Space Exploration Technologies (NASDAQ:SPCX), also known as SpaceX, has had a volatile start to life as a public company. After launching at $135 a month ago, the stock soared easily above $200 in initial trading. However, the SpaceX share price closed Friday at $145.30 and is trending lower. So what could happen from here?
The move lower
Over the past week, the stock is down 12%. In my view, the biggest reason behind the recent weakness is simple. Early investors who bought at the IPO are banking profit. After all, SpaceX surged immediately after its market debut as investors scrambled to gain exposure to one of the most anticipated listings in years.
That enthusiasm briefly pushed the company’s valuation close to $3trn, a level that I (and I’m sure many others) believed overvalued the company. So, once the initial excitement faded, many early buyers decided to lock in their gains. Selling their stock naturally has caused the share price to fall.
This reason also means things don’t bode well for the coming months. Given that the stock price is now close to the IPO price, more people might look to sell their shares to realise profits. After all, those with a short-term view probably would be unhappy if the stock fell below $135. Yet this could create even more selling pressure in the coming weeks, even pushing the stock under $135.
Troubles ahead
Unfortunately for shareholders, there are several reasons the selling could continue through the end of the year. One factor is that the stock still trades on a premium valuation despite the recent fall. It assumes SpaceX will successfully execute on ambitious projects and that take-up for Starlink is high. Any delays to these projects or weaker-than-expected financial updates could see the stock tumble.
Another point I think some are forgetting is that as the months pass, larger institutional investors will have their lock-up periods expire. What I mean by this is big investors often can’t sell stock after an IPO for a few months to prevent high volatility. But when this ends, it could spell trouble.
A balanced view
That said, writing off SpaceX would be a mistake. I think very few companies possess such a dominant competitive position as SpaceX has right now. Its reusable rocket technology continues to give it a significant cost advantage, while Starlink has already developed into a substantial recurring revenue business with considerable room for international expansion.
If management continues to push ahead, investors may become more comfortable paying a premium valuation for a company that is redefining both the space industry and satellite communications.
Ultimately, I think short-term pressure could see SpaceX stock finish the year below $135, potentially going as low as $100. Volatility is likely to remain the defining feature of SpaceX shares over the coming months. For long-term investors, any sharp fall could create a good buying opportunity, and this is the main reason I’m keeping the stock on my watchlist.
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Jon Smith does not hold any positions in the companies mentioned.
