What’s SpaceX Really Worth? This Analyst Says $63 a Share

Welcome back to the rundown interview edition. Today, I am talking to Nicholas Owens, an equity analyst over at Morningstar. Nicholas covers SpaceX, was just had a record breaking IPO last week, and the stock continues to surge. At the time of this recording, SpaceX stock is trading above $200 a share. But Nicholas believes the actual value of the stock should be closer to $63. So in this conversation, we get into why Nicholas is so bearish, and how he actually got to that number, if space in general is overrated, and also take a look at SpaceX's AI strategy moving forward. This was a really good conversation. I think you guys are gonna really enjoy it. So let's get into it. All right, guys, today we are talking to Nicholas Owens, an equity analyst from Morningstar. Nicholas, welcome to the rundown. - Thanks for having me, say. - I'm super excited for today's conversation. We're talking SpaceX, you know, your report before the IPO about SpaceX caught my attention. It caught a lot of people's attention, because in your report, you said that you're assigning a value of $63 a share to SpaceX. Now, since the IPO on Friday, SpaceX stocks is just, I mean, the stock went up 19% on day one, 20% on Monday. I think it's up another 10% today on Tuesday, the day we're recording this. Did you expect this to happen after the IPO despite your, bearish outlook? - Would you believe yes? Like, I think the real tension here is between what Morningstar would call a intrinsic value or fundamentally based valuation of the stock, which I can talk about. And let's say the market for the stock, like supply and demand, you know, what you see in the stock chart, I had every reason to believe that there's a lot of enthusiasm for the stock, for Elon Musk companies in general. And, you know, the way the IPO price was set with a relatively small flow, I fully expected to sort of stay high here for a while. And we can even talk really about what the differences are between what I view and let's say what the market seems to be pricing in. But yeah, it's, the market was prying for this stock to go up. That doesn't surprise me. But the real tension is what are investors buying or what are they paying for at these prices and what's reflected in the expectations, if that makes sense? - Well, what I'm surprised though is, I'm with you, I kind of felt the same way that the stock would rally post IPO, because a lot of factors here to small float is one of them. But the fact that it's been kind of like a smooth ride up, it wasn't like a Figma style where you had a jump, I don't know, 50, 60, 70% in the first day, it was like 19% in the first day, 20% in the second day, it's just slowly, slowly going up. And the fact that it wasn't Harkie Jerky is kind of surprising to me, no big drop on the second day or third day. And it's just, it's kind of like a rocket ship up. - Oh yeah, a rocket ship, you got it. (laughing) - Yeah, I mean, I guess we sort of reached the limits of what I would consider my expertise in terms of, looking at volatility weighted float and volumes and stuff, that's kind of not my area, it may get shopier and may stay smooth. I think the underwriters are active in the sort of days and weeks after the IPO and kind of managing what they call an orderly market, 'cause they're still moving some of those shares around. So I guess I don't, I think the story for me, more long term, will be where will value shake out. In the next year, you'll have potential dilution as the lockups expire. You'll also have index funds buying it because it's a big piece of the market now. And so we'll see. - Let's talk about the math behind your $63 number that was making the waves. You said this was a mathematics more than skepticism. Now, we don't need to get into the full DCF model here, but can you kind of break it down? How did you come up with the $63 number? - Sure, and I think it's really, I really want to emphasize that it's not like disagreeing with the market about the potential for this company to do amazing things. And even let's say unprecedented things looking at the rocket business and Starlink, the way they develop the Falcon rocket and its reusability is incredible. And they literally change the math on what you'd even consider to be feasible, the launch of the space or the dollars per kilogram, the launches is radically come down because of SpaceX. Where the issue is, so the way we do it is I valued, let's say the unknown here really is the AI piece of the business that they acquired. You know, you had a rocket company and satellite company that acquired the AI business from Elon Musk in February. And they're heavily investing in that, which is part of kind of the wider AI theme, people investing tens of billions of dollars in infrastructure and servers and stuff. And basically we look at that as unknown outcome, right? So will they succeed the biggest project on the books is putting data centers in space? There's a whole debate about whether that's even possible from an engineering point of view, people talk about the radiation or cooling. I've actually become convinced that on an engineering basis, it's doable. I think they have SpaceX has a video showing kind of like a mockup or a prototype and they can leverage some of the same tech that let's say that they've developed for Starlink. What is unknown to me and where we modeled a handful of different outcomes is how commercially viable or competitive will data center in space be compared to a terrestrial data center. And the way I interpret it is the company has a cost advantage and it's a ability to put stuff into space and they kind of rinsed and repeated that many, many, many times, many more times than any competitor. And so there's a possibility that they could have a data center in space that has an operating cost slight edge compared to terrestrial because the solar energy's free and the cooling is free. So let's sort of leave that as the depth of the science that we would get into. So if you believe that and you believe that it's compelling, let's say from a financial point of view, that's one scenario that we modeled. And I think that's the scenario that the market is assuming is totally true and that's where you get to the $170 on the first day and 200 something today as a share price. We valued that scenario at $154 a share. The problem is it's not 100% likely to be that way. So the two things that need to happen are starship that's a giant new model rocket, the top part of that has to be reusable. In order for them to launch all these satellites, they have put in a permit request for up to a million data center satellites, which I think is a bit high. You don't need that many for it to work, but thousands of satellites, they need to launch these, like hundreds of launches a year, like more than one a day. And that requires the starship to be able to relaunch quickly, not like after six months having all the tiles replaced or what have you. And so that's not proof it. They just did a test run of starship. They didn't reuse the top part portion. And so we'll see in the next year or two how the engineering plays out. I give them the benefit of that, that they can do it most likely, but it's not baked in as a certainty to my scenarios. And then the second piece is whether data centers and space will be cost effective. Again, I'm assuming they're doable engineering-wise, but that's how we get to the $63 is we're probability waiting this outcome against other scenarios where the data centers may not be cost compelling or where starship is reusable less frequently. So I hope that helps kind of put it in context. Yeah, so for my understanding, it's like, you're thinking best case scenario, right? Everything works. Like the starships work, which there's still having some engineering issues there, but let's assume they get that figured out because they have historically gotten this stuff figured out. Let's assume data centers and space works. Let's assume all of this works, they overcome the engineering challenges. And you're assigning that $154 a share value and the way you back up, back down to 63s by assigning each one of those segments a percentage of actually happening, right? Correct. And that's how you come up with the 63. Yeah, and the real problem, you could say, that lowers these percentages is that the two things have to happen. Starship has to be reusable and data centers in space need to be compelling. So the kind of combined probability, the way we looked at it, was only 7% for that best case scenario. No, and if we learned something tomorrow, which I don't think we will quite so soon, but if we learned more about either of those, I can change the percentages and that would move my valuation. But in reality, just being honest, It's still even at 154, that's still meaningfully below the market price. So I think you have people also pricing in kind of other moonshot, marth's shot, long range projects as added value to the company that, again, might work out, but aren't a solid 100% probability in my book. When you guys were going through this exercise, I'm sure you guys were digging into this stuff. Was there a conversation like maybe we need to add a coolness multiple, right? Space is cool. People want to get into the cool industries. And then also an Elon multiple. I mean, obviously Tesla has a great example. People have been calling Tesla overvalued for a decade. It's still trading at pretty insane multiples compared to the rest of the market. Was there that conversation like maybe we got to add in a little coolness multiple here? I mean, did we talk about that? Yes. But no, there isn't like a line item in my model that says cool, therefore, you know, wax or whatever. And we don't really use multiples to value stocks. And that is one of the disconnects, right? So our evaluation is meant to measure what the present value of the free cash flow to the firm is full stop. And I do my best to model, in this case, a range of scenarios and weigh them into what I would call the most likely outcome or the set of most likely outcomes. And in the long term, we believe that stocks tend to arrive at those fair values. Obviously, we will have new information over time as well. I'm not really in the business of trying to guess what the market will pay in the next minute or hour or day. That's going to be where these multiples and the Elon premium and all those factors will come in. I will say this though, I tried to reflect some of that in these percentages. And then I would say I would give any other company lower probability of success for these projects. I mean, again, I'm trying to. So it is built in essentially in your analysis because of the his legal president, Elon. To be honest, like not to pick on any one competitor or another, but another rocket company that said the same stuff, I would say, maybe 0% probability of that upside scenario. See what I'm saying? Yeah. Yeah. And speaking of just space in general, is he by personal opinion is just, I feel like space is just overrated as a whole, right? I think it's just, it's still so unknown. There's all this like, like talks of obviously data centers and spaces gotten a lot of hype recently. But there's also like talks about mining on the moon and this and that. And to me, it's just everyone's throwing out all these crazy tams for space. And again, I think it also plays up to like the sci-fi factor of it in the kind of place to people's imagination and especially retail investors. So I think that is all overrated and bad. It's also baked into like the premium that SpaceX is trading out right now. Yeah, I hadn't thought about this, you know, no pun intended space being an overrated space. I looked at this company, particularly with its AI venture, but then also the longer term goals, you know, putting a city on Mars or mine on the moon. Those are let's say debatable value propositions, but again, I think this is the company best position to go after that. And the way I really modeled it is essentially as an infrastructure play, like almost like building the railroads, you know, 130 years ago, putting that infrastructure and the supply chain in place to be able to do that. And it very much hinges on starship being able to go, you know, they're back again many times, et cetera. It's a very kind of ambitious and, you know, a fantastical project, but here it's happening. You know, 15 years ago, did we think there'd be reusable rockets with the stars landing, you know, two minutes after launch? No, but there they are. Yeah, and don't get me wrong. I'm just with you. Like, I feel like the technology is incredible. The progress, I mean, what they're able to do, catch in the rockets with the chopsticks. I mean, it's absolutely insane what they're able to pull off. But to me, I'm just like, even if they're able to dominate 100% of that market, like what is the actual like business upside for just, you know, dominating rockets? Like, is it actually the crazy tan that people are projecting? I'm a little skeptical about that, but what I wanted to ask you about speaking about rockets is like the starling part of SpaceX's business. You know, your report again, I recommend everyone reads your report. It's fantastic. You estimated that the tan for starlink is closer to 129 billion versus what SpaceX is estimating, which is like 1.6 trillion. That's a pretty big difference. So can you break down where that gap comes from? Absolutely. And yeah, so, Tam, the total addressable market is the way I interpret those numbers. And it's interesting actually that the smaller of the three that they put in their registration statement was for the rocket piece, right? Yeah. So the 1.6 trillion addressable market that they list for the starling business, that's the 1.6 trillion is pretty much what every human spent on telecoms on earth this year. So to set that, that, so what you, what I interpret from that like, like you said, it's as if they're saying we could go get or dominate, you know, 100% of this market. And so I actually interpret like addressable is sort of like in air quotes like like in theory, they're in that market for sure. They are playing in the mobile telecom broadband and wireless market. That's kind of the service that that starling provides. But we did an independent assessment of what we think a more realistic or addressable not in air quotes market opportunity for them is. And here again, we're trying to give them the some benefit of the Dow given kind of these multiples that are being thrown around. And we're saying they have a great niche, right? There's stuff you can do with starling connectivity that you can't do with with with ground based to, you know, broadband or wireless. And there's pretty big market for that. And then we, we interpret also this most likely scenario is that they can sign kind of like partnerships with wireless carriers and use the wireless carrier spectrum in most cases, which is an important solution to a constraining problem that they have, which is radio spectrum is the limiting factor to get the information up and down from satellite. So that's where we get to the 129 billion global opportunity, which, and we even give them in, I want to say it's in our 10 year forecast, they get to some 45% of that market, which is pretty aggressive. But in that's in part because they kind of define some of that market. These niche uses that they are the most credible provider in their way ahead in terms of the number of satellites that they have up there to be able to deliver that connectivity. So, and then similarly on the AI side, their tams is ridiculous. The 20. What that is is like a quarter of world GDP. So they're saying AI is addressing basically people's work, right? Like what's the value of a quarter of people's work? We're going to address that. Maybe, maybe AI will address that, but it doesn't mean it's going to turn into 25 trillion dollars of revenue to this company, right? So it's like an intellectual statement. Here's the value of the thing that the AI is potentially augmenting or displacing one way or the other. But again, does not in any way equate in my view to that being the top line or bottom line figure that you'd expect to put in this company's income statement. I like how you broke down the startling stuff. And I want to talk more about AI because to me, that obviously is the biggest unknown, right? So the good feeling for where SpaceX is when it comes to their rocket business, where they are when it comes to their startling business, they're way ahead of everybody else. The AI stuff is like the biggest unknown. They're starting to pivot a bit, making some interesting moves. What is your take on their kind of pivot to being a neocloud company, you know, signing these data center deals with Google and Thropic, and then also beyond that, their decision to acquire cursor, which broke earlier today. So background for that or my view, so yeah, they're active, let's say, across the sphere of things that are going on in AI, you know, they have their own LLM, Brock, they have the server farm, they are planning to put the GPUs in space, et cetera. I primarily view their business plan as let's say extending what they did between rockets and startling potentially into space. And so that kind of the main current of how we look at this business is as an infrastructure, like AI infrastructure for humanity or for the future. And renting out the capacity that they've done to end Thropic to Google is very much a validation of that, right? So they're saying we built this amazing data center. We can use it to train Brock. We can also rent it out, right? And so. In a way, I'm indifferent in my forecast between whether they get more subscription revenue for GROC or more rental revenue from Anthropic. They're one of the handful of AI companies that own that infrastructure. Anthropic does not, right? They do an own data center. They have to go out and rent it. That's just a validation that SpaceX through its AI division is one of a small number of the AI companies that owns its infrastructure. This vertical integration, owning all your stuff, owning the whole stack is very much a part of the SpaceX strategy. They kind of proved it out in the original rockets and satellites business model in that they use their own rockets, which are lower cost than anyone else's, to launch the Scyling satellites. They do so frequently. The vast majority of the payloads that they've brought up are their own satellites and they charge themselves like the Friends of Family discount for it. They get it at cost, so they have an even bigger cost advantage in that market, which we give them a narrow moat rating because the characteristics of those businesses are so strong and they're so far ahead. And that may in one scenario kind of extend out into AI. If the GPUs in space with free solar heating and arguably free cooling is incrementally cheaper than the data center on the ground, that could be the way that this business plan sort of proves out and extends the same strategy of vertical integration. Yeah, that makes sense and you can kind of see that, you can kind of see that the pathway to get there, which I think is what a lot of people are excited about. It's not just like a fairytale anymore. Now it's like, okay, I can kind of see this making sense based on everything that SpaceX has done. I agree. And then so now following up to that, the cursor acquisition, that was confirmed this morning SpaceX is going to move forward with their $60 billion acquisition of cursor, which is a AI coding agent. And they're going to it's an all stock deal too, I think is very important. How do you, how do you see that? Do you think that's going to be a game changer for them to finally make some inroads into the enterprise and enterprise side of the side of the AI market? I wouldn't say game changer, I mean, I, you know, so two things. Yes, they are using equity to do the deal. So what I, right. That's the, let's say, most efficient currency for them to use right now, especially if you believe as I do that it's over value. That said, so that that means 60 billion is almost as much money as they raised in the IPO. So it just gives you a sense of the size of the deal. And yeah, so the I did model a idea. So there's kind of a, you know, an outlay and some dilution. What's the upside? And you see that as probably making rock more valuable and raising their ability to have more of that enterprise type subscription revenue over time. And that's something that, and I think I view it primarily as like bringing that team on board real quick, right. So some people would call this an aqua hire. So it's, it's getting those people who know how to do that ramped up real fast. And they, I, I, yeah, this company likes to move fast. And so here we are, whatever couple days after that, and they're going for it. So not ultimately a shock, because they had already eaten the agreement a while ago. And, but I doubt that it'll be a huge game changer, but it could add value to the rock platform. Yeah, I think I think people are starting to see like the vision come through now where it's like, okay, this is not just like a space company anymore. The AI started side is somewhat serious beyond just it being like a neoclad player. It could potentially kind of, you know, especially if they can kind of, you know, what we'll see what it does to, to grog this acquisition of cursor. So the last questions for you. So, you know, markets are going nuts right now stock is trading above $200. Is, when is gravity going to impact this stock again? No pun intended. But is it going to come back down to earth? Are you think, are you thinking weeks? Is it months? Are you waiting for a specific moment? Is it a star is it a starship? Sorry, a starship test launch that doesn't go well. Is there what's going to take for this stock to kind of come back down to reality? I have to say I do not know. I was just sure if you were keeping an eye on like a star star ship thing or maybe like something like that. Well, I'll tell you exactly what I'm looking out for. It really is those two huge question marks that that would change the probability waiting of my valuation one is showing demonstrating let's say the reusability or the rapid reusability of starship. Which I think is possible, but not in the bag yet. And also some data that would show how cost competitive a data center in space would be compared to terrestrial those are really the two factors that will drive my valuation and here's the thing I think that people have already priced those in so if they if they say hey, today we have a reusable starship should the stock go up. I don't think so because I think they already believe that so. And then on the kind of other side of the scale over the next year, most of the rest of the shares could become available for sale by by the current owners, the insiders who bought it as a private company that dilution or I mean it'll increase the float, it'll increase liquidity. Some of the index funds will also increase their allocation because they are float adjusting their their holdings. But you know, as long as investor appetite remains high, that shouldn't matter too much, but other IPOs I've covered, you see this potential selling of insiders is kind of ends up being an overhang on the stock, you know, look at standard arrow is one that I cover. Carlisle is exiting their position every you know couple months and that that's that weighs down the stock so that's a scenario I think people should be aware of and then you know, person or they just issued 60 billion in equity there could be other deals like that maybe they could go out and buy Tesla. Probably issue equity to do that. So those are dilution type events that investors I think should keep in mind. You don't have to say about it because the chairman has 85% of the votes. That I was actually going to bring that up was I forgot to mention that like there's going to be force buying because of the index fund inclusion, the fast track index fund inclusion. That is buying pressure but then obviously like there's going to be the set once the six month lock up expires are going to have potentially a ton of insiders ready to sell the stock so how is that going to balance out in the market. You brought up something that I wanted to end on the Tesla space X merger a lot of noise about it. If you were to sign up a probability to that that it actually happens in the next 12 to 24 months, what would you put that out right now. I'm not likely to me. And I think there's some kind of sound let's say operational reasons why they want to share resources and be able to like move people around and work on the chip fab and all these things without being kind of like accused of diverting resources or whatever. And we put it all into one roof what today what they have to write up as a related party transaction which sounds kind of you know squarely it would just be like hey we're doing this project and it's really cool. And then we're going to start with the question mark and me and the analysts who cover Tesla for warning starts that we wrote up a piece kind of analyzing the scenarios that the open question would just be like at what type of deal terms for Tesla shareholders Tesla shareholders have a little more of a say because Elon Musk only controls about up to 20% of the votes there so they have to kind of like make it right for Tesla shareholders which. It's going to be some overlap there to right with like the Tesla some of the same people sure yeah yeah that's going to be very interesting Nicholas I really appreciate you talking talking space X with us today I highly recommend people read your report you had a couple great pieces on it I read through all of it really good stuff you break down the math not super difficult to follow so if anyone's out there that wants to learn more we'll put a link in the show notes for people to check that out and again we appreciate you coming on and. You got to come back on in six months so we can see where we are here and and who knows maybe the stock will be trading closer to $60. We'll look forward to the check up thanks so much for having me say appreciate it Nicholas have a good one. Well alright guys hope you enjoyed that conversation with Nicholas Owens I appreciate Nicholas breaking down the math behind why he's bearish you know let's give you really interesting to see what happens to space X stock once some of the IPO hype starts dying down especially what's going to happen after these six month lockup period that allows insiders to start selling. The other thing to watch out for is the space X Tesla merger I mean I also think that it's likely going to happen sometime in the next year or so. Let me know what you guys think are we being too bearish on space X do you think that space X will merge with Tesla drop your thoughts on Spotify and YouTube and while you're at it consider leaving us a five. star rating as well, all that engagement really does help us out and it helps other people find the show. By the way, if you're new here just an FYI, we post an episode every single day throughout the week, breaking down what's happening in the market. So if you're not subscribed yet to the channel, definitely get subscribed, especially with everything going on in the markets right now. Thank you guys again for listening, watching, and commenting. Shout out to Mike for all the work behind the scenes and we'll see you guys back here tomorrow.