Since it listed on the stock market in the summer, Space Exploration Technologies (NASDAQ: SPCX) has been on a wild and sometimes very exciting ride. The SpaceX stock price now sits 1% below its listing price. But that price snapshot gives no hint of some of the highs and lows along the way.
With the price now actually slightly cheaper than when it was listed – after which it soared – should I now buy some SpaceX stock for my portfolio?
Growing very strongly – there could be more to come
There are some strengths to the SpaceX business that make me interested.
Customer demand is large and likely to keep growing strongly in coming years. SpaceX is already generating billions of pounds per quarter in revenue .
In its latest quarter, that number almost doubled year on year. With its proprietary technology, large installed user base and impressive client list, I believe SpaceX can likely keep growing revenues strongly in coming years.
So why have I not invested yet? There are two key reasons First, SpaceX is yet to make a profit and the company is burning through cash. I do not have an absolute rule against invest in unprofitable companies, but in general I prefer a business to prove its business model can be sustainably profitable before investing.
Second, with a market capitalisation of $2.2trn, I think SpaceX stock is wildly overvalued.
What if I miss out?
However, there are plenty of examples from the past of growth shares that are unprofitable and look very expensive using traditional valuation metrics, but go on to soar as the business breaks into the black. Tesla is one recent example.
After all, valuation metrics like price-to-earnings ratios are better suited to companies with well-established and fairly stable financial performance. If a business is losing money and growing revenues quickly, valuing it with a high degree of confidence can be difficult.
So what if I am wrong about SpaceX being wildly overvalued? After all, if it can keep scaling fast, that might give it a strong competitive advantage that it can then use to generate profits thanks to economies of scale and pricing power.
Balancing risks and potential rewar
One option could be for me to put a relatively modest sum into SpaceX stock. For example, say I invested £500, that would give me skin in the game and allow me to benefit from any future rise in SpaceX stock.
The downside would be limited. At worst, even if SpaceX stock plummeted to zero (something that is always possible with any share), I would lose no more than £500.
I see elevated risks with SpaceX stock – but such an approach could help me manage my risk while also giving my portfolio some exposure to this growth story.
On the hunt for cheaper growth stocks
Each investor has their own risk tolerance. Some would be happy with such an approach. Personally though, I would rather invest in a share where I think the valuation looks much more attractive when considering both risks and potential rewards.
So for now, I am not putting a single penny into SpaceX stock. Instead I am looking for other growth shares I think offer a more compelling balance of risks and rewards.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
