SpaceX has become one of the most talked about companies in the world. From reusable rockets to Starlink and ambitions that extend beyond Earth, the company has captured investors’ imagination like few businesses before it.

But when a company inspires this much excitement, how do investors separate the story from the numbers?

In this episode of Investing Compass, Mark and Shani take a closer look at Morningstar’s analysis of SpaceX and why the company’s valuation has become such a fascinating case study in investing.

The episode explores:

  • How Morningstar approaches valuing a company with huge potential but significant uncertainty
  • Why exciting narratives can sometimes make it harder for investors to assess risk
  • The assumptions that need to go right for a high-growth company’s valuation to make sense
  • What individual investors can learn from analysing companies at the frontier of technology and innovation.

Below you can find more of our insights on SpaceX:

Why SpaceX is coming to your Super Fund. Most Australians will end up owning SpaceX — whether they like it or not.

SpaceX rally continues, expanding sky-high valuations. SpaceX has risen 50% from its IPO price to become the second-most-expensive stock under Morningstar’s coverage.

Young & Invested: Is SpaceX the wealth machine that investors have been waiting for? The record-breaking IPO has sparked a wave of excitement and accompanying products, but history tells a different story about the long-term prospects.

Is SpaceX a threat to this ASX giant? Investors are raising concerns about the future of telecommunication connectivity in Australia.

SpaceX jumps 19% in debut, but hurdles lie ahead. Pre-IPO holders could start selling later this summer, and earnings will be an important test.

You can find the transcript below:

Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature, does not take into consideration your personal situation, circumstances, or needs.

Shani Jayamanne: Mark, you got approached by a man at the gym.

LaMonica: I did get approached by a man at the gym. I think a little context is important.

Jayamanne: I mean, we can leave it at that.

LaMonica: Okay, we could. No, a guy by the name of Carlos who listens to the podcast.

Jayamanne: What did he have? Did he like it?

LaMonica: I mean he said he did, but it would have been really rude if he came up to me randomly at the gym and told me he hates the podcast.

Jayamanne: That’s very nice.

LaMonica: It was very nice. I got to meet his friend as well.

Jayamanne: Does he listen to the podcast?

LaMonica: He doesn’t, but he asked the name of the podcast, so maybe he will start listening. He didn’t write it down, but he might have a better memory than the two of us have.

Jayamanne: Yes. We also have a couple of people to thank.

LaMonica: We do have a couple people to thank. So Mark. We’ll only use first names here, so not me. I’m certainly not thanking myself. So Mark left a really nice review for us on Amazon for the book, Invest Your Way. So we really appreciate that. And then Lisa left a really nice review on Goodreads. So we appreciate that. So if anyone else has read the book and wants to leave a review, a good review, then we would appreciate that as well.

Jayamanne: What are we going to talk about today, Mark?

LaMonica: Okay, well, we’re going to set this up a little bit. So, as you’re aware, and as hopefully listeners are aware, we are proponents of a goals-based investment strategy on Investing Compass. And, the process is pretty simple, so you figure out how much your goal will cost, when you want to achieve it, and then you come up with a plan and an investment strategy to achieve that goal. And we don’t have any evidence to suggest that Elon Musk listens to this podcast, but we also have no evidence to suggest he doesn’t listen to the podcast.

Jayamanne: We do have listeners in the U.S.

LaMonica: That is true.

Jayamanne: It could be him.

LaMonica: It could be him. But he’s had an exciting week because he is now a trillionaire.

Jayamanne: And the way he became a trillionaire is pretty straightforward. Started some companies and he took them public. And we’re going to talk about his later latest venture, which is SpaceX today.

LaMonica: Yes. So we are going to talk about a couple different things. We’re going to talk about what SpaceX does. We’ll talk about the view from our analyst who covers SpaceX. And we also want to talk about how it will impact investors who hold passive indexes that SpaceX will be part of at some point. And then just some general comments on hype, Shani.

Jayamanne: So let’s get started. SpaceX has three divisions. The first and best known is the Rocket Business. The Rocket Division designs, manufactures, and operates a family of reusable rockets to launch various payloads into Earth orbit for government and commercial customers.

LaMonica: And then there’s Starlink, and they operate a lot of communication satellites, and that provides mobile broadband and wireless services.

Jayamanne: And then there’s xAI, which operates a large language AI model named Grok, a data center business and X, which is formerly Twitter.

LaMonica: Speaking of Twitter, your Twitter account has been hacked.

Jayamanne: It has, and they won’t give me access back to it. So there’s some strange person posting pictures of cats on there.

LaMonica: I know. It is it is very weird. So back to SpaceX. So with these three different divisions, it is a really interesting company, and it checks pretty much every box for things that investors are excited about right now. We’ve got space, we have large language models, we have data centers. And then there’s Twitter, which I don’t think anyone’s excited about, except for that cat lady that’s posting things on your account. So we’re not going to spend too much time on Twitter today.

Jayamanne: All right, so let’s walk through each of the businesses in some detail. I’ll start with the rocket business. The company is focused on the next generation rocket called Starship, and this is key for profitability. An enormous amount of money is being invested into Starship, close to $3 billion in 2025. The goal is to build a rocket with an enormous lift capability of 100,000 kilos that is completely reusable. As you can imagine, the technological challenges are significant. The current rockets are reusable but require time consuming and costly remanufacture before relaunch. The goal for Starship is to eliminate this step, which means the jet engine components need to withstand the heat of re-entry.

LaMonica: And if this works and Starship becomes operational, the research and development expenses will start to diminish over time as a percentage of sales, and eventually this division will become profitable. So it is not profitable right now. So our analyst has built a base case, which we’ll talk about as we go through this. And he thinks the base case is revenue will reach $18 billion at a 20% operating margin by 2035. So more on that later.

Jayamanne: Alright, it’s your turn, Mark. Could you go through Starlink?

LaMonica: Of course, because I am the king of technology. So Starlink is the one very profitable part of the company already. So it already generates positive cash flow. And that can be used, of course, to fund all these other divisions. So the rocket division, the other ones we’ll talk about. And Starlink is also really important because Starlink satellites are the number one customer for the rocket division. So the vision here is that there will eventually be tens of thousands of communication satellites in the low Earth orbit, which provide, as I said earlier, mobile and broadband services. So in the IPO filing, SpaceX put the total addressable market for Starlink at $1.6 trillion, which is a lot, even for Elon Musk. And that is roughly the entire global market right now for mobile and broadband services. So our analyst does have an issue with this with this total addressable market because it is unlikely that Starlink will replace current capability in densely populated parts of the Earth. So we’ll talk about that a little bit more later. But there is a large market outside of these densely populated areas where nearly one-fifth of the world population lives.

Jayamanne: And part of that one-fifth, where I used Starlink for the first time on the weekend.

LaMonica: Did you?

Jayamanne: I did when I was in Stewart’s Point for my sister’s wedding.

LaMonica: How did you find it?

Jayamanne: It was fast, worked well.

LaMonica: Okay, what did you do with it?

Jayamanne: Instagram.

LaMonica: Okay, so really putting it to use. A little different than the Ukrainian army soldiers trying to use it to operate drones.

Jayamanne: No. But we are going to pause here because some investors may have zeroed in on Mark’s last statement. Because if Starlink does take over the world’s mobile and broadband delivery, that isn’t great for current providers, companies like Telstra. The reason we don’t think Starlink is a threat in densely populated areas is because in these highly populated areas, there are data constraints on available spectrum and signal latency, which means there is a delay in sending and receiving data. Basically, this means that Starlink doesn’t work well in urban areas because there’s too many people. And since the current networks do work well, we think it’ll be difficult for Starlink to gain any market share.

LaMonica: Okay, we’re going to move on to AI now. And the AI business used to be a standalone business owned by Elon Musk called xAI, and then it was merged into SpaceX. So we think about $50 billion has been spent on their large language model. And our analyst doesn’t think that much of Grok. He believes that it’s well behind competitors. So the interesting part of this division is the data center business. So the company has built data centers here on Earth, but the plan and what people are very excited about is to put these data centers in space.

And this is, of course, where stuff starts to get complicated. So if this works, and it’s important to note that the technology is not proven, this benefits SpaceX in two different ways. So the first is there’s another significant customer for the rocket division. And the second is, of course, they can commercialize all of these orbital data centers.

Jayamanne: Even if these orbital data centers prove feasible, there are various ways this could work. If the technology can put the data centers in space and solve latency issues while being more cost effective than data centers on Earth, we think that things can go really well. In the case our analyst has modeled, SpaceX takes 20% market share. Another scenario is being able to put data centers into orbit, but latency issues limit their use. In that case, our analyst has modeled 4% market share. Then there is a possibility that none of this works.

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There are some advantages, they think to putting data centers in orbit, but there are also some things that they need to deal with. So the advantage is that they can be powered by solar, which is, of course, free. So I think we all know that data centers use a lot of energy. But there are all these engineering challenges that they need to deal with. So they need to shield the processors from radiation. They need to figure out a way to release the heat they produce into space, and they need to secure sufficient radio spectrum so that they can move the data to and from Earth. And we’re just going to keep ignoring Twitter. So that’s the other part for some strange reason that’s in this AI division.

Jayamanne: All right. So let’s turn to competitive advantages. Since there are so many distinctive businesses, our analysts looked at each separately. So take it away, Mark.

LaMonica: Okay, so we do think that there is a moat with the rocket business, and that’s due to cost advantages. So there are several other companies that currently do this or are trying to build reusable rockets, but SpaceX has a significant lead over them. We also think that Starlink has a competitive advantage because of the rocket business.

So basically, this is kind of circular. Starlink satellite launches provide a significant customer for the rocket division, which means they can spend more on research and development and then defray those costs, which makes each launch less expensive, which then benefits Starlink. So at this point, we don’t think the data center business has a moat because the technology is still unproven. But we could view that same virtuous cycle if it does work, where of course they benefit the rocket division, the rocket division then benefits the data center business.

Jayamanne: All right, so now we’re going to move on to valuation. Our base case values the shares at $63. Then we have our moonshot scenario, which is the orbital AI data center scenario where the technology works, and it is adopted widely due to the cost advantages. In that case, we think the shares are worth $169. Currently, the shares are trading at $201 a share, which means they are significantly overvalued under the baseline scenario and still overvalued in the moonshot scenario.

LaMonica: All right. So that was a lot. We don’t talk about technology too much. We talk about rocket ships, orbital data centers, latency. So we’re both sitting here and we have not rushed off to buy shares yet.

Jayamanne: No, we haven’t. And I’m pretty sure I know the answer to this, Mark. But are you going to buy SpaceX shares?

LaMonica: I I’m not, surprisingly. So I mean, I think the first issue is I’ve talked about a lot. I am an income investor. This is an unprofitable company that does not pay dividends. So I think it sort of gets eliminated there. But I think it also just doesn’t align with what I’d like to invest in, which generally is boring businesses that are fairly predictable and that I understand. And we can see this in the valuation. So there’s a huge difference, right, between those two different scenarios our analysts has come up with, right, in the share prices $63 and $169, so it’s 168% more if this data center technology actually works and this business takes off. And so it’s reliant, those differences in valuation are reliant on technology that I don’t understand, and there’s no way that I can go in and address whether this is actually feasible. So there’s a lot of risk there, which of course is part of investing, but given the valuation levels, I think a lot of that upside is already priced in, and none of the downside is if something actually goes wrong.

Jayamanne: All right, great. It’s not really my cup of tea either. I don’t invest in individual shares, and even if I did, this wouldn’t be the type of company that I would invest in. But I do invest in broad index funds. And so we’re going to talk about that a little bit now.

LaMonica: Okay. So let’s start with how indexes work. So there’s simple rules with indexes that we talk about all the time. And for instance, we’ll say the S&P 500 is the 500 largest companies in the US. The ASX 200 is the 200 largest companies in Australia. But there are also additional criteria for a company to get into an index. And so those include liquidity, trading history, and investability. And generally there’s a requirement around something called seasoning. And seasoning for IPOs just stipulates that they trade for a certain amount of time before they’re actually included in the index.

Jayamanne: So the S&P 500 index has a seasoning period of 12 months. Mostly, this doesn’t matter because many new IPOs are relatively small and likely wouldn’t qualify. But SpaceX is different given the high market cap and investor interest. The S&P 500 has not changed the rules to include SpaceX, but the NASDAQ and FTSE indexes have. So it will be included in several indexes soon.

LaMonica: But there is one important thing to remember about this. So a good deal has obviously been made about the market capitalization of this company. So at the IPO, the valuation for the company was $1.77 trillion. And as of recording on June 17th, it’s now worth more than $2 trillion because it’s surged in value after the IPO. So technically, it is the sixth largest company in the US.

Jayamanne: And in theory, this would mean it would make up a good deal of an index, but that isn’t what will happen in this case. The indexes look at something called the float adjusted market cap, which is only $90 billion US. That is because only a small amount of shares were involved in the IPO, and most are still being held by insiders, which are either employees at SpaceX, Elon Musk, or early venture capital investors. There is mandatory lockup period where the insiders can’t sell. Even when the lockup period ends, only some of these shareholders will sell. So we don’t know the impact yet. But as more shares enter the market, the float adjusted market cap will increase.

LaMonica: So depending upon the funds and ETFs you own and what indexes they track, you may end up owning some SpaceX, but initially it will probably be very little, but it will likely grow over time.

Jayamanne: So to finish up, let’s talk a little bit about hype and what is going on in the market. I know you love investing hype Mark and calling everything a bubble, so maybe you should start.

LaMonica: So this is my reputation now.

Jayamanne: You have a few reputations, to be honest.

LaMonica: Okay, well, why don’t we just talk about this one? So I obviously don’t know if we’re in a bubble, and I think the important thing is that nobody knows until hindsight. So the way we identify a bubble is that it bursts and the share market falls a lot. But, I will say that it’s going to be an interesting year. So we’ve obviously had the SpaceX IPO. We have two more big ones coming, the two AI ones, Anthropic and OpenAI. So there will be a lot of media attention on all of these companies, and there may be meaningful share price gains after the IPO, like what we’ve seen with SpaceX. So the only thing I’ll say is investors do need to stay focused during times like this. And that’s just everything we always talk about. So focus on your strategy and your goals. And if companies don’t align with what you’re trying to achieve, just give them a pass and try not to second guess yourself.

And you just need to make peace with that, which can be hard with all this media attention. So you don’t need to own these companies to build wealth. And as I hope we’ve demonstrated during the podcast, these rosy projections you’ll hear are far from certain.

Jayamanne: And one thing that we can say is that a lot of Australian investors have a different perspective. Comsec had four times as many customers bid on SpaceX shares than for any float in its 30-year history. But to reiterate what Mark has said, we often see investing decisions as binary. A share is good or a share is bad. But what you need to ask yourself is if an investment is right for you. So thank you for listening. I don’t normally wrap up these things.

LaMonica: I know. Are you going to be okay?

Jayamanne: I will. But we will link some articles in the show notes that you can read further on this, uh, especially Morningstar’s view on SpaceX.

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

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