Stay grounded: blueprints vs. buildings

Since everyone’s talking about SpaceX this week, let’s “go there,” too.

I know I touched on the topic two weeks ago in “SpaceX and the misunderstood power of scale.” And then Nick Ward went into much greater detail last Friday in “Before you buy SpaceX stock.”

But considering what a big to-do this company is, I think it warrants one final discussion before its initial public offering (IPO) tomorrow.

We all know the bullish projections that SpaceX could become the world’s most valuable company. And, really, they’re not wrong.

Aaron Burnett of Mach33 recently published an extensive estimate of what SpaceX might be worth in 2040. What he wrote was very well done: thoughtful, detailed, straightforward, and intellectually rigorous.

The way he sees it, SpaceX’s Starlink platform – the satellite system designed to deliver high-speed broadband around the globe – will become its cash-generating engine, bringing in hundreds of billions of dollars in annual revenue. That will then fund the company’s plans to establish an orbital computing infrastructure… which will go on to produce nearly $1 trillion of annual revenue by 2040.

Again, that might very well happen.

But it hasn’t happened yet.

Physicist Enrico Fermi became famous in the 1930s for solving seemingly impossible problems by first determining whether the assumptions were reasonable. And, with all due respect, when I apply his lens to Burnett’s, it’s crystal clear that the Mach33 model depends on possibilities instead of actualities.

Investors are essentially guessing on:

To put it in real estate terms, SpaceX is still a blueprint at this point, not a building. And while a blueprint is literally designed to lead to a building, they’re not the same thing.

Investors who try to pretend otherwise can find themselves wishing they hadn’t.

Every great company begins as an idea, including Wide Moat Research. So I’d be delusional if I scoffed at the notion of investing in a concept before it’s an actuality.

The problem occurs when investors begin assigning certainty to ideas alone.

Even when those ideas work out, it’s often after years or even decades of struggle. History is filled with world-changing advancements that still generated disappointing and outright disastrous returns for early investors.

Railroads, airlines, the internet… In each case, the technology did eventually succeed. But far too many fortunes were lost along the way.

Or, if you want a much more recent example, look no further than Fermi America (FRMI), a company ironically named after the aforementioned Enrico Fermi. Investors went crazy over its IPO last year.

Not SpaceX-level crazy, mind you. But they were wild about it nonetheless.

When Fermi went public in October, investors were obsessed with its vision to capitalize on artificial intelligence (AI) by building one of the largest planned data center campuses in the United States. Its addressable market seemed enormous – largely because it was – and its future looked limitless as a result.

But there’s always a limit, just like there’s always a reality that can mess up one’s undeveloped plans.

I’ve written about Fermi a few times now, including last December, when I explained, “Fermi has no operational assets. None. Zip. Zilch. Zero. And it won’t [have any] for another year.”

So while investors (i.e., speculators) piled in to value its IPO at $21 per share, that opinion didn’t last long. A major contract was terminated in December. Lawsuits were subsequently filed against it. And its CEO and CFO have since stepped down in disgrace.

So it’s no surprise that the stock was trading at around $6.90 last time I checked – and that was after rallying around 20% yesterday.

Fermi was never a bad idea in itself. And it could still end up earning the valuation originally assigned to it.

But a blueprint has one value… and a completed building has more. Let’s never forget the difference.

That distinction is precisely why I remain focused on HALO assets: investment opportunities that are “heavy [on] assets” with “low obsolescence.”

Examples of these kinds of companies with profitable, mission-critical assets include:

These businesses may not capture headlines the way SpaceX does. But their cash flows actually support their valuations.

I, for one, am much more impressed by those actualities than the possibilities some other companies offer. Call me old-fashioned, out of touch, or boring for that stance (or whatever else you’d like).

That’s your prerogative, if you so choose.

Mine is to make money – and keep it.

Here at Wide Moat Research, our job isn’t simply to identify extraordinary possibilities. It’s to determine what those possibilities are worth.

Not just for tomorrow, but for today as well.

The United States of America was built by dreamers focused on “tomorrow”: people who wanted more money, more religious freedom, more opportunity, and more liberty from unnecessary restrictions.

Really, it was built by people like SpaceX’s Elon Musk. We wouldn’t be anywhere without his kind of vision of a world – a universe – that can benefit our children and grandchildren.

As Americans, we should admit that kind of vision, especially as we approach the 250th anniversary of our Declaration of Independence. But as investors, we also need to remember that we’re better off owning buildings than blueprints.

So while others run to assign value to orbital data centers that might exist in 2040, I remain perfectly content to own the data centers, cell towers, logistics facilities, cold-storage warehouses, advertising assets, and aviation infrastructure that are creating value right now.

That’s why I cautioned investors against purchasing shares of Fermi last year, no matter how intriguing it appeared. And that’s why I’m cautioning against purchasing shares of SpaceX today.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

Do you know there’s more to investing than SpaceX?

Moreover, they’re well-priced companies with real profits and long histories of sustainability to boot. Those are qualities that, with all due respect to Elon Musk, SpaceX simply cannot claim.

Join Nick Ward and me in this week’s Wide Moat Show as we explore the consumer discretionary sector instead – including seven stocks trading at stunningly low valuations.

Catch the full episode right here.