Is SpaceX Worth the Hype?

0:05Ryan Knutson:Elon Musk's company SpaceX is going public. Meaning, at some point on Friday, SpaceX will begin selling shares on the stock market. And it's aiming to raise a lot of money. SpaceX is by far the largest IPO ever. So I don't even have to say the largest that I've covered. It's the largest ever. Our colleague Corey Dreebush is an expert in initial public offerings, or IPOs. And she says that the amount of money that SpaceX is aiming to raise, a whopping$75 billion, is more than the amount typically raised in an entire year by all other IPOs combined. So think about the total dollars that are raised in a year by IPOs in the U.S.

0:53Ryan Knutson:So all of the companies that are listing, all of the money that they're raising from all these investors. Yeah, all the companies listing in the U.S. to raise money each year. If you look back the last 10 years, that total has only exceeded the$75 billion SpaceX is going for twice. That is, forgive the pun, astronomical. It's pretty crazy. So what does that tell you? It speaks a lot to the craziness of what SpaceX hopes and dreams to do. They kind of believe in almost the quote-unquote impossible.

1:34Ryan Knutson:The price SpaceX is selling shares for values the company at$1.77 trillion. That puts it among the top 10 most valuable companies in the world. On paper, does it look like SpaceX is a company that should be worth$1.7 trillion? SpaceX is selling itself based on its potential, not its current ability to turn profits. SpaceX, in its current iteration, is unprofitable. You're buying into what it could be, not what it is right now.

2:15Ryan Knutson:Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Thursday, June 11th.

2:29Ryan Knutson:Coming up on the show, is SpaceX really worth$1.7 trillion?

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3:52Ryan Knutson:When Elon Musk founded SpaceX in the early 2000s, he had big dreams for what the company could accomplish. The long-term goal of SpaceX is perhaps not a very commercial-sounding goal at all, which is to really build the technologies necessary to make life multi-planetary. Human life on other planets? His vision wasn't always taken that seriously. For one, Musk didn't have a background in aerospace And for the most part, launching rockets into space had been NASA's domain Not a private company's It didn't help that getting rockets into orbit is no easy task It's literally rocket science Plus, it's super expensive and dangerous The first three rockets SpaceX launched And here we go.

4:39Ryan Knutson:In 10, 9, 8, 7, 6, 5, 4. The Falcon 1 rockets, which cost millions of dollars to make, were either destroyed or lost mid-flight. But in 2008, SpaceX finally started to take off when Falcon 1 Flight 4 successfully reached orbit. Which means Falcon 1 has made history as the first privately developed launch vehicle to reach Earth orbit from the ground.

5:13Ryan Knutson:SpaceX later expanded beyond the rocket business. It went on to launch a satellite internet arm called Starlink. And it eventually merged with XAI, Musk's artificial intelligence startup, which also owns the social media platform X, by the way. So SpaceX is now a rockets, internet, AI, and social media company. How all that works out financially was mostly a mystery. Since it was a privately owned company, it didn't have to disclose very much, even to its original investors. One thing that's been fascinating about SpaceX for the many years that I've been watching the company is it's been notoriously so secretive about its finances.

5:55So the majority of pre-IPO investors have been in the dark about how much it made or lost.

6:02Ryan Knutson:That's changing now that the company is going public. To be listed on stock exchanges, companies have to disclose a lot. A few weeks ago, SpaceX released a document that was several hundred pages long and outlined the financial state of the business. Let's start with a part of the business that's making money, Starlink. When you think of SpaceX, even just the name, you think of rockets and space travel. But the part of the business that's really propping up the company right now is actually much more boring. That's the constellation of satellites that provide high-speed internet to people all over the world, even in very remote locations.

6:47Ryan Knutson:Starlink has 10 million subscribers, five times more than it had three years ago. And last year, the Starlink division was responsible for$11 billion of revenue, which amounted to more than 60 % of SpaceX's total sales. While Starlink is the profitable segment of the company, a big money-losing segment is the AI division. So, yes, SpaceX has its famous space business, which includes rockets. Then it also has Starlink. And then the final segment of the business is earlier this year, it acquired another Musk company, XAI, the maker of Grock. So it now has this artificial intelligence segment, which is unprofitable.

7:34Ryan Knutson:The XAI division only brought in around$3 billion in revenue. But it's spending money like crazy. trying to build data centers and improve its technology in an arms race with rivals like OpenAI and Google. When you add it all up, the Starlink, the rockets, the AI, SpaceX is not a profitable company. It generated roughly$19 billion in revenue, but still lost nearly$5 billion overall last year.

8:07Ryan Knutson:This is why some analysts are raising eyebrows over this$1.77 trillion valuation. Not to get too technical, but that means that SpaceX is listing at 94 times sales. By comparison, Apple's price-to-sales ratio is around 10, even though it has more than 20 times the revenue that SpaceX does. Does anybody look at this valuation, this potential valuation, and say, I don't think so? I mean, any analysts out there that are skeptical? cool. I mean, Morningstar came out and put out a valuation that was significantly low. I think it was below$800 billion, they said, was the more reasonable valuation. Still pretty big, but yeah, that's like less than half of what people are anticipating.

8:54Ryan Knutson:Exactly. Just to say, it isn't uncommon for companies to go public while operating at a financial loss, especially in the tech world. And a lot of what drives companies to go public is actually the need for an influx of cash so it can be reinvested into the company to grow for the future. And the future is really what makes people excited about SpaceX. Some of the banks SpaceX is working with on this IPO think SpaceX's future could be really lucrative. So the future of SpaceX, if you believe these analysts, is the AI segment, this really unprofitable, very new segment to the company. And by 2027, research analysts at the two banks that are leading the IPO, Goldman Sachs and Morgan Stanley, they both project the company's revenues from AI to eclipse the revenues from space and satellite segments.

9:48And by 2035, Morgan Stanley, research analyst, projected AI to bring in around$1.1 trillion in revenues. So again, you can believe it or not, but that all goes into this$1.77 trillion valuation.

10:06Ryan Knutson:What is so exciting about the AI division? I mean, why do they think it could make so much money? So part of what SpaceX is focusing on right now is not necessarily like your chatbot. Obviously, they have Grok, but what they include in part of their AI business is seeing this future of operating AI data centers in space. The lowest cost place to put AI will be space, and that'll be true within two years, maybe three, three at the latest. What Musk and a few other minds have started to talk about in the last few years has been, why don't we take these data centers and put them in space and allow this big computing to orbit, orbit the Earth, and that allows to scale up technology without like the headaches that are being faced on Earth.

11:07Ryan Knutson:There are three headaches that putting a data center in space would theoretically help with. Power, cooling, and the growing backlash against data center construction. These orbital data centers would be powered by the sun through solar panels and cooled by the frigid temperatures in space. And unlike on Earth, little green men aren't going to be saying, please don't put this data center in my sector of space. At least not that we know of. We don't. We haven't heard from them directly.

11:39SpaceX sees this as, okay, SpaceX has this very dominant position where they're able to launch things into space fairly easily when you think about it. They have gotten this down pat. So they are able to do this and they figured, you know what, we can be the ones to operate orbital data centers. and we can do that for both for XAI and for other AI companies that might need that.

12:10Ryan Knutson:Right, because other AI companies don't own rockets in the same way that SpaceX does. Not even rockets. They don't know how to launch the rockets. And so in some ways, the idea is that the market that SpaceX is going to have, so to speak, or that it could unlock is space, is all of space and everything that could potentially come with it. Yes. What they call a total addressable market of$20 trillion of potential sales are out there. $28 trillion. That's how big SpaceX thinks the space market could be. To put that in perspective, that's about as much as the annual GDP of the entire U.S. economy.

12:54Ryan Knutson:In its IPO filing, SpaceX said those revenue opportunities were the largest in quote human history, with the majority of that revenue coming from future AI-related business. What SpaceX needs to do to hit these projections that analysts are seeing in the future, trillions of dollars of revenue, it's all about AI. And to make that work, you need to make orbital data centers work. So you have to have real confidence that that's going to happen. Because if that doesn't happen, where are these profits coming from?

13:34Ryan Knutson:What could that mean for investors if SpaceX doesn't hit its goals? That's next.

13:50So good, so good, so good.

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14:50Ryan Knutson:Before a company goes public, it goes on tour, or what's called a roadshow, where it tries to figure out how much money big-time investors are willing to pay for the stock. But SpaceX didn't take the usual approach. Typically, when a company launches its roadshow pitch to investors or they go around, they get feedback from investors saying, hey, how much would you pay? We're thinking in this price range, it's like$5,$10 price range. SpaceX turned that on their head and said, you know what, we don't want drama on this IPO roadshow. We're just going to tell you this is the price, take it or leave it.

15:28So they launched the roadshow with a$135 share price, said take it or leave it, and that's what investors are grappling with right now.

15:39Ryan Knutson:Musk is banking on the hope that a lot of people were willing to buy at that price. See, back in 2020, Musk made a promise. He tweeted that he was a huge fan of individual investors, aka retail investors, or people who buy shares through apps like Robinhood or their personal investment accounts. And he said that when SpaceX went public, he'd make sure those individual investors get, quote, top priority. You can hold me to it, he said. And he's kept that promise. When SpaceX goes public, as much as a third of the offering could be sold to individuals, which is way more than usual. And part of the reason Musk loves individual investors is because they love him.

16:25Ryan Knutson:At Tesla, one of his other companies, individual investors' faith and enthusiasm help Tesla's valuation reach levels higher than its sales alone would explain. What kinds of things have you been hearing from retail investors in terms of how they're feeling about this coming IPO? There are a lot of believers. And I would say that's what we are hearing. There is extreme interest in the IPO. There's such a group of Musk fans who, like, in Musk I trust. They believe in Musk. They believe in this dream. They're just happy to be a part of it. Corey and a colleague spoke to some everyday investors earlier this week.

17:07Ryan Knutson:Like Tamar June, a tech executive in her 60s who uses Starlink at home. She says she wants to be in on SpaceX in part because she believes in Musk. The man can execute. He can execute on his vision. Dean Norrie is another investor who wants in. He doesn't consider himself a Musk fanboy, but he's been listening to Musk's videos and podcast interviews and learning about SpaceX for years. They're the only organization that I believe is teed up and ready for the total market that's going to become available in space. And Josh Hill, a sales manager at a manufacturing company, says that while he's skeptical of the Musk hype, he does plan to buy in eventually.

17:49He's done a really good job of doing what he does best, and that's hyping things up and moving pieces around to make it look attractive at$2 trillion.

18:04It's shocking to me how much interest I hear.

18:07Ryan Knutson:Why is it shocking to you? I would say the shocking part is the lack of price sensitivity. Not just, I would buy it for this price. It's more, I just want shares. That is what is so surprising to me is to hear this fervor of nothing will go wrong. It has to go up. Mm-hmm. And as anyone who has covered markets for so many years, we know that markets don't always go up. The potential to make a lot of people a lot of money is big, but there's also potential to really erode the trust of the individual investor. And honestly, that's what I'm thinking about individual investors here. What happens if they see this huge loss?

18:56Ryan Knutson:You know the old adage, buy low, sell high? That's what earned Musk a lot of fans with Tesla. Investors had years to buy that stock while it was still pretty cheap, and they made tons of money when it started skyrocketing about a decade ago. With SpaceX, much of the rise in its valuation actually took place when it was a private company. And its current valuation,$1.7 trillion, already bakes in a lot of those future expectations. And Tesla has, that valuation has rocketed up higher while it was a public company. So individuals were all able to participate in that. So if it comes down, even if it has a day when it comes down 15, 20 percent, a lot of those folks got in at a much lower level.

19:44They're still in the green. Here, we're seeing everyone get in at a very, very high level. And that's just, I just worry. But I'm a warrior.

19:56Ryan Knutson:But even if you have zero plans to buy SpaceX stock, Corey says that if you have a 401k or other investments in retirement funds, you might not have a choice. The NASDAQ 100 Index, which tracks the 100 major U.S. companies, has agreed to change its rules to include SpaceX in the next month. And that means major investment funds attract the NASDAQ 100, some of which might be in your 401k, will automatically buy SpaceX. Usually, these indexes say you need to wait at least three months, maybe a year, before you're allowed to be in our index because we need the stock to be less volatile, fewer stock swings.

20:36We don't want it right when you go public. It needs, quote-unquote, seasoning time. But what the advisors or bankers were saying to the index providers was, SpaceX is going to come public. It's one of the top, the largest companies in the world. If you don't have it in your index, you're missing out on a huge part of the market.

21:00Ryan Knutson:Not every index sees it as worth the risk, though. For instance, the S &P 500 isn't changing its rules. SpaceX isn't the only company with a major IPO coming. Anthropic and OpenAI are also expected to go public later this year. We're hearing about so many other IPOs that are coming down the pipeline around artificial intelligence in particular. Why are there so many companies that are looking to IPO right now? It comes back to how much cash these companies are burning through and how fast they're burning through that cash. Of course, if SpaceX's IPO trades down, I think OpenAI and Anthropic are going to have to re-evaluate their plans.

21:46Ryan Knutson:So far, that doesn't look like it's going to be an issue. BlackRock alone wants to buy at least$5 billion worth of SpaceX shares, according to people familiar with the matter. And other large asset managers have also made clear their intention to buy. So there's all this excitement now, but does that tell you anything about whether SpaceX will actually live up to all this hype? I mean, that is the... $1.7 trillion question. Yeah, it's a trillion dollar question. And it's going to be fascinating and exciting to watch on Friday.

22:49Thanks for listening.