Space Exploration Technologies (NASDAQ: SPCX) caught a lot of investors’ attention when it listed on the Nasdaq stock market a couple of months ago. Since then it has had a rollercoaster ride, but the SpaceX stock price now stands 18% below where it started.
So could it now potentially be a bargain for investors to consider?
The difference between price and value
To start with, it is useful to explain what a bargain actually is in investment terms. Just because a share is cheaper than it used to be does not necessarily make it a bargain. It can be that it used to be very overpriced and now it is merely overpriced.
A bargain is when you pay less (ideally much less) for something than turns out to be of worth, even accounting for the costs of tying up your money in it.
As billionaire investor Warren Buffett puts it: “Price is what you pay. Value is what you get”. Or not.
SpaceX looks overpriced to me, based on its current business
So looking at the SpaceX business from the ground up (fittingly for a rocket firm), does it now potentially offer good value? From a long-term perspective, I think potentially it does, as I explain below.
More immediately though, I see SpaceX stock as badly overpriced even now, despite being markedly cheaper than when it listed.
The company is lossmaking and is burning through cash fast. Sure, it ended last quarter with $100bn of cash, cash equivalents, and marketable securities and could likely raise more cash easily by selling shares.
But my concern here is not about short-to-medium-term liquidity. It is about the fact that the company has not yet proven it can generate positive cash flows at an operating level.
Set against that, the market capitalisation of $1.8trn simply looks unjustifiable to me. I have no plans to invest.
Could this turn out to be a bargain?
Stepping back to a longer-term view though, it may be argued that my concerns above lack relevance for a growth company.
SpaceX is not burning through cash for no reason. It is spending heavily to try and develop sustainable competitive advantages in business areas that demand capital expenditure. If it can do that, it should gain pricing power that could help it become profitable.
If that works well enough, it may yet be that today’s SpaceX stock price comes to look like terrific value some years down the line. I recognise that, but I also see lots of risks.
Competition is strong and growing not only in space launches, but also satellite wifi and social media. That alone is a huge risk, in my view. Then there are other concerns, from the unproven business model of the company’s social media platform X to the long-term impact of telecoms regulation in satellite wifi profitability.
For investors who like a decent margin of safety, I do not currently see SpaceX stock as worth considering. Fortunately, there are other growth stocks in today’s market that are already profitable and hopefully offer better margins of safety.
Should you invest £5,000 in SpaceX right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
