SpaceX and the misunderstood power of scale

Let’s talk about SpaceX.

The aerospace manufacturer and space transport services company officially filed its S-1 registration statement with the SEC last week. And it’s looking at an initial public offering (IPO) on June 12, which is right around the corner.

Analysts are projecting a $1.7 trillion to $2 trillion valuation – more than enough to make investors’ vision go green. But that doesn’t change the fact that, as I explained last week, I don’t recommend investing in IPOs.

For one thing, there’s too much marketing and emotional manipulation that goes into market debuts. For another, early-in investors often use IPOs as high points to cash out, which means the stock price often falls – sometimes significantly – in short order.

Finally, private companies can face challenges while transitioning into public entities. There are different mechanics and nuances to consider, and it can be a rocky road navigating through them.

Now, SpaceX founder and CEO Elon Musk has been running Tesla (TSLA) as a publicly traded company for over two and a half decades. So that latter concern might not apply here at all.

But the first two do.

As such, try to look past how this will likely be the biggest IPO we’ve ever seen – by far… and consider just two investing elements that determine a company’s long-term trajectory.

The first is scale: how sheer size can be used to cut production costs. Larger companies tend to have more efficient operations and lowered costs of capital.

They’re making more money off their ability to offer more products or services to sell under one corporate roof. And banks recognize and respect that, giving them better lending rates to expand even further.

That matters immensely. But so does valuation: how much a company will really be worth in the near future.

And while scale is most definitely in SpaceX’s favor, its current price assessment is far less set in stone.

You don’t have to be an Elon Musk fanboy to see that SpaceX has scale on its side. The company has such a wide business moat, it’s practically a monopoly.

According to estimates by Space.com, SpaceX launched about 85% of American orbital flights last year. And of the 317 successful launches worldwide, it still claimed more than half at 165.

If that data doesn’t blow your mind, you also need to consider how its earth-to-space moat includes:

Stated simply, SpaceX not only owns an established and powerful highway to space that allows it to streamline costs left and right… it also controls the dominant low-earth-orbit communications network behind it. There’s no need for it to outsource such tasks; it’s got that cost under control.

All of this is incredibly impressive. There’s no two ways about it.

However, we also need to consider SpaceX’s projected valuation of roughly $1.75 trillion. That means it will trade at about 91x its trailing annual sales…

Which are only estimated at $19 billion…

Without any consistent profits yet.

Compare that to Nvidia (NVDA). It’s generating massive amounts of profit and free cash flow, yet it’s trading closer to 21x trailing revenue on a price-to-sales basis.

So 91x seems pretty rich, to say the least.

With its strength of scale, SpaceX has definite potential to become a trillion-dollar-plus company someday. But it’s not even close to being there yet, and investors could be setting themselves up for abject failure by ignoring that fact.

That’s why I’ll be watching its market launch just as closely as everyone else… but keeping my actual money far, far away.

Frankly, there are real estate investment trusts (REITs) out there that offer much more attractive combinations of scale and valuation. These opportunities might look much more boring.

But they also entail far less risk of producing volatility-induced heart attacks down the road.

If scale is what you’re looking for, consider Equity Residential’s (EQR) proposal to buy up AvalonBay Communities (AVB). If it goes through, that all-stock deal will result in the world’s largest publicly traded apartment REIT ever.

It would also be the largest REIT-on-REIT purchase, with an enterprise value of $35 billion. That’s more than 50% larger than warehouse power-player Prologis’ (PLD) $22.4 billion takeover of Duke Realty in 2022.

That kind of action is possible – without projecting astronomical valuations – because of Equity’s impressive size and subsequent capabilities.

Investors can also look at Realty Income (O), “The Monthly Dividend Company.” Founded in 1969, it’s built up a net-lease empire that allows it to make massive acquisitions with global sourcing capabilities.

Smaller landlords just can’t compete with that.

Its size and affiliated strength attracts cheaper capital, which allows more acquisitions, creating a cycle of success that’s extraordinarily difficult to disrupt.

VICI Properties (VICI) is working on – and succeeding in – that same strategy, only in the gaming and experiential field. It’s been leveraging its ownership of trophy assets on the Las Vegas Strip to make purchase after purchase in recent years.

They’re not making any more land on that 4.2-mile stretch, which attracts visitors from all around the globe, including international business conventions and individuals from the wealthiest strata of society. There’s no place in the world like Las Vegas, and VICI has a whopping 11 dominant properties there.

Then there’s the aforementioned Prologis, which has long-since surpassed its original status as a warehouse landlord. Today, it operates a global logistics infrastructure platform throughout major population centers, ports, and transportation corridors.

The REIT boasts deep tenant relationships with global logistics operators, as well as superior access to land and power supplies. Moreover, its size – and smarts in employing that size – is allowing it to diversify into data centers, the world’s fastest-growing real estate category.

Looking at all these companies, there’s absolutely no doubt that scale opens doors.

It’s just a matter of valuing those openings appropriately.

SpaceX is extraordinary in what it does, how it does it, and at what scale. There is quite simply no other company like it, and it deserves a high valuation as a result.

But it doesn’t deserve suspending good judgement. And good judgement says that a 91x valuation is probably flying too close to the sun.

I can’t get on board with that.

Heavyweight REITs like the ones I mentioned above are much more realistically positioned for investors to profit from. There’s room in their share pricing for actual error and market misgivings alike.

If anything, they’re undervalued.

Equity Residential, Realty Income, VICI Properties, and Prologis already have demonstrably durable cash flow and investment-grade balance sheets to match. While shareholders do expect more growth ahead, that’s based on years and even decades of proven track records.

They’ve already shown that they’re safe, stable stocks to own. They’re known entities working in well-established fields that offer sleep well at night (SWAN) probabilities.

SpaceX, for all its accomplishments and potential, still has much to prove. Its scale means a lot, but it doesn’t mean the world.

Keep that in mind as the countdown continues to this historical launch. In the end, I think you’ll be happy you did.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

Real estate investment trusts (REITs) have been largely unloved for years. Ever since interest rates started going up, their stocks have been going down.

But I’m calling it: the end to that trend.

In last week’s Wide Moat Show, Nick Ward and I discuss Q1 REIT earnings… and the very good news I’m taking from it.

Catch the full episode right here.