With stock in SpaceExploration Technologies (NASDAQ:SPCX), or SpaceX as it’s commonly known, now (8 October) changing hands for 24% more than when the group listed in June, investors who participated in the IPO are sitting on a decent profit.
But with the business making losses — and needing billions of dollars for investment over the next few years — is it the sort of stock that investors should consider only having a short-term relationship with (snog), or is it more of a keeper (marry)? It’s important to get the decision right. Otherwise, there could be a painful and expensive divorce ahead.
A tried-and-tested investment philosophy
The Twelfth Magpie‘s a firm believer in the benefits of long-term investing. It might, therefore, seem strange to discuss whether those early SpaceX shareholders (like me) should get rid of the stock after only four months of trading. But there’s no point holding a stock that’s doomed. So post-IPO, what are SpaceX’s prospects?
Unfortunately, SpaceX has only published one set of earnings since becoming a public company. And at first sight, they look encouraging. Compared to the previous three months, revenue for the quarter ended 30 June was 66% higher and adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) was up 214%.
Cash is king
However, the group also increased its capital expenditure (CAPEX) by $8.26bn to $18.37bn. Goldman Sachs estimates that SpaceX will need $350bn of cash through until 2030.
This number’s important because, although CAPEX is initially recorded on a company’s balance sheet, it’s then written-off (depreciation and amortisation) over a period of time thereby reducing its earnings.
And with any loss-making business, once it runs out of its own cash it has to either borrow (more interest) or ask shareholders for additional money.
That’s why EBITDA isn’t universally popular. It excludes interest, depreciation, and amortisation.
Instead, many investors prefer to look at the cash available to owners, which billionaire investor Warren Buffett defines as earnings plus depreciation and amortisation, less average CAPEX. Using this measure, SpaceX had a cash outflow of $16.06bn during the quarter. For context, it raised $85.7bn from its IPO.
It’s clearly a long way from being in the black. I can understand why some investors might prefer to avoid the stock altogether.
Does management think the tooth fairy pays for capital expenditures?
Warren Buffett
Some thoughts
However, history tells us that the rule book is thrown out of the window when it comes to all-things Elon Musk. Look at Tesla. It’s trading at over 300 times earnings. But this tells us something. It demonstrates that investors are looking far into the future. Tesla’s positioning itself as an AI business yet it hasn’t sold any robots yet.
Similarly, SpaceX’s valuation isn’t based on what it’s achieving now but its potential. It claims its total addressable market is worth $28.5trn.
Personally, I think Starlink’s a good business (it’s profitable, at least) and Starship, the world’s most powerful rocket, went into orbit for the first time last week (28 September).
I plan to hold on to my small number of shares. Others could consider adding some to their own portfolios. But like any marriage, I’m sure there will be a few ups and downs along the way.
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James Beard owns shares in Space Exploration Technologies.
This story originally appeared on Motley Fool
