Today is the day for the largest IPO in history as SpaceX looks to raise about $75 billion in its Initial Public Offering– far surpassing the previous record of ~$30 billion raised by Saudi Aramco.
SpaceX also holds the record for the most valuable IPO in history with an initial market cap of ~$1.8 trillion (with a T!). Saudi Aramco initial market cap was $1.7 trillion with third most valuable being Alibaba at $170 billion.
With a market cap of $1.8 trillion SpaceX’s trailing twelve-month (TTM) revenue sits at ~$19 billion, representing about a 33% increase from the previous year. That implies a price-to-sales ratio of roughly 100x!
To put that into perspective:
- The long-term price-to-sales ratio for the tech-heavy Nasdaq is about 4.3x for perspective so SpaceX is about 22x more expensive than the overall long-term average of the Nasdaq 100 index.
- The long-term average price-to-sales ratio for the broader S&P 500 is about 1.8x (though the S&P 500 is currently trading at about double it’s own long-term average).
Let’s think about the implications of that 100x price-to-sales ratio.
Assume that as the company matures over time, it eventually settles around a 4x P/S ratio–double the S&P 500 but in line with the Nasdaq 100. If we assume the stock price does not change at all from current levels, a 4x multiple implies a required total annual revenue of about $450 billion. That is roughly 23x greater than current revenue levels.
If SpaceX continues growing its top-line revenue at 30% per year indefinitely, it would take about 12 years to reach that $450 billion mark.
In other words, if you buy the stock at the IPO price today, and the price remains completely flat for 12 years while revenues compound at a blistering 30% annually, the valuation would finally be fundamentally justified.
But it is highly unusual for a company to grow annual sales at 30% per year indefinitely. In the hyper-scale initial stages it’s possible, but eventually, the law of large numbers forces that growth to moderate.
We remember this exact story with Tesla. Bullish analysts justified its meteoric price with completely unrealistic growth projections, hand-waving fundamental analysis away because “Tesla is not a car company, it’s a tech company.” For years, I addressed how ludicrous those baseline assumptions were. To justify its peak valuation, Tesla’s revenue would have had to continue climbing at extreme, unsustainable rates that essentially assumed it would become the only auto supplier on earth. Because that was the inevitable mathematical conclusion of those growth rates, it was easy to spot the absurdity.
And sure enough, look at what happened over the last two years: Tesla’s revenue essentially flatlined. What happens to a stock price when the market prices in double-digit sales growth into perpetuity, and sales suddenly hit a wall? The valuation model collapses. Perhaps this is why Elon Musk pivoted so heavily toward an IPO for SpaceX to capture the next wave of market liquidity and discussing the potential to absorb Tesla?
Back to SpaceX… Christopher Bloomstran of Semper Augustus put it incredibly well when responding to an analyst claiming SpaceX will easily be worth $10 trillion to $30 trillion within a decade. Mr. Bloomstran noted:
“SpaceX at $10 to $30 trillion within a decade? Right. The entire S&P 500, itself as fundamentally overvalued as at any time in its history, has a $65 trillion market value. The prospectus identifies a $28.5 trillion TAM [Total Addressable Market]. Annual sales for ALL S&P 500 companies total $20 trillion.”
For those not familiar with the term, Total Addressable Market (TAM) is the maximum revenue opportunity available for a product or service if a company were to capture 100% of its market. It helps investors evaluate the ultimate theoretical upside of a business concept to guide strategic capital allocation.
Certainly, SpaceX has a more diversified revenue expansion runway and structural growth potential than a pure auto manufacturer like Tesla. However, the exact same speculative euphoria seems to be at play to justify these extreme entry multiples. We just can’t seem to help ourselves from jumping bubble to bubble.
This is not a recommendation to buy or sell SpaceX. However, I know it is top-of-mind for many investors right now and folks are curious about it. The purpose here is simply to provide historical and mathematical perspective so that if you choose to participate, you understand exactly what you are buying and what operational milestones must occur to justify your entry price. This fundamental knowledge is what helps investors identify rational entry/exit strategies rather than chasing a narrative.
This is also not an attack on Elon Musk! He is an incredibly intelligent, once-in-a-generation businessman and engineer who is executing operational feats no other human or organization has accomplished. Although, there is a history of him overpromising products and capabilities, which certainly influenced the stock price at those times. However, my commentary is directed squarely at the euphoric mania this market cannot seem to shake, and the underlying macro liquidity that continues to fuel these speculative peaks.
Over the last 20 years, we’ve watched the market jump from bubble to bubble: Housing, Clean Energy 1.0, the 3D Printing hype, Meme Stocks, NFTs, Crypto, SPACs, Electric Vehicles, AI, and now, the final frontier.
Disclosures:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain
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This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed
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