A 40% share price gain in a matter of weeks is unusual. But that is exactly what we have seen lately with Space Exploration Technologies (NASDAQ: SPCX). The SpaceX share price has shot up 40% since the first week of August.
Why, and ought I to invest?
Very impressive revenue growth rate
The simple answer to explaining the share price surge, in my opinion, is that strong revenue growth has fuelled bulls’ enthusiasm for the stock.
Last month saw the company release its first quarterly earnings since listing on the stock market in June. The topline number of 92% year-on-year growth animated investors who are hoping that SpaceX has very strong prospects of rapidly building its business.
Revenue growth helps support the investment case here for multiple reasons. The larger the revenues, the greater the potential economies of scale. That could help improve profitability, something that is important as SpaceX remains heavily lossmaking and is burning through cash.
Additionally, some of the businesses in which SpaceX competes – like rocket launches – have high barriers to entry. The more it can build its position now by growing sales, the harder it may be for rivals to compete in future. That could help profitability.
The valuation debate rages on
Still, while that may explain the recent surge in the SpaceX share price, it does not answer my question of whether there is good enough value on offer to justify adding the stock to my portfolio.
SpaceX is losing money hand over first. It is not yet clear when – if ever – it is likely to break into the black. Capital expenditure costs, notably but not exclusively on AI, are large and could get even bigger.
That matters because, as I see it, the current valuation is based on what the company could be, not what it is. If it was based on current business performance, I do not believe it would merit anything like its $2.1trn market capitalisation.
Even looking ahead though, does that market-cap make any sense? It seems to presume that the company can keep growing fast and then break into profit at some point.
I think the price tag’s too high
At the moment the current S&P 500 price-to-earnings ratio is 26. At a valuation level like that, the SpaceX’s current market-cap would imply earnings of around $81bn a year. That is not impossible at some point — but it seems simply fantastical for now.
There are plenty of risks that could get in the way of maintaining revenue growth rates and making a profit, after all. Competition is increasing in all of SpaceX’s main business areas. The high capex rate I mentioned above could mean profitability actually gets further away, not closer.
SpaceX has impressive technology, an established customer base and large target markets. But I see it as badly overvalued. So for now, I am ignoring it in favour of far more attractively-priced growth stocks elsewhere in the market.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
