SpaceX’s market cap stands at over USD 2 trillion. But how much is it actually worth?
| From the desk of Miles Everson: Investing has enabled many individuals to attain financial security and independence for decades. That’s why every Wednesday, I talk about investing in the hopes of inspiring readers to build their wealth through this activity. In today’s “The Independent Investor,” we will talk about the biggest IPO in history thus far. Curious? Continue reading below! |
SpaceX dominated the news cycle a few weeks ago after going public. … and it’s not just because it’s an Elon Musk-owned firm like Tesla. You see, SpaceX’s initial public offering (IPO) was anything but typical. During its first day of trading, the company managed to raise over USD 85 trillion and closed the trading day valued at over USD 2 trillion. Those numbers make SpaceX the largest IPO in history. Prior to SpaceX’s public debut, the largest was Saudi Aramco’s, which managed to raise nearly USD 26 billion in 2019. SpaceX will no doubt get the market’s attention for the time being.
While the company is valued by the market at over USD 2 trillion, just how much is it really worth? We’re going to answer this question by leveraging the analytical tools used by Rob Spivey, Director of Research of Valens Research and Altimetry Financial Research, and his team. According to Spivey, the company’s space segment earned a Uniform return on assets (ROA) of 12% last year, right around the market average. Spivey says this segment could be worth about USD 125 billion if it stood on its own. Meanwhile, Starlink is SpaceX’s cash cow, with 30% returns. This unit should be worth as much as USD 600 billion. SpaceX's third segment, AI, is losing money as it desperately spends on new data-center construction. Its Uniform ROA was negative 18% last year. While it's hard to value an unprofitable business, Spivey and his team gave it a best-case-scenario value of USD 600 billion as well. All told, that puts SpaceX’s valuation at USD 1.3 trillion.That's a bit lower than its IPO valuation and value following its first day of trading. That tells us expectations are high. To understand just how high, we now turn to the first of today's Uniform Accounting tools: the Embedded Expectations Analysis (EEA) framework. The EEA shows how well a company needs to perform in the future to be worth what the market is paying for it today. Most Wall Street analysts use what's called a discounted cash flow, or DCF model. They add up their projections for all future cash flows and discount them based on the “cost of capital.” Said simply, it shows how much money a company will have to spend to generate those cash flows. That's how normal DCFs work. They're built on analyst assumptions. There are a lot of investors combing over companies' earnings. For most companies, the market gets it right. By using the EEA framework, Spivey and his team assumes the market knows best. They likewise use Uniform ROA and Uniform asset growth because they're an easy way to model free cash flow. SpaceX was originally projected to be worth USD 1.8 trillion prior to its IPO. At this valuation, investors were betting SpaceX will generate returns of 32% by 2030. That translates to a staggering 660% growth in assets (50% per year for five years).
Based on those projections, investors expect SpaceX to have nearly USD 300 billion in assets and to have generated roughly USD 100 billion in free cash flow by 2030. In other words, those are the milestones the company must meet in order to satisfy investors. Starlink is well on its way to recording Uniform ROA of 60%. Meanwhile, the AI business strives to be like the hyperscalers, which averaged 29% returns last year. However, these are still goals. SpaceX's business isn't there yet. Hence, its current valuation, according to Spivey, is what they’d call “aspirational.” Incentives Dictate Behavior When it comes to compensation, Spivey and his team analyze that through what’s called incentives dictate behavior (IDB). IDB just means “individuals will do what they are paid to do.” No stock analysis is complete without a look at how management gets paid. Musk needs to grow SpaceX’s market cap to a whopping USD 7.5 trillion to get stock awards from SpaceX. For reference, that valuation is roughly 50% larger than “Mag Seven” darling Nvidia, currently the largest company in the world. On top of that, Musk has to meet two non-financial goals:
Those are the keys to getting from the “aspirational” USD 1.3 trillion valuation to something over USD 1.8 trillion. In other words, investors have to believe there's a better-than-0% chance that Musk can achieve one or both of those goals in the next decade. It's also important to note that, while he's entitled to a massive payday if he hits these goals, Musk already controls 85% of SpaceX's voting shares. So, he's missing some of the compensation-based guardrails that are usually looked for in a business. He has used his massive voting power to his advantage in the past. For example, some Tesla shareholders criticized him after he “bailed out” another one of his companies, SolarCity, by folding it into Tesla for USD 2.6 billion. He just pulled a similar maneuver by selling xAI into SpaceX at a USD 250 billion valuation… and selling X (formerly Twitter) to xAI before that. An IPO Unlike Any Other SpaceX’s IPO is an IPO the market has never seen before. It has the distinction of being both the biggest IPO in history and likely the most-followed among retail investors and financial institutions alike. New stocks typically take up to a year to get added to index funds. However, since this was such a big IPO, several index funds changed their rules so investors can start buying SpaceX shares as soon as its second week of trading. That said, as shown by Spivey’s analysis, SpaceX’s is worth USD 1.3 trillion at best. It’s far too early to say how SpaceX will perform or judge how much runway it has for growth. For now, we can only wait and see. The company is bound to get widespread coverage from both its believers and detractors. … and as an investor, the best thing you can do amid that overwhelming flow of information is to do your best not to get carried away by either side. That way, you won’t end up making trades based on emotions like anxiety or panic. Hope you’ve found this week’s insights interesting and helpful. Stay tuned for next Wednesday’s The Independent Investor! There are moments in markets when the turning point is invisible in real time… Learn more about the end of U.S. deal droughts in next week’s article! |
Miles Everson
CEO of MBO Partners and former Global Advisory and Consulting CEO at PwC, Everson has worked with many of the world's largest and most prominent organizations, specializing in executive management. He helps companies balance growth, reduce risk, maximize return, and excel in strategic business priorities.
He is a sought-after public speaker and contributor and has been a case study for success from Harvard Business School.
Everson is a Certified Public Accountant, a member of the American Institute of Certified Public Accountants and Minnesota Society of Certified Public Accountants. He graduated from St. Cloud State University with a B.S. in Accounting.
