4 Reasons to Think Twice Before Buying SpaceX Stock Right Now

Founder and CEO Elon Musk doesn't have nearly as many friendly supporters now as he did when he was first building Tesla.

On Friday, SpaceX (NASDAQ: SPCX) finally completed its well-ballyhooed initial public offering (IPO). You probably weren't one of the lucky few retail investors selected for the initial direct placement of the roughly 20% of these shares specifically earmarked for this crowd. But if you haven't yet, you can always buy it in the open market at the current price.

Before you do so, there are four things you'll want to consider about this company -- and its stock, and its CEO -- that might change your mind.

Image source: Getty Images.

1. The hype was far too frothy

Veteran investors know all too well that modern-day initial public offerings are typically overhyped. They've seen it plenty of times, in fact, with companies like Meta Platforms (then called Facebook), Alibaba Group Holding, Groupon, and GoPro when it went public back in 2014. All four of these stocks surged well above the IPO price immediately after they went public, with investors clamoring to participate in what were perceived as brilliant business ideas. In all four cases, these tickers eventually fell below their initial offering price. And in two of these cases -- GoPro and Groupon -- the stocks are still in the red.

What happened? In simplest terms, the companies in question weren't ready to live up to the fervent bullishness surrounding their public offerings.

But this can't come as a complete surprise. The purpose of an IPO is to raise as much money as possible by issuing as few shares as possible. This requires a little bit of salesmanship, which can easily turn into hype. After a couple of quarterly earnings reports, reality starts chipping away at the bullish euphoria that initially made these stocks must-haves at any price. Although it's only an anecdotal observation, it seems the greater the hype, the more disappointing that ticker's short-term performance is following the public offering.

To this end, it's not a stretch to suggest that SpaceX wasn't just the biggest-ever IPO, but also one of the most-ever hyped, setting the stage for an all-too-familiar outcome.

2. A valuation rooted in unrealistic expectations

The argument for buying new stocks at steep valuations is that the underlying companies' current revenue and earnings aren't yet what they're going to be, but that you want to be in a position before those results begin being produced. And to be fair, it's a reasonable argument. It certainly worked out well enough for the aforementioned Meta and Alibaba, anyway, as well as mega-winner Amazon. It's also a reasonable argument for paying a premium to own a stake in SpaceX.

SpaceX shares are priced really, really richly, though. Never even mind last year's loss of nearly $5 billion (that's a problem that can be solved with scale). The stock's still shockingly expensive at 113 times 2025's total company revenue of $18.7 billion. For comparison, the S&P 500's trailing price-to-sales ratio is only 3.6 right now, and that's unusually high.

But SpaceX will be able to grow into its valuation by simply winning business that's out there just waiting to be won? There's no denying there's a growing market for satellite-based internet, space-launch services, and artificial intelligence infrastructure. This company is largely built on the premise, however, that the enterprise AI application industry will eventually be worth a whopping $22.7 trillion. It will be big to be sure, but that's uncomfortably optimistic. For reference, World Bank reports the planet's entire 2024 GDP was $110 trillion.

It's difficult to imagine artificial intelligence apps becoming one-fifth of the world's total commerce. Also bear in mind that other AI data center owners/operators are at least as well-positioned as SpaceX is to win whatever artificial intelligence app business ends up materializing.

3. Shareholder voting power is wildly unbalanced

It used to be the case that every share of a company was equal to another in terms of shareholder voting rights -- one share means one vote.

In an era of high-profile founder-led companies, the market has moved away from this convention. For instance, Alphabet's B shares, which insiders like founders Larry Page and Sergey Brin own, provide a total of 10 votes apiece. As such, these insiders essentially control over half the company. Fortunately for all other shareholders, the company and its stock have performed very well, drawing little scrutiny of this arrangement.

SpaceX founder and CEO Elon Musk are arguably taking this sort of stockholder voting right imbalance to a whole new level, though. Because he owns more than 5.5 billion class B shares, which grant him 10 votes per share versus only one vote for every class A share, Musk essentially controls 85% of SpaceX. It might be fine. If it isn't, however, there's little that ordinary shareholders could do to change the company's direction and leadership.

4. SpaceX (and Musk) are a sociopolitical target

Last but not least, although it has nothing to do with the company's operation or potential success, there's no denying that Elon Musk -- now the richest man in the world -- has fallen out of favor with plenty of people.

And it's not just the man. SpaceX's subtle but significant pivot to being primarily an artificial intelligence infrastructure company means SpaceX will now be criticized by some as a high-profile contributor to global warming, as well as a major consumer of precious resources like land and potable water in an environment that's increasingly regulating the industry's operation. Sending massive rockets into space over and over again may also not be great for the environment.

It hasn't mattered yet in the sense that it's prevented Musk or SpaceX from doing what they do. Still, it's another factor to consider.

James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Tesla. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.