SpaceX

SpaceX: The. Biggest. IPO. Ever. Is. Ridiculous. Hype.

Scott Buchanan1 Comment

Here is a graphic that compares the size of the initial public offering (vertical axis) and the total company market cap (size of circle) of SpaceX to everything that has come before:

Elon Musk’s space launch/AI conglomerate spin-off SpaceX went public on Friday. Retail investors were all over it like a pack of starving dogs, driving up prices of SPCX from its opening $162 to $192 as of the close Monday. This has been grand theater, with Musk serving up signature visions of gargantuan total addressable markets, while investors are in fact getting crumbs of a money-loser. In the restaurant biz, this is known as selling the sizzle instead of the steak.

Let us pause for a reverent moment to savor the grand vision used to sell SpaceX: making humanity multiplanetary by dramatically lowering the cost of access to space. It extends beyond launch services into global communications (via Starlink), space infrastructure, in-space manufacturing, resource extraction, transportation, and ultimately a potential Mars economy—expanding from billions to trillions of dollars in theoretically addressable markets. Ooh, ahh, who would not want a piece of that?

Well, there are some problems here. It is hard not to splutter when trying to explain it, it is so bad for investors. I will just call out three issues I see:

( 1 ) Governance: You Own It But Can’t Influence It
The IPO float represents roughly 4-5% of total shares, so we the people only get a sliver of the company. But it gets worse. Public shareholders receive Class A shares with one vote each, while Musk holds Class B shares carrying ten votes each, giving him approximately 85% voting control. More unusually, the company bylaws explicitly prohibit shareholder proposals — meaning investors cannot even put advisory resolutions to a vote. This is governance subordination beyond what even Zuckerberg imposed on his investors.

( 2 ) Valuation: Priced for Perfection Without Profits
There is no price/earnings ratio because there are no earnings. At $2 trillion, SpaceX trades at approximately 20 times REVENUE. That price/sales is not unheard of for a small, fast-growing software company with almost no capital requirements (think: early-stage Amazon, Google, Palantir, etc.). But it makes no sense to apply it to a capital-intensive hardware and infrastructure business with negative GAAP earnings. Starlink is growing rapidly but requires continuous heavy capital expenditure to maintain and expand its satellite constellation. And SpaceX faces meaningful competition for orbital launches from Blue Origin, ULA (for military missions), maybe Rocket Labs, and the Chinese (for non-West payloads).    And, if you dig into it, over 90% of their proposed addressable market is not space at all, but enterprise AI (!!).     SpaceX pitches a total addressable market of $28.5 trillion, with AI opportunities alone accounting for $26.5 trillion. This is essentially the entire global GDP of the planet for a single year, and I guess they assume their pitiful Grok will claw back lots of market share from Claude, ChatGPT, and Gemini. As we said, priced for perfection.

( 3 ) Unbuilt Revenue Streams
SpaceX has announced contracts to provide AI compute services to other companies — potentially a significant revenue source — but the data centers required don’t yet exist. Investors are therefore paying partially for infrastructure that is neither built nor generating revenue, on a timeline that remains speculative.

OK, but we have seen shares of Musk’s other baby, Tesla (TSLA), remain at uniquely high price/sales and price/earnings, seemingly indefinitely. So, investing in SpaceX is much like investing in that shiny yellow metal called gold: there will never be conventional earnings payback, but there might well be some greater fool out there who will pay more for my shares than I did. This really comes down to a psychological head game, not fundamentals. Gold has in fact done very well over the years, and the pros learned the hard way not to short TSLA, not matter how unsupportable its price is.

Final comments on index fund buying to drive up the share price – one of the bull drivers for SpaceX has been the prospect that the huge company market cap (around $2 Trillion) would force index funds like NASDAQ and S&P500 to buy boatloads of SPCX stock, driving up the price. But it turns out this will not be such a big factor. These indices only take into account the publicly traded shares, not locked-up, non-traded founder shares. So, we are looking at around $100 billion in traded SPCX shares, not the full $2 billion, which is mainly shares controlled by Musk and venture capital. $100 billion is only about 0.15% of the total S&P500 market cap of about $70 trillion. This means fund purchases of SPCX should not by itself drive down prices of other companies.

It is true that inclusion in Nasdaq-100 and Russell indexes will force automatic buying of around $25 billion in SPCX shares from funds tracking those indices. That seems like a significant driver, but (a) everyone knows this, so it is already factored into today’s prices, and (b) index fund purchases will be offset by billions in sales from VC’s as they sell shares when their lock-up periods expire in a few months.

Side comment: Historically, the major indices have had a little gravitas about what companies to include. The Nasdaq-100 typically requires at least a 3 month “seasoning” period for an IPO to trade, and then waiting till the next regularly-scheduled reconstitution. Thus, it might take around six months for an IPO to make it into the Nasdaq-100 index. For SpaceX (and presumably for Anthropic and OpenAI IPOs), NASDAQ changed the rules to allow REALLY big IPOs to be included within 15 days. (This means that some other company will get booted from the Nasdaq-100). Russell caved even further than NASDAQ, with almost immediate inclusion in the Russell 3000.

Staid Standard and Poor’s alone has maintained its dignity here, refusing to compromise on its principles. For inclusion in the S&P 500, a company must be publicly listed for at least one full year, must show positive GAAP earnings in the most recent quarter and positive cumulative earnings across the trailing four quarters (this is going to be tough for a cash-burner like SpaceX), and at least 10% (not 5%) of its shares must be publicly traded. So, no S&P listing for SpaceX in the near future.

What Will End The AI Bull Market?

James Bailey2 Comments

It’s feeling like the late ’90s, with an impressive new technology pushing tech stocks and the broader US market to all-time highs. Retail investors are using new platforms to get in on the action, tech companies are doing more IPOs to take advantage of the higher stock prices, and other companies are trying to boost their stocks by saying they are pivoting to the new technology (though often they aren’t really changing).

The excitement drives valuations to record levels:

Shiller CAPE Ratio

In the ’90s, the internet really was a transformational new technology that would enable lots of profitable new companies. But the market got ahead of itself, a bubble that led to a crash- the S&P fell by almost half, while the tech-heavy NASDAQ fell by over 3/4 and took 15 years to recover.

History rhymes, but it doesn’t repeat exactly. I don’t currently expect a big crash driven by AI stocks; it helps that unlike in the ’90s, many of the big players are currently profitable. But I also don’t expect the NASDAQ to keep posting 20+% returns every year.

If the AI bull market doesn’t end in a dramatic crash, how will it end? It’s already shrugged off a war. A US recession is unlikely this year, though plausible next year.

The end I see slowly approaching comes from crowding out. What Robert Solow said about computers in 1987 is true about AI today: you see the AI age everywhere except the productivity statistics. There’s only so much money to go around in markets when productivity growth is unexceptional and savings rates are falling.

We’re already seeing the war hit certain markets (if not US stocks). Iran’s gulf neighbors are now putting lots of money into missile defense, money they now won’t be spending on data centers or gold (down 16% from pre-war), and everyone else has to spend more on oil.

Interest rates have been rising- partly due to central bank attempts to fight inflation, partly due to ongoing high rates of government borrowing, and partly due to financing the AI buildout itself. Higher rates make it more expensive for companies to invest in the physical AI buildout, and make investors discount future AI revenues more while making bonds a more attractive substitute for stocks today. 10-year TIPS now yield 2% over the inflation rate, a sharp contrast to the 2021 stock boom when they yielded less than inflation. If I were older I’d be loading up on TIPS, and even at 38 I’m starting to get tempted.

Trying to call the top exactly is a fool’s errand, but if I were feeling foolish, I’d point to the big upcoming IPOs. SpaceX just filed for an IPO that would be the biggest ever both for the amount of money raised ($75 billion) and the total company valuation ($1.77 trillion). This shatters the previous records for the biggest overall raise ($29 billion raised by Saudi Aramco when it went public in 2019) and the biggest raise by an American company ($18 billion raised by Visa in 2008). OpenAI and Anthropic are likely to follow with IPOs that would also break the previous records- making 3 companies each trying to raise more than the $45 billion raised by the entire US IPO market in 2025. Even if the process of going public doesn’t reveal any flaws in the companies, that money has to come from somewhere- and it takes up a substantial proportion of all net inflows to US stocks in a typical year (IPOs plus new money into existing stocks).

In short- where will the money come from? What are investors going to sell in order to buy into these IPOs? Technically they could do it all with cash, but I think it’s at least plausible that they start selling other stocks. The selling pressure will continue after the IPOs as employees of the newly-public companies see their stocks vest and other early investors become able to sell off.

I’m not trying to time the market. Even if this is a ’90s re-run, we could easily still be in the 1998 buildup, not the 2000 peak and crash. But I am diversifying. US stocks are currently the world’s most expensive. Investors value US stocks that highly because there’s a real chance that US companies are profitably building the technologies that will drive the future. But there’s also a real chance they aren’t– and if that state of the world comes to pass, I’d prefer to own a significant chunk of bonds, foreign stocks, and real assets.

A thought on the SpaceX IPO

mdmakowsky1 Comment

The SpaceX IPO is set for June 12th, with an anticipated market cap after day one between $1.5 and $2.5 trillion. Most of that valuation is based on the prospect of dominating the market for satellites, putting data centers in space, and the endless demand for computing power from AI. It is essentially an AI-related market power play.

I have no speculative insight into the value of SpaceX stock as an investment, but I am an inveterate, unrepentant consumer of irony. An IPO is a speculative investment, but it’s also the act of becoming a publicly held company. A large part of being a public company is getting the accounting right. Modern accounting has all kinds of informational value, but from the point of view of large companies it’s mostly about minimimizing taxes while maximizing perceived value. Both of those ambitions include strong incentives for malfeasance, which is why we have audits, financial regulation, and the IRS. The IRS and financial regulation have been defanged, however, mostly due to a lack of personnel from aggressive destaffing, at least some of which you can lay at the feet of DOGE. You can’t audit a massive company effectively without accountants.

Or can you?

I can’t think of a technical task that is more perfectly suited to AI than auditing a public company’s accounts and SEC filings. You feed AI a billion previous filings, all of the associated laws and regulations, and then flag all the records previously found in violation. Then you feed it new ones and say “show me the violations and discrepancies in rank order of dollar value.” A hundred good accountants using a dedicated AI, that’s exactly the kind of story that leads to the order of magnitude increase in labor output that the biggest proponents of AI are looking for.

Never forget that the event that initially popped the dotcom bubble was Microstrategy getting caught cooking the books.

I know you can’t write history like a novel, but “IRS, previously destaffed by Musk-headed DOGE, is forced to use AI enabled audits and finds massive revenue discrepancies, leading to panicked sell-off of Musk-headed IPO record holding company and kicking off AI stock sell-off”…that’s too easy, right?

WSJ: Nothing Important Happened in China, India, or AI This Year

James Bailey3 Comments

I normally like the Wall Street Journal; it is the only news page I check directly on a regular basis, rather than just following links from social media. But their “Biggest News Stories of 2024” roundup makes me wonder if they are overly parochial. When I try to zoom out and think of the very biggest stories of the past five to ten years, three of the absolute top would be the rapid rise of China and India, together with the astonishing growth in artificial intelligence capabilities.

All three of those major stories continued to play out this year, along with all sorts of other things happening in the two most populous countries in the world, and all the ways existing AI capabilities are beginning to be integrated into our businesses, research, and lives. But the Wall Street Journal thinks that none of this is important enough to be mentioned in their 100+ “Biggest Stories”.

To be fair, China and AI do show up indirectly. AI is driving the 4 (!) stories on NVIDIA’s soaring stock price, and China shows up in stories about spying on the US, hacking the US, and the US potentially forcing a sale of TikTok. But there are zero stories regarding anything that happened within the borders of China, and zero that let you know that AI is good for anything besides NVIDIA’s stock price.

Plus of course, zero stories that let you know that India- now the world’s most populous country, where over one out of every six people alive resides- even exists.

AI’s take on India’s Prime Minister using AI

This isn’t just an America-centric bias on WSJ’s part, since there is lots of foreign coverage in their roundup; indeed the Middle East probably gets more than its fair share thanks to “if it bleeds, it leads”. For some reason they just missed the biggest countries. They also seem to have a blind spot for science and technology; they don’t mention a single scientific discovery, and only had two technology stories, on SpaceX catching a rocket and doing the first private spacewalk.

The SpaceX stories at least are genuinely important- the sort of thing that might show up in a history book in 50+ years, along with some of the stories on U.S. politics and the Russia-Ukraine war, but unlike most of the trivialities reported.

I welcome your pointers to better takes on what was important in 2024, or on what you consider to be the best news source today.

Starship: Quantity has a Quality of its own

James BaileyLeave a comment

If the SpaceX Starship ends up working as planned, it will do the same things our rockets do now, but at one one-hundredth the price. In an inspiring blog post, Casey Handmer argues that even people within the industry have yet to appreciate the qualitatively different opportunities that this price drop would enable:

By refilling in LEO, a fully loaded deep space Starship can transport >100 T of bulk cargo anywhere in the solar system, including the surface of the Moon or Mars, for <$100m per Starship. Starship is intended to be able to transport a million tonnes of cargo to the surface of Mars in just ten launch windows, in addition to serving other incidental destinations, such as maintaining the Starlink constellation or building a big base at the Lunar south pole.

Second, and more importantly, shoehorning Cassini 2.0 or Mars Direct into Starship fails to adequately exploit the capabilities of the launch system. Not to pick on Cassini or Mars Direct, but both of these missions were designed with inherent constraints that are not relevant to Starship. In fact, all space missions whether robotic or crewed, historical or planned, have been designed with constraints that are not relevant to Starship. 

What does this mean? Historically, mission/system design has been grievously afflicted by absurdly harsh mass constraints, since launch costs to LEO are as high as $10,000/kg and single launches cost hundreds of millions. This in turn affects schedule, cost structure, volume, material choices, labor, power, thermal, guidance/navigation/control, and every other aspect of the mission. Entire design languages and heuristics are reinforced, at the generational level, in service of avoiding negative consequences of excess mass. As a result, spacecraft built before Starship are a bit like steel weapons made before the industrial revolution. Enormously expensive as a result of embodying a lot of meticulous labor, but ultimately severely limited compared to post-industrial possibilities. 

Starship obliterates the mass constraint and every last vestige of cultural baggage that constraint has gouged into the minds of spacecraft designers. There are still constraints, as always, but their design consequences are, at present, completely unexplored. We need a team of economists to rederive the relative elasticities of various design choices and boil them down to a new set of design heuristics for space system production oriented towards maximizing volume of production.

As they say, read they whole thing, especially the part about space tractors. I leave you with one final quote:

It is time to raise the scope of our ambition and think much bigger

“Rapid Uncontrolled Disassembly”: Musk’s Positive Take on Rocket Explosion

Scott BuchananLeave a comment

If you haven’t been living under a rock, you probably saw at least one image of Elon Musk’s “Starship” rocket blowing up last week. This is a really big rocket, some 165 ft high, which Musk intends to use to ferry humans to Mars, as early as 2026. And before that, paying passengers like you and I are to climb aboard for brief tourist excursions to outer space.

The rocket is designed to land back on its launchpad, to be ready for its next flight. That part is what went wrong last Wednesday. I snagged three screenshots from the live-streamed SpaceX video on YouTube to show what happened. The first image shows the vessel descending on its rocket jets, obviously dropping way too fast as it neared the ground.

This is what happened upon impact:

Ouch.  It turns out that not enough fuel was getting to the rocket engines to slow the vessel’s descent.

Here are the smoking ruins:

Another man may have been chagrined over this outcome, but not the indomitable Musk. He had given this flight only one in three odds of landing intact, and he was ecstatic over the vast majority of things that went right, and the useful data collected. After all, the rocket did successfully take off, ascend to 40,000 ft (12 km), and mainly descend in the desired horizontal orientation to minimize overheating. Right after the blast he tweeted:

“Fuel header tank pressure was low during landing burn, causing touchdown velocity to be high & RUD, but we got all the data we needed! Congrats SpaceX team hell yeah!!”

 When you are Elon Musk, a little RUD (Rapid Uncontrolled Disassembly) is all in a day’s work. Which may be partly why he accomplishes so much more than most of us.