4 “negative Nelly” questions to ask about SpaceX

If you’ve followed any of my recent publications (like this one right here), you know my opinion about SpaceX (SPCX). I haven’t been shy about expressing my concerns surrounding that stock, to say the least.

(I know Brad Thomas has written about his misgivings as well, both here and here.)

As I said during our most recent Wide Moat Show episode, this admittedly high-flying company is trading on hopes and dreams. And while that might sound romantic in theory, it’s actually pretty scary when it’s put into practice.

Basically, that’s just a nice way for me to say “investors” (i.e., speculators) are gambling on the stock rather than paying close attention – or any attention at all – to SpaceX’s underlying fundamentals.

With that in mind, now that the initial public offering (IPO) has happened and shares are available for anyone who can afford them… I’m sorry, but I’m going to be repetitive and write again about why they’re simply not a good idea at this time.

Some of you might not have caught my past commentaries. Others may have even agreed with me at the time, only to start suffering from the fear of missing out (FOMO) since.

After all, the stock is up, even having suffered a 3.56% decline yesterday. And there’s still a whole lot of hope and hype surrounding it.

On the one hand, I get it. There’s no doubt that SpaceX is a very interesting company with a lot to get excited about.

Its space travel component alone is compelling. So are its orbital data centers. And the artificial intelligence (AI) systems that will (theoretically) power Elon Musk’s fleets of humanoid robots one day.

But excitement alone can’t be the basis for a solid investment strategy. You need something more in order to classify it as a smart, safe investment.

And right now, SpaceX quite simply doesn’t have anything else.

There’s clearly a tangible hype around SPCX shares. Unlike some, I’m not trying to deny the obvious.

Nor do I have any problem acknowledging how unpopular my position is, with even institutional investors buying into it. In fact, the last Wide Moat Daily article I wrote was focused on SpaceX’s inclusion in several well-known indices – despite how the company isn’t yet profitable and might never be.

That right there is my fundamental issue… one I’m very concerned is being ignored.

Two weeks ago, I warned of the increasing volatility and risk metrics formerly conservative investments have invited by including SpaceX in their holdings. We know that the S&P 500 won’t allow it until the company meets its profitability standards. But I’m increasingly surprised to see what will, including the Schwab U.S. Large-Cap Value ETF (SCHV).

Here’s a snippet from that institution’s summary page:

At face value, that all seems perfectly reasonable for a value-oriented fund. Yet I have to take issue with Schwab’s interpretation of the word “value” here, which seems to be pretty skewed.

SpaceX has a triple-digit price-to-sales ratio. Not even a price-to-earnings ratio. Price-to-sales.

Because, remember, SpaceX has no earnings to speak of at this time.

Rational analysis seems to indicate that an earnings-less company with a literally astronomical appraisal is anything but cheap. Yet as of Wednesday, SCHV has begun to build a position in it anyway, allocating $1.9 million to SPCX shares.

Now, in its IPO prospectus, the company assesses its total addressable market (TAM) across all its various revenue streams at roughly $28.5 trillion dollars. That’s $28,500,000,000,000.

That’s a lot.

To hopefully put it into proper perspective, the U.S. gross domestic product (GDP) is expected to be roughly $32 trillion this year. And China’s is projected at roughly $21 trillion.

That alone should make you blink. But there’s another consideration still that I’m concerned both individual and institutional investors are missing…

Most of the SpaceX hype seems to center around its extraterrestrial possibilities. And I’ll admit it captures the futuristic ethos of science fiction better than any other company in the market.

On the one hand, who doesn’t think outer space is cool? Then again, as SpaceX’s own assessment shows, we have a long way to go before our lives begin to look like George Jetson’s.

About $22 trillion of the company’s TAM estimate comes from its AI enterprise application segment. That’s the vast majority of it.

The actual space portion of the business – its broadband, Starlink Mobile, and launch component – represents less than $2 trillion of that pool. In which case, SpaceX’s self-proclaimed worth is much, much, much more about its AI ambitions.

So while people rush to place real bets on SPCX’s long-term outlook, I can’t help but wonder if they’ve stopped to question:

Call me a skeptic or a negative Nelly. But I’m not willing to bet that SpaceX will go on to dominate that highly competitive market.

It just doesn’t make sense.

SpaceX has a monopoly on most things space related. I’ll grant it that.

However, as previously mentioned, those operations are not the driving force behind the stock’s current and continuing hype. AI is, regardless of whether people realize it or not.

And that’s a market SpaceX hasn’t come even close to cornering. I know I’ve already said it, but I cannot stress this point enough.

Moreover, those competitors – at least the big names I listed above – have well-established operations that are generating very real and continuing profits. As such, I would argue that those opportunities offer much better risk-reward profiles and realistic upside prospects than SpaceX can.

Really consider my four questions above. Then tell me you don’t agree.

Kind regards,

Nick Ward
Analyst, Wide Moat Research

As we’ve already established, SpaceX is still all over the news, making headlines and causing commentary left and right.

But over at The Wide Moat Show, we’ve got other stocks we want to talk about – like the seven “boring” bargain stocks Brad and I covered in this week’s episode.

They’re primed to yield very nice results, as you can see for yourself when you catch the full episode right here.