Now into his 90’s, billionaire investor Warren Buffett has seen the space race unfold within his lifetime. And when it comes to buying stock in Space Exploration Technologies (NASDAQ: SPCX), better known as SpaceX, I am taking a leaf out of his book.

Buffett and the circle of competence

OK, I do not know exactly what Buffett’s approach to SpaceX stock is, but I do know enough about his general approach to investing to surmise what I think it may be, as well as draw some conclusions of my own about whether I ought to add the growth share to my portfolio following its price crash.

Buffett has repeatedly emphasised the importance of staying inside an investor’s circle of competence. In other words, that means sticking to what you know and understand.

Is SpaceX’s business within my circle of competence? I do feel I have a handle on some of the key areas in which the company competes, but not a deep expertise. Still, I would feel comfortable investing in this area and indeed have formerly owned shares in UK-based SpaceX supplier Filtronic.

What about the business model?

Buffett generally likes a business model that works so smoothly it hums. Think of some of his best-known investments, such as Coca-Cola and vehicle insurance company Geico. They basically have clear business models that have been proven over decades and run successfully in pretty much the same way from one year to the next, or even one decade to the next.

Here, SpaceX looks different to me. For starters, it seems like it is really multiple different businesses put together in one company. Launching rockets for other organisations (such as NASA) and maintaining its own Starlink satellite wifi offer are different activities, but at least have some crossover, in my view.

I am less convinced that the company’s AI division fits into the overall mix in a meaningful way. Clearly then, this remains a work in progress. Not only is the business model in flux, it remains unproven.

For Buffett, that matters when it comes to investment. Unless you can identify a company’s business model, you are unable to assess with a high degree of confidence how it is likely to perform in future.

SpaceX’s valuation remains high

When he does understand a business, Buffett aims to build a margin of safety into any investment. So he looks to buy into what he calls great businesses at an attractive price.

SpaceX stock has crashed in recent weeks. But that does not necessarily mean it is now cheap. Far from it, in my view. The lossmaking company still commands a $1.5trn market capitalisation.

I do not see that as justifiable, let alone attractive.

The argument for such a valuation is SpaceX’s potential. It has an installed customer base, proprietary technology and a highly skilled workforce. It could therefore grow revenues at speed and perhaps turn those capabilities into profit.

Be that as it may, for now the company remains lossmaking and I find its valuation far too high. Using the Buffett approach to investing I think there are far more attractively-priced, profitable companies with proven business models on offer elsewhere in today’s market.

Should you invest £5,000 in SpaceX right now?

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Christopher Ruane does not hold any positions in the companies mentioned.