SpaceX Scours the Solar System in Search of Profit
SpaceX, the private aerospace company founded by Elon Musk, has managed to upend the space launch industry by offering pioneering launch vehicle technology at a lower cost than established industry rivals.
The company, under the leadership of Musk, has done what many thought impossible, including landing booster rockets for reuse. But SpaceX is now struggling to find a way to justify its bulging valuation.
If money go before, all ways do lie open
Musk is no stranger to disruptive enterprise, as his leadership of Tesla Inc. (NASDAQ:TSLA) can attest. Yet, no amount of disruptive thinking can overcome the iron laws of economics.
The space launch business is lucrative, but SpaceX has found it challenging to make money in it. With launch numbers in decline and competition on the rise, things look set only to get worse. Yet, SpaceX has managed to sustain - and grow - its valuation, which hit $33.3 billion in its last fundraiser.
SpaceX's valuation now hinges on two big promises, ones it may find very hard to keep.
Slip the surly bonds of earth
SpaceX's first big promise is manned spaceflight, which includes a planned moon mission as soon as 2022, with Mars to follow not long after. However, these promises defy even the most ambitious timetables for manned spaceflight as laid out by NASA. Indeed, the space agency recently took Musk and SpaceX to task for making promises they cannot keep.
SpaceX claims it will begin ferrying its first batch of space tourists around the moon in 2023, and later to Mars, inspiring the imaginations of many deep-pocketed investors. Space tourism can be a lucrative business, and there is clearly an appetite among investors for company's trafficking in such offerings. Virgin Galactic Holdings Inc. (NYSE:SPCE), the brainchild of billionaire mogul Richard Branson, has paved the way in this regard. It intends to begin commercial tourist flights on its space plane soon.
While potentially lucrative, space tourism is - and is likely to remain for some time - a niche business catering to the ultra-wealthy. It might turn into a healthy revenue stream, but even $500,000 tickets could not justify a $33.3 billion valuation. Virgin Galactic's market capitalization is a comparatively meager $2.5 billion, which includes expectations of development of hypersonic jet plane development over the next several years. This alone will be insufficient for SpaceX.
Better three hours too soon than a minute too late
SpaceX's second big promise involves its Starlink satellites. The company claims it will be able to net billions of dollars per year from satellite internet subscriptions. During the company's most recent funding round, Musk sold investors on the idea of Starlink with gusto.
However, it has been demonstrated fairly conclusively that satellite internet of the kind SpaceX plans to offer will be of little value to most consumers, with the addressable market likely limited to rural and isolated populations, governments and the occasional specialist project reliant on extremely low latency.
Consequently, SpaceX is likely to obtain only limited revenue from Starlink, even if it can manage to obtain significant government and military contracts. They may be just about enough to pay for the project over time, but they are unlikely to deliver the profitability that SpaceX has promised and that investors expect.
Verdict
In conclusion, SpaceX may be able to survive as an important space economy player thanks to its established launch business and nascent space tourism pursuits. The survival of its bulging valuation, however, is far less certain. Neither of these endeavors are likely to yield sufficient economic rewards to justify its current valuation.
SpaceX has shot up like a rocket. Its fall back to earth may not be pretty for investors.
Disclosure: Author is short Tesla.
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This article first appeared on GuruFocus.
