Article by David Curmi
On the 12 June , SpaceX sold approximately 555.6 million shares at U$135 per share in the largest fund raising Initial Public Offering(IPO) in history, raising approximately $75bn. The IPO was preceded by a significant amount of hype surrounding both Elon Musk but also about the future plans of SpaceX. Let’s take a moment to review these.
SpaceX has three main businesses. 1 - Its satellite communications business – Starlink, where most of the revenues and cash is generated. 2 – Its space division, where it has developed reusable rockets that carry the Starlink payload. This division loses money. 3 - Its AI segment which includes the social network X, as well as its data centres. This division also loses money. The mission of the company is to “extend the light of consciousness to the stars”, to develop a colony of humans on the moon, orbital datacentres energised by the power of the sun and a future energised by the abundance that AI creates. Behind such fantastical ideas is Elon Musk. A man with perhaps the closest one can get to having the midas touch. Despite the challenges in the businesses, the fact that he has managed to successfully produce reusable rockets has indeed created the pathway to looking at space as an addressable market. Perhaps all of this is a means of getting his hands on some prize real estate! This alone has probably created a unique selling point that competitors will find immediately difficult to overcome.
Unsurprisingly, despite all the questionable governance around the way the company and its voting system is structured, the shares surged on first listing, and following initial sustained buying reached an all time high of $225.64 on the 16 June. At the time of writing the shares trade at $156 per share $21 above the issue price, valuing Space X at over U$2.1trn. On any traditional metric of valuation these shares would be wildly overpriced. At launch they were valued at almost 100 times on a price to sales basis. As a comparative when Google had its IPO, it did so on a Price/Sales of roughly 10x revenue. More recently Palantir debuted at 20xCrazy indeedBut the story is not in these numbers but in the hype generated by the futuristic nature of the companies activities, and the significant cult like followers of Elon Musk. He has convinced an army of investors to believe in his moon dream and part with their cash to jump on the same bandwagon, apologies, rocket. Who may be right is anybody’s guess! There is no sense in trying to rationalise the numbers. Believe in the dream or don’t invest.
Yet the natural pull to rationalise is over whelming. Making sense of the valuation is like reading a science fiction novel. We are talking about trying to estimate the cash flow revenues of mining the moon, putting millions of humans on Mars, and creating an orbital network of datacentres. Goldman Sachs, the lead investment bank behind the IPO suggests that revenues will grow 100 times by 2030 to $322bn. Who’s to say how realistic this is! Morgan Stanley, another investment bank involved in the IPO was even bolder, suggesting that revenues could hit U$3.4tn by 2040. Or if you read the risk factors(38 pages of them) in the prospectus, none of this could materialise.
Added to this complexity is the governance structure that gives Elon Musk effectively 85% of the company due to the dual share structure set up whereby his shares carry ten times the number of votes that the shares sold to the public carry. Through this and the exemptions the company obtained, Musk is the CEO, CTO and Chairman of the company, besides being its visionary. Investors therefore have little protection here, but do not seem to care much. He has made many millions and even billions for investors. His track record combined with the cult following convinces investors to take the risk.
Why should such governance issues matter? Yet they do especially if things go wrong. Ah, forgive me, dreams always end well!
This IPO has generated a level of excitement and enthusiasm that is infectious. This is down to Musk as a character and his fantastical vision. There are aspects of the valuation that take me back to the technology boom of the 2000s. Many of the companies that came to the market as part of that era are now buried somewhere in a tech graveyard. Will SpaceX be one of them? Unlikely but the risks are significant and given the number of SpaceX shares that are likely to hit the market in the coming markets, it is quite likely that a significant stock overhang will materialise, stunting the potential for the shares in the near term. It’s been an interesting rise, but knowing when to get off the rocket could be critical, unless Mars is your ultimate destination! One curious anecdote is that if you ask Grok(Musk’s AI model) if SpaceX is overvalued by standard metrics the answer is as follows, “Ultimately, by any current financial metric(P/S, P/E or Free Cash Flow), SpaceX is heavily overvalued. Buying the stock at these levels is a venture-style bet on a future where SpaceX successfully captures a massive slice of global AI compute and global telecommunications from orbit”. Who are us mortals to decide!!
David Curmi is the Chief Officer responsible for Client Relationship and Business Development at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. “Curmi & Partners Ltd may distribute SpaceX shares and may have a commercial interest in investor participation in the SpaceX IPO.”
Curmi & Partners Ltd, with registered address Finance House, Princess Elizabeth Street, Ta Xbiex, Malta XBX 1102, is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.