Key Points
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SpaceX trades at a lofty valuation despite sinking roughly 13% since the end of its first day on the market.
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Because of its current valuation, SpaceX stock could drop considerably over the next 10 years, even if the business thrives.
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Some estimates, however, forecast such extraordinary revenue growth that SpaceX stock could still deliver a monstrous gain to shareholders.
- 10 stocks we like better than Space Exploration Technologies ›
At this point, if you had invested in Space Exploration Technologies (NASDAQ: SPCX) on its opening day, when the stock ended its first day on the market at about $160 a share, your investment would be in the red. SpaceX has fallen over 13% since June 12.
And under a modest set of assumptions, the next 10 years could push the stock even lower.
The uncomfortable truth is that SpaceX’s starting valuation was so high that even impressive revenue growth over the next 10 years might not automatically lead to impressive returns. Here’s just one scenario: Suppose, for the sake of example, that SpaceX grew its revenue 20% annually for the next 10 years. That would lift annual revenue to roughly $116 billion by 2036 — a remarkable achievement.
Now, suppose we valued this hypothetical business at about 6 times its annual sales. That would imply that SpaceX is carrying a market cap of around $700 billion — less than half the company’s current market valuation of $1.8 trillion.
Under these conditions, a $5,000 investment in SpaceX stock today would be worth less than $2,000 by 2036. In other words, even if everything goes right for SpaceX, its stock could still shrink.
Of course, investors could decide to value the business higher than 6 times its annual sales. Or revenue could grow even more drastically. Morgan Stanley (NYSE: MS), for instance, thinks SpaceX’s revenue could hit $3.4 trillion in 2040. If we keep our price-to-sales (P/S) ratio at 6, then SpaceX’s market cap would hit about $20.4 trillion by that year with that revenue, which would subsequently grow a $5,000 investment today into about $57,000.
These are, however, only predictions, and predictions rarely line up with reality. What we know today is that SpaceX continues to trade at about 100 times sales, a very pricey valuation for any company. A disciple of Warren Buffett like myself simply cannot tolerate that valuation. I’d wait for a more favorable price before I buy this stock for the long run.
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Steven Porrello has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
