Key Points
Tesla (NASDAQ: TSLA) went public in 2010 and has delivered life-changing returns since. Given its average annualized returns of 40.11% (as of writing) since it hit equity markets, $5,000 invested in Tesla 16 years ago would be worth more than $1 million today.
Tesla’s co-founder and CEO, Elon Musk, recently took another one of his companies public: Space Exploration Technologies (NASDAQ: SPCX), and many investors have high hopes for the rocket company. Could SpaceX follow in Tesla’s footsteps and deliver millionaire-maker-level returns?
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The ingredients are there
According to some estimates, SpaceX’s IPO has turned more than 4,000 of its current and former employees into millionaires. Many of them had likely been with the company for years, during the period when it helped revolutionize space travel. SpaceX pioneered the routine reuse of orbital-class rocket boosters.
Falcon 9, the company’s primary operational rocket, has a reusable first-stage booster, a factor that has helped the company significantly reduce space travel costs. SpaceX has become the industry leader and earns revenue from contracts with government agencies and other institutions. But SpaceX isn’t done innovating.
The company is working on Starship, which is designed to be fully reusable, including both its Super Heavy first-stage booster and Starship upper-stage spacecraft. That could, once again, allow the company to reduce launch costs, leading to higher margins and profits. SpaceX has two other operating segments: one that provides internet connectivity services through a constellation of Low Earth Orbit satellites, and an artificial intelligence (AI) business that provides AI computing capacity.
Connectivity is the company’s most profitable segment. The company’s customer base and revenue in this unit are growing rapidly, and SpaceX plans to launch its next-gen Starlink satellites into orbit to serve far more customers. Further, SpaceX has signed important AI compute deals this year and sees a massive opportunity in this market. The company hopes to eventually address the limitations of hyperscalers’ AI build-out by serving its customers via AI satellites.
These plans could significantly improve the company’s already strong financial results. In the second quarter, SpaceX’s revenue grew 92% year over year to $7.8 billion, while its net loss shrank to $541 million from the $1 billion reported in the year-ago period. Analysts (on average) expect SpaceX to report earnings per share of $0.07 this year (as of writing).
And CEO Elon Musk said the company has an internal projection of $1 trillion in annual revenue by 2030. That isn’t out of the realm of possibility if the company can continue to innovate and execute its plans over the medium term. And over the long term, SpaceX could crush broader equities.
A lot could go wrong
Investors placed high expectations on SpaceX even before its IPO. Between the company’s dominance in the space industry, its attempts to disrupt some lucrative markets, and its being led by Elon Musk, who has proven he can guide a highly successful company, SpaceX arguably traded at a hefty premium the moment it hit the stock market. That’s partly why, despite significant progress since it went public, the company has not gained much value. And this could remain a problem.
SpaceX is trading at 200x forward earnings, a valuation that seems to have already factored in some of the company’s future success. But what if some of SpaceX’s plans fail? The company could face setbacks if Starship’s flight tests don’t go as planned, among other potential problems. And if that happens, the stock could fall off a cliff.
None of this means SpaceX can’t turn average investors into millionaires over the next 20 years or so, but at current levels, the stock is rather risky and likely to be highly volatile. SpaceX is incredibly unlikely to deliver Tesla-like returns over the next 16 years — that would make the company’s market cap reach about $441 trillion, roughly 14 times the current annual GDP of the U.S. But waiting for a significant dip in the company’s stock price to invest, and holding onto SpaceX’s shares for the next 30 years, could result in life-changing returns.
Should you buy stock in Space Exploration Technologies right now?
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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