Did you miss out on the Space Exploration Technologies (NASDAQ: SPCX) listing in June? Since then, the SpaceX share price has been up, down and all around. Indeed, it is now 8% cheaper than when it listed three months ago.
But while it is now below its listing price, SpaceX has actually soared 39% since the first week of August.
Could it maintain this strong upwards momentum – and ought I to buy some for my portfolio?
Brilliant potential, not just share price momentum
There are different ways of explaining the very strong performance of the SpaceX share price over the past month or so. One is to point to the momentum of the share. Lots of retail investors are very interested in this unique company.
Having missed out on buying when it was listed, some have now taken advantage of price falls. That has helped push the price up. It has also increased other investors’ keenness not to miss out, pushing the share up further.
But I do not think momentum can explain the full story here. A 39% increase in value in a matter of weeks is significant. That is especially so for a company that currently commands a $2trn market capitalisation.
SpaceX’s first release of its quarterly results as a listed company last month was a key catalyst, in my opinion. It underlined two key features of the investment case: revenue is already large ($7.8bn in the quarter) and it is growing very fast (92% year-on-year).
How are people valuing this share?
Then again, with a $2trn market capitalisation, it is hardly surprising the company is growing fast and already has sizeable sales.
This sort of growth does not come cheap. SpaceX is committing huge sums to capital expenditure. In the most recent quarter alone, capex soared to $18.4bn from $2.8bn. Even more money may be required down the road as SpaceX bids to scale up its business in cash-hungry areas such as rocket launches and AI development.
Clearly, as a lossmaking company, investors are looking to something other than a price-to-earnings (P/E) ratio when valuing this share. That makes sense. Even for a profitable, well-established business, a P/E ratio is only one element in the arsenal of valuation tools that the savvy investor uses.
Still, in the absence of profits, what are investors using to value this share?
I’m intrigued, but not tempted
In short, I think the current valuation is based on ambitious dreams of future growth. They might come true – and I reckon the SpaceX share price could soar even from here if they do.
SpaceX does have a lot going for it that could help it grow spectacularly. It has proprietary technology, an existing customer base of deep-pocketed clients and financial muscle that can help fund research and development. But it also faces multiple risks.
Competitors such as Blue Origin are already sizeable themselves — and newer rivals are popping up.
SpaceX’s heavy AI expenditure could turn out to be largely wasted money as it is yet to demonstrate an attractive return on investment. Geopolitical tensions could also block the company from many markets.
With so many unknowns, I actually think the SpaceX share price looks unjustifiably high. I am ignoring it in favour of much cheaper-looking growth companies that are already profitable.
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Christopher Ruane does not hold any positions in the companies mentioned.
