as noted above, I think a huge amount of growth is already priced in with SpaceX. This isn’t the case with Amazon. In fact I’m convinced that none of its space division – which already has 200 satellites in operation and is winning deals with the likes of Vodafone and Delta Airlines – is really priced in at the moment.
I’m backing Amazon
So, right now, my money is on Amazon. While SpaceX may be light years ahead of the company in terms of the space race, I think it’s likely that the Mag 7 company will generate higher returns over the next three years, and is worth considering for a portfolio.
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Edward Sheldon owns shares in Amazon and Nasdaq
