The SpaceX S-1: The Good, The Bad, The Verdict

0:02Tyler Crowe:It's SpaceX's S1 day on Motley Fool Hidden Gems Investing.

0:11Tyler Crowe:Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime contributors Matt Frankel and Jon Quast. And guys, we picked one heck of a day to record here because I'm looking across the news. Walmart's down 7 % on tepid guidance. Other consumer retailers are are way down. Quantum computing companies are up like 20 % on a deal with the government for equity deals and things like that. NVIDIA had their earnings, but we're not even going to talk about any of those things today because you know what? Earnings, they come and go, but an S1 as big as SpaceX only comes around once in a while.

0:48Tyler Crowe:So we're going to do a deep dive into SpaceX's S1 today, and we're going to do the whole show on it. We're going to start with what we liked about it in the the first section, you know, we'll call it the good. In the second part, we're going to kind of poke some holes into some of the things that we didn't like. And based on what we were talking about for the show, there's a few things that we're not big fans of. And then at the end, we're going to give our verdicts on whether or not we're going to be buying this IPO, whether we may be waiting, or if any of us are just like, no, thank you. Obviously the job today was before we went on, it's just basically comb through the S1, see what you see, see what you like.

1:24Tyler Crowe:John, I think we all kind of came to the consensus. there's plenty of things to like and not like. But what stood out to you most is like, hey, this is good. I like really like this.

1:32Matt Frankel:There are multiple parts to SpaceX's business, but the best looking one to me was Starlink. Starlink is both profitable and it's growing like crazy. So check this out. This is the satellite business that allows internet connectivity around the world. Even in remote places, that's kind of the appeal of it. But in the first quarter, its subscriber count more than doubled. It now has more than 10 million subscribers to Starlink. Now, average revenue per user did drop in the first quarter, and it fell pretty significantly. That would ordinarily be kind of troubling to me. But, you know, it's added these lower price points.

2:14Matt Frankel:It's expanded into international markets where the monetization isn't as high. The net result has been this robust subscriber growth, and that is really important. More than that, it's also been able to grow that revenue profitably even at the lower monetization rates. So subscribers more than doubled, as I said. Revenue up 32 % year over year. That's a really good growth rate. And then it delivered a segment operating margin. I'm just talking Starlink. We're backing out the other parts of the business. The Starlink operating margin was 36%. Now, if this was a standalone business, you would look at that.

2:53Matt Frankel:You'd see subscribers more than doubling, revenue up more than 30%, operating margin approaching 40%. That would be a business that I'd be very interested in owning because that is great growth, great profitability, and fantastic adoption pointing to long-term trajectory. I would love that.

3:10Tyler Crowe:I'm going to jump in with an anecdote here because the guys may not know I lived in Africa for six years. And I did. I signed up to be a Starlink customer in 2019. and I think like six months ago is when I actually got the email says hey we're now available where you're living of course I've moved since then I was like well not as much helpful today but I feel like when I got that email like six months ago I think my haunches should have been up like man if they're emailing me about this this must mean there's like an IPO or something is coming because

3:38Jon Quast:they want to grow yeah and John's right that Starlink is the shining star of this business at least so far. It's actually the fastest growing telecom company of its size in history. Starlink has 75 % of all active maneuverable satellites on Earth. It's a big competitive advantage, 4.4 billion in operating income last year. It's a legit business. Beyond Starlink, you really need to read a little bit between the lines for some of the good points, at least when it comes to things that don't have to do with things that the company is going to do in 10 years, 20 years, like building a colony on Mars.

4:13Jon Quast:The space business has a massive market share. That's one. 80 % of the mass delivered to orbit globally comes from SpaceX. CapEx actually seems kind of reasonable to me. You guys might disagree. It's at a roughly$40 billion annual run rate. And that includes AI spend. That includes the space spending. That includes Starlink infrastructure. That actually gives it the lowest CapEx rate of any trillion dollar tech company in the world. We'll discuss the company's total addressable market claims when we're not in the what's good segment of this podcast. But just looking at Starlink, Starlink has an estimated$1.6 trillion market opportunity, and that's a market that already exists today.

4:53Jon Quast:So it could become a much larger business from here.

4:56Tyler Crowe:Yeah, I mean,$1.6 trillion market opportunity, I think globally spend on telecommunications was 1.5. So maybe I'm teasing what we'll get into in the next section, but that does seem like a pretty ambitious target here. But I don't actually want to even talk about Starlink because we've covered it a little bit here. And it wasn't actually the thing that stood out to me the most. It's a nice business. As you said, it's growing. I think competition's coming. You know, Amazon bought Global Star. It's been launching its own satellites. It's trying to compete in this regard as well. So that's something to consider with Starlink.

5:30Tyler Crowe:I'm actually more impressed with the launch business than I thought I would have. I know there's been stories about the launch business kind of on borderline profitability. They've been trying to get Starship off the ground. It's heavy lift rocket. And I think it's done like 11 tests. And, you know, wouldn't you know, they're actually scheduled for their 12th test flight, I think, later today. So I'm sure that's a little bit of a cherry on top for the S-1 to have a successful Starship launch. Fingers crossed with all that. And aside from like this mammoth amount of money they've been putting into Starship in the past, I want to say like a year, year and a half for development.

6:08Tyler Crowe:that business is pretty more or less profitable you saw this very large ramp in uh r &d spending specifically to starship in this most recent quarter most recent year aside from that just using falcon heavy falcon 9 launches it does appear to be profitable from bringing in outside customers that you know it's not like amazing margins but it's something which i goes a long way in the space industry, because this was an industry that was dominated by one company, United Launch Alliance, like 15, 20 years ago. And now, you know, for fractions of the cost, we're actually eking out all vibrational profits on this.

6:48Tyler Crowe:Now, that revenue has slowed down, and I'm not going to like try to hand wave that away. And I would like to see why in the coming quarters. I would like to know whether that was some sort of like pricing competition, because Rocket Lab is starting to do launches. Ariane 6, which is the European's Arian group, their European space agency, they're launching for Amazon this year, as well as starting to see some other companies going into Blue Origin as well. So maybe it's pricing competition. Maybe it was SpaceX deliberately putting more of their own satellites into orbit on its rockets. That was a higher cost burden that kind of brought down the profitability.

7:29Tyler Crowe:So, you know, there's a little bit of balance here. I'd like to see where that goes. But overall, I was more impressed with the launch business than I thought I was going to be. So I think we're two out of three here because we've got launch, we've got satellite communications, and then we've got this great big AI box. And I don't think it's a surprise that none of us have talked about that segment because I think when we get to the what we're not huge fans of, that's going to come up next.

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9:00Tyler Crowe:So, as we said, we're going to kind of go into the nitty-gritty of the SpaceX S1 here and probably get to some of the stuff that when looking up and down the S1, there's going to be some things that we love and some things that we don't like. And clearly, there are some things in this that, you know, aren't the best. I can't say that, you know, every single part of this thing was a glowing recommendation as to why SpaceX was something people would want to buy at the beginning. So with that in mind, let's just go around the horn again. John, what was your ick? What was the thing you kind of read there?

9:31Tyler Crowe:It's like, oh, that's kind of gross.

9:33Matt Frankel:Okay, well, SpaceX is headquartered in Texas, and I will quote the great band Alabama. If you're going to play in Texas, you've got to have a fiddle in the band. Well, SpaceX has two fiddles in its band, and space is playing second fiddle to AI now. You expect a company such as SpaceX to be 100 % space. It is a small part of the vision of the company at this point. And I'm not just blowing smoke. I need you to consider these numbers. Matt pointed out how reasonable the CapEx number was for this company. It's extremely reasonable when you take out AI. 76 % of first quarter capital expenditures was AI related, not space related.

10:18Matt Frankel:That's not an insignificant number. The company has a deal in place with Anthropic now. This is hot off the press. Anthropic will be paying SpaceX$1.25 billion a month. That translates to$15 billion annually. Now, that's great. I love revenue. But consider that if this deal had been in place last year, it would have accounted for 45 % of the company's revenue. This is a huge deal. It's a huge part of the business moving forward for SpaceX. You look at the total addressable market. SpaceX kind of waving its hands in the air saying, we've got the largest total addressable market in history. Well, 80 % of this$28.5 trillion market, 80 % is enterprise AI.

11:07Matt Frankel:That is very interesting. The company is also looking to acquire Cursor for$60 billion. that acquisition could eat up all of the IPO proceeds and the IPO proceeds are set to break all the records. You look on top of this, it wants to build out TerraFab. That could be a$55 billion initial investment. So for some, this might not be gross. This might not be like undesirable. Maybe our listeners are actually celebrating this pivot, this emphasis, this vision that it has for AI. And I wouldn't necessarily disagree with that. It is very surprising, though, that a space company is focusing so hard. And I think that listeners need to understand if you're investing for the rockets, if you're investing for Starlink, that is waning in significance in the eyes and vision of management from here.

12:01Jon Quast:For me, the biggest concern is that based on it, well, I mean, John hit the nail on the head with all the different things they're doing with AI, but the biggest concern is based on a$2 trillion valuation, you're paying more than 100 times sales for a company that lost$5 billion last year, about 300 times trailing EBITDA. Growth is impressive, but not to the point of justifying that type of valuation all by itself. The valuation is clearly based on things that Elon Musk thinks he can do over the long term, like space-based data centers, which is part of that $28.5 trillion figure John just mentioned.

12:38Jon Quast:There's also that risk, mentioning Elon Musk, that you're betting on his future vision. He's not only completely in control, he's also in charge of Tesla. He's also in charge of Neuralink. He's also in charge of the Boring Company. That's still a thing. There's a lot of things that occupy his time and attention. And that is a risk, especially as this business gets bigger and focuses more on AI and all these other adjacent and opportunities at the same time.

13:03Tyler Crowe:Yeah. And to your point, I just, you know, for those who are keeping score at home, the entire GDP of the United States is 32 trillion. So we have a total addressable market that's 75, 80 % of the U.S. GDP. That seems pretty ambitious. It seems like a very global idea that, you know, sometimes you start looking at those numbers, you go, huh, wonder where they got that. Similar to like what I was saying with the Starlink number being roughly equivalent to more than all the revenue spent on telecommunications in 2025. So, hey, but that's the point of S1s is we're trying to be lofty. We're trying to be ambitious here.

13:38Tyler Crowe:And, you know, of things like that, yeah, I can poke holes into that pretty easy. But as an investor, above anything else, this was the thing that got me the most. And it was what I see is a corporate structure and an executive payment structure that's, and to be, you know, harsh here is completely agnostic or potentially even working against investor outcomes and shareholder returns outside of Elon Musk. The combination of it, like this dual class share that they have and a compensation structure that's extremely dilutive to investors, I don't think it really strikes me as a business that wants to work necessarily for its shareholders.

14:20Tyler Crowe:I know I'm being pretty controversial here when I say this, but let's start with this market cap goal that is put out there. I think it's like a billion shares of class B shares. Raising market cap doesn't always necessarily mean raising the share price. Like we mentioned, the cursor deal, that's$60 billion that's probably going to be issued shares. Perhaps there's some cash issued shares, but that's going to raise market cap and could have zero impact on actual price of the stock. There could be other acquisitions that happen in the future that you pay for with stock that may not affect the price.

14:56Tyler Crowe:There are lots of ways that you can increase the market cap of a company and have basically a flat share price. So keep that in mind when you hear market cap-based goals for the executive. And at the same time, you know, we could say like, oh, but if we dilute the company with all these extra shares, you know, Elon Musk is going to be diluted as well. Yes and no, because so much of that package is tied to growing that market cap and his interest would grow as well. And at the same time, he has super majority voting shares. For every share of Class B he owns, it's 10 votes compared to the one. And so you could dilute the company by hundreds of billions, potentially even trillions of dollars in shares that would not even cede control of the company away from Musk.

15:44And so you have things like that.

15:46Tyler Crowe:You have the colony of one million people on Mars. It sounds cool on paper, right? But, you know, what tangible benefits does that give to shareholders in terms of returns? I know that, like, we want to invest in the future. We want to invest in ambitious ideas. But we do want to make money on those ideas. And it's not really clear that that's a money-making endeavor. And, you know, look, I have been saying things like this, you know, corporate structure, executive pay. And I bet a bunch of people will say, who cares? Because, you know, they believe in Elon Musk and he'll figure it out. But this structure completely divorces the success that Elon Musk could have with the company versus like your success as an investor.

16:31Tyler Crowe:And of all the things in the S1, this one would concern me the most as an individual investor. Now, I kind of went on a long tangent here. I think I kind of revealed my cards as to what I'll be saying about the verdict with this company. But after the break, we're going to basically give our final conclusions on do I want to buy this IP or not?

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18:02Tyler Crowe:All right, so we laid out the bullish ideas, the what's good, what's nice about the SpaceX S1, some of the things that we don't like. But, you know, investing is all about balancing those goods and those bads to whether it's worth it or not. So let's kind of, after examining everything that we saw in this, what's our verdict? Like I said, I probably showed my cards, but John, when you finished with the S1, what did you say? Buy now, maybe wait and see later, or no thanks, I'll pass.

18:33Matt Frankel:Yeah, there's exactly a 0 % chance that I'm going to buy SpaceX's IPO, I'd say even in 2026. Now, it might not be for the reasons that you might think. I just complained about the AI, but I'm actually keeping an open mind about that. I'm not saying that that's a deal breaker. In fact, that could really unlock a lot of shareholder value if all of Musk's plans regarding AI come to fruition. So that's not really the issue for me. The issue for me is that IPOs are usually very overhyped, and this is one of the most hyped IPOs, if not the most hyped IPO of all time. So the chances of it being at a very high valuation, the chance of diminished returns over the medium term, I think are quite elevated.

19:19Matt Frankel:Now, there are times where a hyped IPO does make a great long-term investment. I think you can look at Google. I think you can look at Facebook back when they were called Google and Facebook at IPO. Those were very hyped and wound up being great long-term investments. But SpaceX, I'm just going to avoid it here in the beginning for sure. And I'm keeping an open mind about the AI component. I love space. And so one stock that I have been looking at here, I'm going to provide listeners with an alternative. Hopefully it's a hidden alternative, and that is Voyager Technologies, V-O-Y-G. This is a company that went public about a year ago.

19:55Matt Frankel:It has a lot of customers in the defense industry. And so you look at kind of the rising geopolitical threats that emerge in the battlefield of space. This is why Space Force was created in recent times. Voyager serves that market with missile detection and things such as that. But the thing that actually intrigues me the most is not the defense angle, but the space station angle. So you look at the International Space Station. It's been in operation now for I'm not sure how many years, but it is scheduled for decommissioning in 2030. And Voyager Technologies is looking at its Starlab space stations as a potential private alternative to the International Space Station.

20:40Matt Frankel:And so that's a very long term thesis. It's a very speculative thesis as well. But I am really curious about this company and what it is doing. So there it is, Voyager Technologies. The thing that really does intrigue me here is the backlog jumped 54 percent in the most recent quarter to 275 million. That's kind of a longer term indicator. This is only a$2 billion market cap company. So very small, very under followed on Wall Street. There's your hidden gem for the day.

21:08Tyler Crowe:Yeah. You know, as I was saying with the launch business, this is a industry that's getting much more crowded by the day. I think it was an industry 15, 20 years ago where it was SpaceX was this up and comer that was trying to take on a monopoly with the Lockheed Martin Boeing joint, the United Launch Alliance. And now we have seven or eight companies all entering the fray. And there could be a lot of promising ideas like Voyager is one of them. As far as the SpaceX IPO, I think I kind of showed my cards earlier. I'm not that interested in this much at all. I would say this. Here's my caveat. I actually think if Starlink was spun off as a separate entity, I think that's actually the business I would be interested in owning the most.