Never mind the rockets. Just looking at a share price chart for Space Exploration Technologies (NASDAQ: SPCX) can sometimes feel dizzying in itself. The past month alone has seen the SpaceX share price soar 23%.
Despite that though, it remains well below the price at which it listed earlier this summer. It is also over 30% below the high price it hit after that. So could this now potentially be a bargain? Or might it be overpriced?
How investors deal with market uncertainty
When thinking about that question, it can pay to step back and ask another: why has the SpaceX share price moved around so much?
When buying or selling shares, most investors are doing the same thing, whether or not they realise it. They are making a judgement on what they think the share will be worth at some point in the future, including any dividends they expect to receive between now and then.
They are then comparing that to the current price. The investor judges whether, even allowing for the cost of tying their money up, they think the current price is attractive compared to what they see as the long-term value on offer.
Looked at this way, the volatility in the SpaceX share price over the past several months tells its own story. Different investors in the market are taking very different opinions when it comes to evaluating what SpaceX’s long-term value as a business may be.
Strong growth prospects, but not cheap ones
That is understandable as there are so many moving parts here. For starters, SpaceX is a complex business. It has a rocket launch operation, but also a satellite wifi provision business and an AI and social media division too.
Perhaps there are some crossovers that help those businesses work better under one roof, such as shared AI development opportunities. But it remains to be seen how well this unitary business model turns out.
Another difficulty is the pace of growth. SpaceX revenues in the most recent quarter grew 92% compared to the prior year quarter. That sort of growth gets investors understandably excited – but it comes at a price. That price comes in the form of capital expenditure, as well as operating expenditure.
SpaceX knows all about burning rocket fuel at high volumes in a short period of time – but it is also doing the same when it comes to cash. The AI division alone reported costs and expenses that were $1.6bn higher than for the prior year quarter, as it spent heavily on infrastructure.
I’m uncomfortable with the risks
If that spending helps strengthen SpaceX’s competitive advantage and helps it earn more from its proprietary technology and customer base, it could turn out to be money well spent.
If the business shows progress in this direction I think it could help push the SpaceX share price up. Today’s price may yet seem like a bargain in retrospect.
But there are plenty of risks, including growing competition across all of its business areas and the geopolitical risks involved in Starlink satellite wifi’s use in armed conflicts.
I do not think the current share price offers me anywhere near a big enough margin of safety for such risks. I will therefore not be investing.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
