Space Exploration Technologies (SPCX +6.14%) reported its first financial update as a publicly traded company (for the second quarter) on Aug. 4 amid high expectations. The company’s shares rose before it released its earnings report. Unfortunately, the space company’s results disappointed the market, sending the stock sharply lower and extending the losses from recent weeks. SpaceX stock is down 20% from its IPO price and 52% from its all-time high. However, even at current levels, the company’s shares aren’t attractive, in my view. Here are three reasons why I am not buying the dip yet.
Image source: The Motley Fool.
1. SpaceX’s massive spending
SpaceX’s second-quarter results weren’t bad. The company’s revenue soared 92% year over year to $7.8 billion, while it cut its net loss nearly in half, landing at $541 million for the period, versus the $1 billion reported in the prior-year quarter. However, there are some worrying signs. Notably, SpaceX is spending a small fortune to capitalize on what it perceives as a massive opportunity in artificial intelligence (AI). During the second quarter, SpaceX’s capex within its AI business was $15.8 billion, more than doubling quarter over quarter. It was also more than six times the capex in its two other operating segments combined.
Management says it will continue to spend heavily on AI over the next few quarters. That’s a problem for the company’s near-term performance. The market is punishing other corporations that are also spending heavily on AI, even when they generate significantly more revenue and earnings than SpaceX and also boast attractive opportunities in this market. Perhaps the spending is justified and will eventually transform SpaceX’s business. But it’s unlikely that we will see a significant return on investment from SpaceX’s AI-related spending over the next year, which leads me to believe that the stock may fall further and offer investors who believe in its vision an even more attractive entry point.
Space Exploration Technologies
Today’s Change
(6.14%) $6.65
Current Price
$114.92
Key Data Points
Market Cap
Day’s Range
$105.11 – $115.75
52wk Range
$104.83 – $225.64
Volume
255.2M
Avg Vol
121M
2. Incoming downward pressure
SpaceX is acquiring Cursor, an AI start-up, for $60 billion. One noteworthy aspect of this deal is that it is an all-stock transaction. Translation: SpaceX is diluting existing shareholders by issuing new shares to fund this acquisition. It may be worth it in the long run if Cursor can improve SpaceX’s AI business, but this transaction may put downward pressure on the stock over the next year or so, especially if many of these new shareholders decide to cash out.
Also, SpaceX’s first lockup expiration date is Aug. 6. This refers to a set period after a company’s IPO — the lockup period — during which company insiders are prohibited from selling their shares. Once it expires, they are free to do so. And if they do in large quantities, it can put downward pressure on the stock. We don’t know for sure whether SpaceX’s insiders will unload a lot of their shares, but it is yet another thing investors have to factor in before investing in the stock right now.
3. The stock is too expensive
Even with robust revenue growth, SpaceX’s valuation looks unreasonable, at best. The company’s market cap is $1.5 trillion, but it generated just $7.8 billion in quarterly revenue and is not consistently profitable. Every other publicly traded company worth $1.5 trillion or more generates significantly higher sales and is profitable. Another way to see that SpaceX’s valuation is too rich is to consider its price-to-sales (P/S) ratio, which is currently an incredible 73.4. The reasonably valued range typically starts below 2. Even granting that SpaceX deserves a significant premium, given its dominance in markets such as space travel and satellite-based connectivity, its P/S is too high.
In my view, the market will eventually correct that and send SpaceX’s shares much lower, at which point the stock will be worth serious consideration. After all, SpaceX is developing Starship, a next-gen, fully reusable rocket that could significantly cut space travel costs and allow it to stay ahead of its competitors. It is also building a terrestrial mobile network that could enable it to compete with legacy providers. And that’s to say nothing of the company’s AI opportunities. The future is promising for SpaceX, but at current levels, the stock is likely to contract over the medium term, as its success seems already baked into the share price. Another 52% drop will make SpaceX a far more attractive investment.
