Space Exploration Technologies (NASDAQ: SPCX)known as SpaceX, began trading on June 12 in a much-anticipated initial public offering (IPO). The IPO was priced at $135, and the stock moved above $175 that first day of trading before closing at $160.95. Still, that gave a one-day gain of over 19%. As of 1:30 p.m. Monday, the stock was still climbing, trading in the $183 area.
Clearly, Wall Street remains bullish so far. However, it is important for investors to look beyond the hype and try to figure out what will happen to the stock in the long term. Many investors are hoping that Chairman and CEO Elon Musk can generate similar returns for this company as those achieved by one of his companies, Tesla. Over the past 10 years, through June 12, Tesla shares have gained 2,690%. That was small S&P 500 the index is 319.7% total return over the same period.
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To predict how much your money could be in a year if you buy SpaceX stock today, investors need to take a closer look at the company before doing some math.
Image source: Getty Images.
Looking at the basics
SpaceX consists of several businesses, especially after it was merged with another Musk-owned company, xAI (which had previously acquired another Musk-owned company, iX, formerly Twitter). Its long-term businesses build and launch rockets that transport astronauts and satellites (among other things), operate a broadband data network through Starlink, an artificial intelligence company (xAI), and a telecommunications network (X). Management has organized the business into three divisions: space, communications, and AI.
The whole company is losing money. Its first-quarter loss widened to $4.3 billion from $528 million a year earlier. However, revenue grew 15.4% year over year to $4.7 billion.
Revenue for its largest and most profitable business, connectivity, rose 31.6% year over year to $3.3 billion, while operating income rose 15% to $1.2 million. The aerospace business saw a 28.4% year-over-year revenue decline to $619 million, while the top line of the AI business saw a 12.5% increase. However, both lost money.
Using multipliers
Since the company is currently generating losses, it is not possible to use the traditional price-to-earnings (P/E) ratio as its valuation metric. But one can measure it by its price-to-sales (P/S) ratio.
By 2025, revenue has grown more than 33% to $18.7 billion. If the 2026 growth rate matches its first quarter pace, SpaceX’s revenue will increase to $21.5 billion.
The company was valued at approximately $1.8 trillion at the time of its IPO, or 94 times sales. As of 1:30 p.m. Monday, its market cap was estimated at $2.4 trillion, or a 128-fold increase in sales by 2025. By comparison, the S&P 500 trades at a P/S multiple of 3.7.
Trying to predict what the future of SpaceX might hold is difficult. But using the $21.5 billion revenue figure and applying that past 94 P/S results to a valuation of roughly $2 trillion — about 73% of where it already trades today.
In other words, the market appears to be pricing in that level of sales growth next year, and then growth above it. So, if you invested $5,000 today and held on for a year, assuming that earnings grew by 33% and that its multiple P/S returned to 94, you would expect your stock to be worth less than it is now. And if the most selling price the market is willing to pay for the stock halved from its IPO level to 47 still, your $5,000 stake wouldn’t have dwindled in value to about $1,840 a year later.
SpaceX’s early valuation is priced in to higher expected growth and profitability at the end. If the company fails to deliver, the stock can leave investors disappointed.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Tesla. The Motley Fool has a policy of disclosure.
The SpaceX IPO: What Your $5,000 Investment Could Be Worth was originally published by The Motley Fool.
