For a company that regularly shoots for the stars, Space Exploration Technologies (NASDAQ: SPCX), commonly known as SpaceX, has started its stock market life in a similar fashion.
It is only last month that the company listed on the NASDAQ stock exchange. It soon soared – and crashed.
In fact, just weeks after it listed, it has already lost over half the value it reached at one point.
SpaceX is far from over as an investment story, despite that: its market capitalization of $1.4trn dwarfs most UK companies.
On this side of the pond, our biggest company by market capitalization (HSBC) has a market cap just one-quarter that of SpaceX.
So, having fallen by half, could SpaceX stock potentially regain that lost ground – meaning it would double in value from here?
Could, would, and maybe
In short, yes, that may happen. However, if it happens at all then I do not expect it to be any time soon.
To understand why, it is helpful to think about how the market has been valuing SpaceX stock.
It has not been based on a normal valuation metric like comparing the share price to company earnings. After all, SpaceX is loss-making.
Nor do I think the stock has been valued – even now, after its price crash – based on current sales or likely short-term future sales. On a price-to-sales ratio in the high 70s, it still looks wildly overvalued to me based on such an approach.
So, what has driven SpaceX to be valued the way it is? I reckon it is investors’ belief that it could have a transformative business model in some high-growth areas.
The firm’s Starlink wifi offering is already profitable. The scale and technological capabilities of its rocket business could also ultimately prove to be a big money spinner.
On top of that there are other aspects of the SpaceX business I see as punts, such as its AI offering. That could turn out to be a future Lycos – then again, it could turn out to be a future Google. At this point, nobody knows.
There seems to be a lot of optimism built into the valuation.
I’m not ruling a recovery out
Over time, that optimism could turn out to be justified – and if it does, it may well push the share price back up. I see that as more likely if the company can prove that it can make money.
Similar investor scepticism once surrounded Tesla, also headed by SpaceX’s boss Elon Musk.
While Tesla still has legions of doubters, it did, after years of losses, start turning a profit. Tesla stock has soared 23,716% since its stock market listing.
Expectations on SpaceX’s listing, 16 years later, were much higher – and so was the pricing.
Still, if the business can deliver in the coming several years, I think its stock price could yet recover. However, I do not expect that to happen quickly, especially as long-term investors will become eligible to sell their stakes in coming months, potentially depressing the share price.
For now, I am not ready to invest. I prefer to see a proven profitable business model – and what I would regard as a far more attractive valuation. I see that in some other growth shares even in this market…
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
