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With all the hype around Space Exploration Technologies (NASDAQ: SPCX), or SpaceX as it is better known, in the past few weeks, some longstanding British shares can seem both parochial and positively old-fashioned.
There are many examples. To illustrate my point though, let me zoom in on British American Tobacco (LSE: BATS). I think it is possible that SpaceX’s share price growth in the coming decade will far outstrip British American Tobacco.
Despite that, I have no plans to invest in SpaceX. But I do see British American Tobacco as a share to consider, at least for investors who can stomach the ethical question of investing in tobacco.
Understanding this apparent paradox helps to illustrate a number of important investing concepts.
Income matters as well as share price growth
One is the concept of total shareholder return. That consists of share price growth (or dips) during the period of ownership, as well as any income from dividends.
SpaceX does not pay a dividend and as a lossmaking business focused on growth I do not expect it to do so in years to come.
By contrast, British American Tobacco yields 5.3% — and has grown its dividend per share annually for decades.
A growing market can help a company, or hinder it
Another question is how to assess the companies’ respective growth prospects. Cigarette use is in long-term decline. British American Tobacco’s portfolio of premium brands gives it pricing power that can help it mitigate this, but even so its revenues have been falling for several years in a row. That said, tobacco remains a large market.
By contrast, SpaceX benefits from a market that is not just big, but is set to grow substantially. From space exploration and satellite wifi to social media and AI, SpaceX is firmly positioned where the growth is.
That seems good – and it can be. But it also has a downside. In a mature market like tobacco, competition has typically been weeded out and there remain a few big firms who can do a solid but not spectacular business.
Fast-developing markets often attract a lot of competition. That can eat into profitability for decades as rivals compete to succeed, often through scaling up fast.
Some will succeed, while many fail. So as new market areas emerge, there can be some spectacular stock market winners – but also lots of losers.
Here’s why I’m avoiding the stock for now
Will SpaceX be a winner, or a loser? Nobody knows for sure. Given its current strong position, access to capital and entrenched user base, I think there is a fair chance that at least some parts of the firm’s business will do very well in coming years and decades.
So why am I not investing? First, the business model remains unproven. SpaceX is loss-making. Second, the current valuation looks unjustifiable to me. Once the business is more established, I think it will be easier to judge what SpaceX is really worth.
If the business does brilliantly, I think SpaceX stock could soar in years to come even from its current level. I see less scope for explosive growth at a mature company in a declining industry, like British American Tobacco.
But its business outlook and therefore valuations seems far easier to assess – and it offers a tasty dividend.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
