TIVP083 (Video): SpaceX (SPCX): Is It Really Worth $2 Trillion Dollars? w/ Kyle Grieve and Shawn O'Malley

25:02And so members of our mastermind community, both the inner circle and our intrinsic value mastermind will have spots reserved at the conference as part of their membership for free plus private community dinners on Friday and Saturday night and breakfast on Sunday. And for everyone else, there's two ways you can join us. If you're interested, a general admission ticket gets you full access to the conference itself, a stock pitch presentation from Kyle and an intrinsic value portfolio with Daniel and me, plus guest speakers that we'll be announcing in the coming weeks. Or if you want the full experience, our VIP ticket package that gets you all day conference access, plus a seat at our Saturday night exclusive dinner with William Green and the rest of our inner circle community.

25:51And it will definitely be one of the more special evenings we host all year. So if you've ever wanted to spend a weekend talking shop with serious investors in the financial capital of the world, this is it. Find tickets in the full agenda at theintrinsicvalueconference.com. That's theintrinsicvalueconference.com. And if you'd rather join us as a member and get the conference plus the full weekend included, apply to the Intrinsic Value Mastermind at theinvestorspodcast.com slash mastermind dash application. All the links are in the show notes below. Hope to see you in New York. It's a mixed bag and sometimes leadership really knows what they're doing and bets on reinvesting into businesses that build their flywheel at the expense of gap net income, which Amazon, as we know, did for a long time.

26:41And then other times the market rightly sniffs out that billions of dollars of capital are being wasted, like it did with Mark Zuckerberg's spending on the metaverse, which we're still waiting to pan out. But SpaceX, at least for now is certainly getting the benefit of the doubt that these other units aren't holding back the company even if they're being subsidized as they're building an ecosystem that will create lots of value for shareholders or that's a thought and so you know maybe we start to analyze this ourselves by going over what you don't like about the ai segment because this is really where the big bets are being made and the big subsidies are being made yeah i think my main issue with the AI segment is that I think it just has the weakest moat out of the entire business.

27:28You know, if you can say it even has one. So you can argue that X has, you know, network economies, X has 1.3 billion accounts, meaning they can continue showing their users ads. But like you said, the quality of those ads have gone downhill. And I've noticed that as well and continue to make money that way. But other than that, I just kind of find it hard to find any real competitive advantages. GROC is basically an LLM and I've used many different LLMs. And unfortunately, there just isn't that much difference between them. The perspective says that SpaceX has an advantage because it can train its own LLM, operate its own compute infrastructure, and that is vertically integrated.

28:02But this seems to be, you know, exactly what the other tech titans are doing today. So I find it pretty hard to believe it's that much of a competitive advantage. But I will say, you know, this segment is in its early stage. So perhaps Elon has exactly what it takes to get a decent return on these AI investments. And I think that there's a chance that the segment is helpful for SpaceX in terms of connectivity in space in a more holistic way, as AI data centers in space, like I mentioned earlier, would require the use of all three of SpaceX's segments. But I think it's going to continue to be kind of this capital incinerator for many years to come before it actually turns a profit or before we can actually assess whether it's a good investment or not.

28:41When you look at Alphabet's spending on data centers, There's a much clearer argument for me as to how that spending will create value, right? AI is already being used at scale to optimize advertising and to make these algorithms even better at connecting sponsors with the right potential customers at exactly the right moment. And then you have all the research that Alphabet does and the medical world, for example. So looking at genetics and reversing aging and curing diseases. And so I don't have to be an expert on LLMs to recognize how these technologies can help them progress on these challenges.

29:18And point being, you already have several incredibly profitable businesses at scale from YouTube to Google search that almost certainly benefit from having access to cutting edge LLMs. And Google's LLM Gemini benefits from having access to all this unique training data that Alphabet has. And then even in more speculative areas like biotech that I was mentioning, it seems so much more plausible to me how they're going to be able to leverage spending on data centers to support that research. And so with SpaceX, I guess I just can't connect all the pieces together or it's not as obvious to me how these investments will pay off and complement each other.

29:58So I want to now dig in, though, to what you like about the business. When I was talking to you before we hit the record button, you said you actually do like parts of this business. So I assume there are some competitive advantages that you think it can keep compounding. Yeah, that's right, Sean. So obviously we've been harping here a lot on the XAI segment, which I don't really like. But the connectivity and space segments, I kind of do like. They're very, very interesting. So I think that they both have some pretty strong moats that are probably likely to continue to widen over time. So let's start with space here.

30:33So the idea of reusing rockets was really just a dream until SpaceX actually made it happen. There are other companies that are popping up around the world attempting to make reusable rockets, so it's definitely not a monopoly by any means. But I think SpaceX is just really, really far ahead on that curve. Musk is definitely part of the advantage here because simply put, he's just one of the best minds in manufacturing that has ever lived. The Falcon Heavy cut the cost of orbit to about$1 ,400 per kilogram, which was 92 % below the historical averages. And just to give you an idea of how much of the market that SpaceX owns, they alone delivered about 2 ,213 tons to orbit in 2025, more than the entire world combined.

31:11So with their ability to deliver payloads for a cheaper price, and the fact that this is only going to get cheaper and cheaper, I think it's going to be really, really hard for new businesses to develop the technology and manufacturing capabilities to compete on price. Now, SpaceX, you know, they've been around since 2002. This isn't a brand new company, even though it just IPO'd. So replicating what they've done over the last 24 years is no small task. It would require billions of dollars in investments. It would require an entrepreneur with the drive and intelligence of an Elon Musk. And just simply put, a lot of time.

31:41And once they built something that was even close to what SpaceX has built, I think there's a good chance that SpaceX will have already significantly improved on what they currently offer. So it's maybe safe to say that this space segment specifically has some sort of low cost provider type of advantage. Yeah, I think that's completely accurate. So, you know, as the rockets have improved, the tonnage they can drag to space, they've dropped that price. So it started with the Falcon 9, which costs somewhere around 2 ,900 per kilogram. And the Falcon Heavy dropped that price to about 1 ,400 per kilogram.

32:15And the goal for Starship is to bring that cost down to just$100 per kilogram. The SpaceX prospectus stated that they want rocket launches and landings to be as routine and commonplace as airline flights. So, you know, that's why they have to improve this process, make it safe and make it economically feasible. With Starship, they are set to reduce the average cost of reaching orbit by 99 % compared to historical launch costs. And then in the communication segment, you can see that they continue to drop their ARPU as you went over. It's a little harder to compare the segment versus a common competitor that it is brought up to in ASTS.

32:48ASTS has a fundamentally different business model from Starlink. I'm not going to get into too much detail here, but you can think of ASTS as an expansion of ground networks that simply expands a customer's reach. If a cellular provider has a customer who goes to an area where cellular towers won't provide a signal, the user can then opt into using ASTS space-based internet, allowing them to continue using their mobile device in areas that would otherwise be completely unserviceable. With Starlink, you're relying more on their hardware and paying a monthly fee. So ASTS can cost something like maybe$15 a day.

33:21Starlink might cost you something like$100 a month. So depending on how often you're outside of a standard cell tower range, both products can make sense. If you're out of range for more than a week per month, then Starlink makes, I think, a lot more sense than ASTS would. We've mentioned a few times how SpaceX has been able to bring down costs over time, especially compared to NASA, for example. So it does seem like the business has demonstrated maybe some economies of scale. Do you think that's right? Yeah, this is an area that I thought they would have had more of a competitive advantage in, but the numbers didn't really support it.

34:00I think this is a trait that's most obvious in the connectivity segment. So in this segment, operating income improved by 15 % while revenue grew about 32 % from this quarter to the last quarter. Now, everything from cost of revenue to R &D to SG &A grew faster than revenue in percentage terms. I was actually quite surprised by this, but as it looks now, this segment is in full growth mode as well. So if you zoom out a little bit and look at the numbers from 2025 versus 2024, they look a lot better. Operating margins in 2025 improved to about 39 % versus just 26 % in 2024, which is quite impressive.

34:33And the connectivity saw operating leverage across all segments of its business. So I would say it's a little tougher to decide which direction this segment is really going. I tend to trust the numbers over longer periods. So I'd like to believe they have some operating margins here that are going to continue to improve. But since they're just investing so much money into the business here, it's really hard to have that much conviction into which direction it's going to be headed. Well, since you just brought up that this business is investing a lot into itself, I think it's probably a good idea to talk a little bit more about that.

35:03And my guess is it will be pretty tough to assess their capital allocation so far, given that the business is still losing money. But I think what you're doing by going into each segment is really the best way to do it, at least to see which segments are allocating capital best and which are not doing as well. Yeah. And that's sort of the best possible way to do this, in my view. We can, of course, look at the figures from the consolidated statements. But given that SpaceX is still losing money and has a negative no pat, ROIC just isn't that useful at this point. Net income is also negative. So we can't look at consolidated ROE figures either.

35:43But I think we can at least flag a few things for future considerations. So the first thing we can model is the amount of money that's been invested into the company so far. The first simple number to note is shareholders equity. Now, as of the latest quarter, that number is about$34 billion. I generally look for businesses with an ROE in the high teens to 20%. So going forward, whenever SpaceX does become profitable, which is a big if, I don't know when that's going to happen, I would want to see them producing profits somewhere around the$7 billion range. And when that happens, obviously anyone's guess.

36:14Now, invested capital for the ROIC use case requires a little more work. So I use Michael Mobison's operating approach to calculate the invested capital for 2025 and 2024. The latest invested capital is around$44.3 billion. And that's up from$29 billion in 2024. So in 2025 alone, SpaceX spent$19.7 billion just in CapEx. And SpaceX originally planned on raising$75 billion from its IPO. But given all the interest that there's been in the business and the really sharp price action, they actually ended up being able to raise$85.7 billion in what was really truly a record-breaking IPO. And so I think interestingly, one of our portfolio holdings, Alphabet, also recently raised capital and was oversubscribed, which meant that there was more demand than really they expected and brought in about$85 billion.

37:10So right now you have this interesting phenomenon on markets where a lot of equity is being issued after many, many years of the big tech companies being on net stock repurchasers. Now you have basically we'll see how this affects equity markets, where you have companies raising a ton of money at IPO and tech giants, instead of buying back their stocks, are issuing equity to raise tens and tens of billions of dollars. that's right sean and i would say just fair warning to investors you know when ipos tend to pop up at a very very fast rate tends to be somewhat associated with bubbles so you know if you're looking at the market right now as i am and you are sean and daniel is you know you have to just kind of be careful because with a lot of uh recently new issued companies coming out or like you said diluting themselves by issuing equity to raise money it just brings a lot of interest to the market.

38:10You know, you can't kind of go and look at your news app and not see something about some new company IPOing or some sort of new AI initiative going on. And it just creates a lot of upwards pressure and interest in the market. And I'm just saying you should just be careful. So getting kind of back to your Google point there. Google's obviously basically planning on putting a lot of those funds that it raised to work specifically in AI, whereas SpaceX is going to be spreading it upon multiple areas. So this includes the expansion of their AI compute infrastructure, enhancements to their launch infrastructure for the space segment, improvements on those rockets, and then increasing the scale and capacity of their satellites.

38:46So in my opinion, they worded it pretty vaguely. They basically just said they're going to reinvest it back into the business in general. But needless to say, the proceeds will go across the entire business. Now, how long will it take to spend all this? I really can't say, but it's a very, very large cash infusion. So large that if you net it out from the invested capital number, it's actually going to be negative until they spend that cash, which they probably won't have much of an issue doing. Now, after the IPO, SpaceX announced another acquisition in the AI segment, which was Cursor. Cursor is an autonomous AI agent that can help in coding.

39:17This was an all-stock deal valued at about$60 billion that will close in the third quarter of 2026. It's worth noting that Cursor has an annualized revenue of about$4 billion. So the price tag on this was 15 times revenue. The deal was announced on June 16th when SpaceX's share price had already climbed to an all-time high it certainly helps when you can issue shares at an all-time high to fund acquisitions that's actually ends up being a pretty good use of capital allocation but actually how about we look at capital allocation more through the lens of of shareholder distributions which we were just sort of talking about a moment ago but you know what you would normally expect for a rapidly growing tech company especially one pouring so much into capex is that there is of course no buyback or dividend policy in place.

40:04And I'm pretty sure that's the case here with SpaceX. Yeah, that's completely correct, Sean. I mean, that's exactly what you'd expect for a business like SpaceX, which is clearly an investment mode. There's just no reason to distribute any money back to shareholders in the foreseeable future. So when I was going through SpaceX's prospectus, I had to admit that while the financial statement looks pretty ugly, it also reminded me of one of Adam Cecil's case studies from his excellent book, Where the Money Is. I know we've had Adam on the mastermind community to do a Q &A. And he's been a great guest on TIP as well.

40:33But his main point was that many tech businesses hide valuable assets on the income statement, which clearly provide a lot of value, which also end up depressing gap profits. So in SpaceX's case, you can certainly make an argument that part of their R &D spend, which is 100 % expensed, should actually be placed on their balance sheet as an intangible asset. In 2025, they spent about 8.6 billion in R &D, and the space segment was about$3 billion of that. And so that's kind of where I wanted to focus on. So before you get into that, I'm assuming you don't think the AI segment should be capitalized at all, which just means to recognize them as having any residual value on the balance sheet going forward, given what you've said about this segment.

41:17And not only the fact that the spending may not pay off, but also the useful life of a lot of the cutting edge AI chips that are used is really only three to five years. So the depreciation piles up very, very quickly. Yeah, I definitely would not be comfortable with capitalizing those at this point. So AI is an asset, but it just has this much shorter history of success. And of note, Anthropic and Google are still paying XAI about$26 billion per year in compute capacity. So at least they're making something. But in terms of the viable lifespan of that hardware, really hard to say. And I think you're right.

41:53It's probably closer to three to five years. But getting back to the space segment, I think that's where SpaceX really has a good history of success. This segment spent about$3 billion of R &D in 2025. And if you capitalize a portion of that, maybe say 50%, you're instantly adding about$1.5 billion to operating earnings. I just wanted to mention that because if you make that adjustment, then SpaceX gets a little closer to being gap positive in operating income. But getting back to capital allocation, I just think it's too early to say. You know, we're really diving into uncharted territory here.

42:25So it's really hard to say how these investments will end up working out into the future. They've clearly worked out well for the connectivity segment. But until we see what kind of scale benefits SpaceX can get in space in the AI segments, it's really hard to properly assess their capital allocation skills so far. So while we can't really judge SpaceX on the capital that they've allocated so far, or how we assume they'll spend that, call it$86 billion in IPO proceeds. We can still observe how SpaceX is being financed through the obligations that they have to their lenders. Yeah. So in terms of debt, they're actually looking quite good on a pro forma basis.

43:04So current cash on the balance sheet is about$15.8 billion. We're going to end up adding$85.7 billion, bringing total cash to about$101.5 billion. dollars. Now on the debt side, they have about 30 billion dollars in total debt. I prefer to see businesses with net debt to cash flow of less than three times. And since SpaceX has negative cash flow, they don't pass a test on this end. But if we add back the cash on pro forma numbers, they have negative net debt of 71.3 billion dollars. So that's definitely a bonus that gives a much greater safety here going forward. It is good to see how the IPO helped them get into what I would is objectively a much stronger financial position.

43:42But even on that debt number, they will have to continue paying interest expenses. So do you see them having any issues with servicing the debt while they have this negative cash flow? No, not really. So in their fiscal 2025, they generated about six and a half billion in an adjusted EBITDA. Their interest expense was$1.9 billion. So the leverage ratio on that end is about 3.4 times. But I think the question here is, are they going to let the number continue to rise? Or do they have a limit imposed to them from their lenders? And given the covenants on their loans, it looks like they can't really let these numbers rise too much from where they are today.

44:19The consolidated leverage for their bridge loan and credit facility is set at about 3.75 times. And if they want to make an acquisition, they can step that up to about 4.25 times. So they technically breached the covenant by acquiring XAI, but they amended the agreement. So it seems like they have quite a bit of leverage on their debtors to go out there and preach their covenants if the right opportunity arises. So you did mention something about this debt to me that you came across during the research process. And that is that they actually have a big portion of debt that's maturing soon. Exactly.

44:51So they have this$20 billion bridge loan that they entered into in about March of 2026. And the loan is unsecured, which is just great for SpaceX. But the maturity date is only in September of 2026, meaning it was just a six-month loan. SpaceX can extend it for another half year if they're in a good financial position and are willing to pay a fee of about 0.25 % on the outstanding principle. Now, this loan is very interesting because it depended largely on the IPO being successful. And given the short period until maturity, the lenders clearly believe that there was a very high probability that they would be repaid.

45:24And it's written into the detail that it's going to be paid off specifically with the proceeds from the IPO. And since the SpaceX IPO has been incredibly successful so far, I think it's a loan that clearly worked out very, very well for SpaceX. It makes sense for them to use a bridge loan ahead of the IPO. But you do have to deduct that, let's say,$20 billion to repay the bridge loan from their IPO proceeds. So it's still a massive amount, but they basically tapped some of that IPO money before actually IPO-ing by taking on this loan. And to the extent they use this bridge loan at a lower rate due to the short term and relatively high certainty of payoff to pay down higher yielding debt.

46:07Well, then that is a pretty savvy approach to capital allocation. And we've discussed debt here in some detail. And while it's clear to me that SpaceX needs debt to continue chasing its goals because of that negative cash flow we talked about, since they're also not profitable, it's important that management has some skin in the game. which is a topic we always want to dive into a bit when we are considering companies for our portfolio. And so, you know, we want to avoid businesses where it feels like management is playing with money that is not theirs in a highly risky way. So that's something that's come up quite a lot with a company we follow closely in Adobe, where the stock looks very cheap fundamentally, but the conviction we can have in it is sort of capped because insiders aren't putting their own money where their mouth is.

46:59Yeah, great point, Sean there. And while I don't require that businesses have managers who own, say, you know, a 10 % stake in the business, it certainly doesn't hurt, you know, when they have that larger stake. So looking at the cap table, we can see that Musk owns about 12.3 % of the stock, generally for a business worth billions of dollars. You don't see an insider with this big of a stake, but SpaceX, as of the time that I was writing this, is worth two and a half trillion dollars. But there's clearly some very, very good insider ownership even outside of Elon, with Antonio Garcia owning 7.3%.

47:30Garcia was an early investor and a friend of Musk and resides in the company's board of directors. So altogether, insiders own about 20.2 % of the shares, which I think is a very, very good number. It just goes to show you how magnetic Elon's personality is in some ways and the type of very wealthy investors he's attracted over the years, as well as people who are willing to hold onto their shares for the long term with a lot of belief in his vision. For a company with a$2.5 trillion valuation to have insider ownership north of 20 % is not something you see every day. And just to give some context, the biggest portfolio holding in our intrinsic value portfolio is Alphabet and their insider ownership as a multi-trillion dollar company is only 3%.

48:14And so it's great to see high insider ownership. I'll definitely give SpaceX that. But I would like to see how executives are being paid inside of SpaceX and whether you think it aligns well with creating shareholder value because too much insider ownership can also be a sign of egregious stock-based compensation. That's right. It most definitely can. And another yellow flag here is that Elon holds out 85 % of the voting power. so he doesn't require shareholder approval really for anything, which isn't necessarily a bad thing given the direction I think he's taking the business. But just realize that if you are a shareholder, you may as well just make Elon your proxy because whatever he votes for is going to be passed.

48:56But let's get to the base salaries of the executives here. So they all seem pretty cheap, to be honest, for a business of this size. Musk makes a laughable$54 ,000 in base salary. The COO and CFO are making about$1 ,800 ,000. dollars. So from that standpoint, everything seems very, very good. But we have to remember, even though SpaceX is a multi-trillion dollar company, it's still a rapidly growing tech company. And so options tend to be a very popular form of compensation. So let's just see how that adds up. So the business has no short-term incentive program, which I know you, Sean, are a fan of.

49:29So at least we know that SpaceX is thinking long-term when it comes to incentives. That's a good thing. That's good to hear. I'm a little nervous, though, to hear about the long-term incentives though? Yeah. So there are three forms of equity compensation. So you got restricted stock units or RSUs, you got stock options, and then you got performance stock units or PSUs. We only need to focus on Musk's structure as it towers over everyone else by a very, very wide margin. So the RSUs vest based on market capitalization milestones, but there are a total of a billion shares that Musk can unlock here as long as he's able to get the share price up.

50:05So current total shares outstanding are 12.5 billion shares. These are unlocked in 15 tranches up to about 7.5 trillion in market cap. But the second part of this deal is what really, really caught my eye. So Musk has to establish a permanent human colony on Mars with a million inhabitants. Now to unlock any of these awards, he must meet both the market cap milestone and the human colony on Mars milestone. So the market cap milestones seem much easier to me than the Mars colony milestone. My guess is that once there's a million people on Mars, the market cap of SpaceX will probably far exceed$7.5 trillion.

50:41So he'll unlock those PSUs all at once. My take on this is that I guess I don't mind it that much. Musk earns$0 beyond his paltry salary unless he creates shareholder value by increasing the share price. You can argue that yes, in the short term, the share price is exposed to the whims of the market. I see that angle. But you know, the million people on Mars is a completely company specific KPI that I think Musk has complete control over. You know, if SpaceX hopes to establish that colony in space, the space segment will be required to get there. And I assume it's going to be generating quite significant amounts of revenue by that point.

51:18SpaceX is just thinking about things in a totally different way than 99.9 % of companies. And that even might be understanding. And I don't think there's really any company in the world for better or worse that takes this sort of approach to how they think about the vision for the future and then actually set up their long-term comp to match that right i mean to have a target of a million people on mars as part of your executive compensation is either really crazy which i'm biased toward or just ambitious in a way that we've really never seen from any other company. And so this clearly creates a lot of uncertainty in the business.

51:57I'm not sure how to capture a million people on Mars in a financial model or DCF, but Musk has made a lot of money during his career dealing with uncertainty. And he's definitely accomplished some incredible things with the odds stacked against him. So I don't know, maybe you won't have a million people on Mars, but maybe it'd be 10 ,000. But so I want to look now at some more of the risks underlying SpaceX, because I think with all three of these segments being in industries that are, to varying extents, brand new, from social media to rocketry and AI, there are all sorts of risks out there that we can only imagine now.

52:43But there's so many unknown risks that we just probably can't even imagine. And so how do you account for that? when thinking about the fair value of a company. Yeah, you're completely right, Sean. And I completely agree with you. I mean, you go back 10 years ago and discussing things like AI data centers wasn't even mentioned other than in the most esoteric, you know, Silicon Valley circles. But now I've had multiple conversations about it with very, very intelligent investors. And it's been pretty eye-opening to see just how far we've come. And not only that, but just how quickly the pace of innovation is moving.

53:14And I think the biggest risk is the most obvious one when looking at SpaceX, not just as a business, but as a stock. You know, I've done a lot of research into bubbles and right now SpaceX, the stock, has a lot of embedded risk in it. So as of June 18th, the business is priced at 110 times revenue and somewhere around 500 times adjusted EBITDA. And that's annualizing the latest quarter and adding the 4 billion in revenue from cursor. So I assume, you know, revenue probably is going to continue to climb up. But I think you get my point here. The stock is very expensive. Now you have to assume incredibly high growth rates here to make any type of return.

53:49And in order to support that growth, you need a massive market. I won't spoil the evaluation as we'll get to that later. But needless to say, I'm very skeptical that this would make a good investment at this time. A good reality check to do if you're trying to figure out whether you're buying the top of an absurd bubble is to think about, okay, what would it take to have a multi-bagger return on this? What would have to be true? What valuation would have to be reached? And so at a$2.5 trillion valuation to get a four-bagger, which is, to be clear, a great return, but we often are really looking for 10 and 100 baggers on a 30-year time horizon.

54:30So to get a four-bagger at current prices with no dilution along the way, you would need SpaceX to become a$10 trillion company, which is, for context, bigger than India and Japan's economies combined. And so I say that sort of tongue in cheek because the math behind those values are not a one to one comparison. There's a stock to flow difference. But still, it just highlights to me the magnitude of the numbers we're talking about here and how there seems to be so much more potential downside than upside based on current valuations. Yeah, that's right, Sean. I mean, if you're even contemplating SpaceX, you essentially have to look out into the future and you have to make assumptions that things are going to work out very, very well.

55:16You know, this isn't some sort of value play where you can look at the sum of the parts and, you know, buy it for less than liquidation value, not even close. So if you are looking at this business, and I think by now we probably lost any real value investors talking about the numbers here, but I digress. Let's get back to the risks here. So some of the other risks that I see are actually quite similar to some of the other businesses that I've covered here. So I recently, we discussed QXO and Brad Jacobs, and that risk obviously was key man risk. So let's be honest here. You know, if Elon Musk weren't the CEO of SpaceX, it wouldn't have anywhere close to the amount of fanfare that I think it does.

55:54And if we were to take him away, you know, I just don't think this business is nearly as good. He'd also be losing Musk's ability to tell a story, which I think he excels at. Plus, he has arguably the largest audience of anyone in the entire world. Now, I've spoken about the concept of reflexivity before, but I think it really applies to SpaceX. The concept, as outlined by George Soros, states that an investor's perception and biases can influence the economic fundamentals that they are trying to observe, which in turn alters their perception and future actions. In SpaceX's case, I think the fact that Elon Musk is always providing content helps improve investors' perception of SpaceX.

56:31And that's why they can go out when their shares have risen, you know, 67 % since the IPO and make these all stock deals like they did with Cursor. There's a saying on Wall Street that with Tesla, the product isn't the product, the product is the stock, right? That Elon is always just selling the stock. And what that just means is hyping up what's possible. And so it seems like that same model has very much been cloned here with SpaceX when we're talking about million man colonies on Mars. And I also think it goes without saying that there's a tremendous amount of reflexivity here. And I can't believe we haven't said this yet, but Musk is also simultaneously the CEO of Tesla.

57:11And so it is truly striking how well he's been able to do at running both for a while now. But I don't know, unless he's a cyborg. I just don't see how it's humanly possible to run both well indefinitely. And so you know me, Kyle. It feels like in every episode we do, I'm always asking you about how regulation is going to affect an industry with SpaceX involved in AI, space launches, and wireless communication. It is also hard for me to believe that they aren't operating in industries that are either already highly regulated or will be in the future. So from regulation to simply must time and the narratives that are being sold, I think that you can count a number of very substantial risks here.

57:58I knew you'd mention regulation here, Sean. And I think it's, you're completely correct. I think it's highly relevant when discussing SpaceX. If you look at the launches, you know, SpaceX needs federal aviation administration licensing. It holds a bunch of government contracts in NASA and defense as well. If Musk, you know, were to get on the wrong side of the U.S. administration, they could easily make it their aim to make Musk's life a nightmare, which would definitely affect SpaceX's underlying economics. Now, as for the connectivity segment, SpaceX appears to be in an oligopoly right now. As long as they are cutting prices, I don't see that much room for regulators to, you know, have a stink about that.

58:33But if we look a decade from now, when SpaceX is already cheap and maybe their growth levers kind of run their course and they don't have the runway that they once did, maybe they'll start playing around with things like pricing power. And in that case, you know, regulators might get involved. Now, as for the AI, you know, we just saw the U.S. government shut down Anthropics' most advanced AI model yet in Fable 5. The U.S. government demanded that Anthropics suspend all access to any foreign national. And soon after, they took Fable 5 offline for everyone. While this isn't an existential threat to Anthropics' business model, as it has other AI models that are working, it's still just a nuisance.

59:10And with these models continuing to get better and better, I wouldn't be surprised if SpaceX's AI segment at some point doesn't get into the crosshairs of US regulators. It actually does feel like the political risk has dialed down a bit here. But I mean, just last year, you had Musk falling out with Trump, which he did while running the Department of Governmental Efficiency, which was yet another responsibility he took on. And so anyways, it feels like he could clash with any global leader at any time. That was sort of my takeaway from that episode. And maybe that bravado has contributed to his success.

59:49I think it probably has. But as a shareholder, man, seeing him get into what was, I think, objectively speaking, like fairly juvenile arguments with the president of the United States, that would have me really questioning his risk management as CEO. But anyways, I want to double click on something you said earlier, and that was regarding the TAM for SpaceX, which has been a pretty controversial topic to say the least. I don't think this is necessarily a risk to the business, but it's a risk for analyzing the business because it feels like SpaceX's numbers are just totally out of left field. And to the extent that you think any of their projections are plausible or not, really determines what you think of the valuation of the business.

1:00:37That's right, Sean. And what you're referring to is SpaceX proposed TAM of about$28.5 trillion that they outlined in their prospectus. Now, this assumes a TAM of about$370 billion for space, $1.6 trillion for connectivity, and$26.5 trillion for AI. Now, just to give you an idea of how big these numbers are, the worldwide GDP is$123.6 trillion. So you're looking at a market that is proposed to be about 23 % of worldwide GDP. This just seems far too ambitious to me on the face of it, but let's dive into it in a little more detail in each segment. So let's start with the small space segment first.

1:01:15So SpaceX is getting a$370 billion number from Euro consults figures. The problem with this number is that launch services, which is SpaceX's core business, doesn't make up 100 % of that TAM. So that leaves the actual global commercial launch market. Now, it's really hard to get accurate numbers on what exactly that market is. I've seen numbers as low as 5 billion, and I've seen numbers as high as 14 billion, but we can definitely assume the segment is growing and at a pretty high rate. Another potential area SpaceX could work in is the lunar economy. So I recently had a conversation with a PhD physicist who mentioned that perhaps SpaceX will help with the construction of infrastructure specifically in space.

1:01:53think of things like bridges or large infrastructures constructed specifically in space then brought back down to earth. Now, obviously, this is way too speculative. So I'm not really going to give this any weighting at this point in the market. But you understand what I'm talking about. You know, there's a lot of potential out there. Now, with all that said, I think a more realistic number is probably closer to 50 to 100 billion dollars over a long time period. probably emphasis on over a long time period and that is a much smaller number than a 370 billion dollar projected tam but we have to remember that during the ipo process businesses are incentivized to create as much hoopla and excitement as possible so that they can try and raise capital at a higher valuation which allows them to get more bang for their buck you know more dollars per share issued.

1:02:46And obviously SpaceX did not disappoint on that front, but maybe we can talk more about the connectivity segment, which I think we both agreed is probably the most promising part of the company, but also they've cited it as having a$1.6 trillion TAM. Yeah, I'll give you a hint here, Sean. And I think the TAM for all segments is overstated, but let's look at connectivity here. So the SpaceX claims are in three segments. You have Starlink broadband, mobile, and enterprise and government. For broadband, they assume that the entire world is outfitted with satellite-based internet. If you have 1.8 billion households paying$31 a month, then you get to that kind of$670 billion per year.

1:03:30But, you know, I find it hard to believe that they will both penetrate every household on earth and have 100 % usage on households that are penetrated. You know, they currently have 10 million customers. So that number that they are using to get to just seems very, very, very far off and probably impossible to actually reach. We have to also take into account that not every household has the same amount of disposable income. I think their market, you know, maybe is more like 10 % of global households at a price closer to maybe$25 a month. That alone cuts the TAM to$65 billion. The mobile assumption is$740 billion, but they run into similar problems.

1:04:11They will never take 100 % of the market, nor will 100 % of the market be willing to spend that kind of money on satellite connectivity. So if we assume 15 % penetration and an average spend of about$16, you get a TAM of$52 billion. The enterprise and government TAM seems somewhat reasonable at$200 billion, and that takes us to about$300 billion. I think listeners can probably tell here that doing this work is based on estimating an uncertain future and that we are really going off estimates that are impossible to validate until we can see the future unfold. But I do think it's probably not a bad thing to bring some skepticism to the estimates that SpaceX is presenting here.

1:04:53Yeah, I think you kind of have to bring it. Otherwise, you can really make any value for SpaceX make sense to you and then you just go and buy the shares. But, you know, I think when I look at the space and connectivity segments, we're going to see new competitors popping up that SpaceX will need to compete with. And that's going to put further pressure on how much time they can actually take. Now, looking at the AI segment, they said that segment has a$26.5 trillion of TAM. And I think that's pure dream world in my view, given what it will actually service. So the biggest segment is the enterprise applications, which they estimate is worth about$22.7 trillion.

1:05:32They're including the entire digital economy, but this total includes services that SpaceX just doesn't offer. For instance, it includes the TAMs of businesses such as Salesforce, Azure, Amazon Web Services, and Google Cloud, as well as many other large, very well-established businesses that I just don't think that XAI will compete with. I would estimate that the AI segment TAM for SpaceX is maybe closer to$200 billion. Perhaps they can expand that by adding new AI-related services. And that's still a very, very large number. But if we add that all up, we get to about$600 billion. Still, a massive, massive number, but nowhere near the TAM that SpaceX released.

1:06:09So I don't think this has been the most ringing endorsement up until now of us thinking that SpaceX likely has an intrinsic value that justifies the pop in the stock post IPO. But we are at that time of the show where we need to discuss intrinsic value. And I think with all the uncertainty about margins and TAM, to say the least, it is going to be a very difficult business to fundamentally evaluate. So I'm excited to see where you landed on it with your model. Yeah. I mean, as, as you already alluded to, this is not an easy business to evaluate just given all the uncertainty into the future. Um, but you know, we do at least have some numbers today that we can base things on, but you know, we don't really have a very long history of these numbers being very, very secure.

1:07:02And we don't have very, very long history of the growth, simply because SpaceX is involved in these brand new industries that I think have a very, very wide number of outcomes. But, you know, let me take a stab. So the current valuation of SpaceX is insanely forward-looking, as I already discussed. If I just look at its EV to EBITDA, I get 589 times, which is just mind-blowing. Now, the revenue multiple is 129 times. By the time you hear this episode, it could very well be different given how much volatility the stock prices has. But when you're looking at a business like SpaceX, you kind of have to be forward looking.

1:07:38Nobody is honestly looking at SpaceX as some sort of value play. I don't mind looking out into the future when analyzing a business. But with SpaceX, there's so many moving parts to account for. And the growth that is currently being priced in is obviously very, very high. we've actually invested in two companies that in hindsight were pretty wildly overvalued at ipo with uber and airbnb but the difference is that we bought them after the business fundamentals had caught up to the stock price whereas with spacex if my life depended on guessing what would happen so i say this with little conviction but if you're forcing me to make a guess I would probably say that most likely I think the stock will be down a number of years from now.

1:08:21Maybe, you know, let's just call it, let's say 50 % in five years from now. And in that sort of arbitrary hypothetical, perhaps we would find it attractive, right? You would have some moderation of the valuation plus some, you know, five more years of progress in the underlying business. then it might actually be a compelling investment. But I'm getting ahead of myself. So how about we go a little bit more over your evaluation and the assumptions that you've made of what would be a fair value for SpaceX today? Yeah. And before I do that, Sean, I just want to comment on something you said. So I looked briefly at Uber and Airbnb when they IPO'd.

1:09:07And to me, it was very obvious that businesses were really, really good. but that's kind of the whole point of the IPO process is that a really really good business can make for a really really bad investment and I think if you invested in the IPO of Uber and Airbnb I'm not sure I don't have the numbers in front of me but I don't think you did very very well whereas if you took a strategy of okay I'm going to watch this business for a time and let's see what happens that makes more sense because both Uber and Airbnb decreased significantly after the IPO which allowed investors like us to get entry into those businesses and make a half decent return.

1:09:41So I want to get back to your question here about the evaluation. So it was pretty fun because it actually reminded me of QXO, a business that I recently pitched to you. And the similarity was that they both have these very, very fast growth rates going forward, much higher growth than basically any business that I've ever looked at on the show. So for my base case, my assumptions are that the business is going to continue growing at about a 37 % compound annual rate in terms of top line. I chose this number because it's in line with what analysts are forecasting for by about 2028, but I made it even more conservative and had that forecasted out to 2031.

1:10:18The prospectus has a revenue kegger at about 34 % since 2024, but we have to remember that the AI segment is likely to accelerate revenue, albeit at lower margins compared to the other segments. From there, I'm going to assume that margins continue to rise. Even though the AI segment will be a drag on margins. I still think that we continue to get margin expansion from economies of scale. I estimate EBITDA margins rise to about 26%. I then apply a 30 times EB to EBITDA multiple on this, which I think is actually probably quite conservative. In the context of everything else we've talked about today around SpaceX's numbers, yeah, it does seem fairly conservative, but I don't know.

1:10:55What makes you say that it is actually so conservative? Yeah, I felt the exact same way when I wrote that. But you know, if you look at Tesla, so it has half the margin city that SpaceX currently has and trades at 131 times EBITDA. So that's why I think this is a somewhat conservative number, despite the fact that it's optically expensive. Tesla is still growing revenue over the longer term at about 15%. Now with all this, I get a value of about$110 in 2031, which is a downside kegger of nearly 10%. So to account for the massive uncertainty, I also feel much safer applying a pretty big margin of safety of 40%.

1:11:33And this gets a return all the way down to negative 18 % compounded annually. So you can see here that either the market is heavily overpriced in the business, or my assumptions are completely off and I'm just being way too conservative. So keep in mind with my revenue numbers, SpaceX is taking about 15 % market share from the TAM that I already covered. And yet that still implies a pretty negative return for a while. You know, I'm glad I didn't have to try and tackle valuing this one, but I'm also glad we did cover it though, because when a company instantly adds over$2 trillion in market cap to US stock indexes overnight, that really is something worth investigating.

1:12:16And yeah, I don't feel like I need to say much here because I clearly this one is just way too rich for our taste at 110 times sales at a fraction of that price in the private markets. I thought it was too rich. And apparently that was a mistake. But we'll see how long this can persist for. And maybe I come across as as bitter for missing out on it. But I don't find myself with with too much FOMO here. When we start talking about Mars colonies, I don't mind waiting on the sidelines. Yeah, I completely agree with you. This business just has just too much uncertainty for me to ever get comfortable with having any money in this.

1:13:01And even if the price were to get to, say,$100, I just can't see myself ever wanting to make this into a position that would be anything more than a highly speculative, you know, 1 % position. So I agree with you, but this just doesn't belong in the portfolio. I still think though, you know, it's going to be fun to see what happens. But given how Musk's businesses always seem overpriced, I think there's a pretty small chance this business ever gets interesting, specifically in terms of price anytime soon. All right, folks, that's going to be it for today. I want to leave you with a quote. This one comes from one of the best venture capital investors of all time, Peter Thiel, who says, I would never bet against Elon in anything.

1:13:42That's hard rule number one. If you ask what's been the innovation in SpaceX or Tesla, it's what I describe as complex coordination, where you just have to take a lot of different pieces and the innovation is to combine them in a new way. So Elon Musk has been a master at doing just this. And I do think that praise is deserved from Peter Thiel. And I think we are still wanting to give him credit here for what has been accomplished with SpaceX. We definitely don't want to be betting against Elon, but we just don't feel like the market has valued the business in a way that is attractive to us. So on that note, thank you for listening and we'll see you again next time.

1:14:31Just a quick note before you go, this episode would not be possible if it weren't for our friends at Fiscal AI. It's our complete stock research terminal that Daniel and I use on every single episode and with every company we dig into, pulling 20 years worth of financials, digging into segment data, grabbing quotes from the latest earnings calls, and making use of real-time institutional grade data all in one place. And if you want to try it yourself, well, head to fiscal.ai slash T-I-V-P. That'll include two weeks of Fiscal Pro for free and 15 % off if you upgrade to a paid plan. That's fiscal.ai slash T-I-V-P.

1:15:10Thanks for listening.

1:15:31Thank you.