What's Going on with SpaceX Stock?

Space Exploration Technologies (NASDAQ: SPCX) stock has been on a wild ride.

After debuting at $135 a share, it surged to roughly $225 before falling to around $105. It has since recovered to about $140 (as of this writing). That's a remarkable swing for a company whose long-term story hasn't changed dramatically in just a few weeks. So, what's going on?

I think three things explain most of the volatility: Expectations have gotten ahead of reality, SpaceX's enormous spending has raised new questions, and investors are increasingly focused on Starship.

Image source: Getty Images.

Expectations got ahead of reality

The first problem was simply how quickly enthusiasm built around the stock. SpaceX went public with enormous investor interest. That's hardly surprising. Few companies have a combination of technological ambition, growth, and Elon Musk's track record.

But excitement can become dangerous when it gets embedded in the share price. SpaceX quickly climbed from its $135 IPO price to roughly $225. To put that into perspective, the market capitalization at the peak was close to $3 trillion, making it one of the five largest companies on the planet.

At that level, investors weren't merely betting that SpaceX would execute well. They were betting it would execute exceptionally well. That's an important distinction. When a stock is priced for near-perfect execution, even excellent results can disappoint if they aren't quite good enough.

And SpaceX's first earnings report provided a perfect example. Revenue jumped 92% year over year to approximately $7.8 billion. That's fantastic. Still, it didn't stop the stock from correcting by more than 50% from its peak at one point.

But investors also discovered just how much money SpaceX is spending to build its future, which brings us to the second issue.

SpaceX is spending billions to build the future

SpaceX spent approximately $18.4 billion on capital expenditures during the second quarter. Put that number in perspective. The company generated $7.8 billion of revenue while spending more than twice that amount on capital investment. The vast majority went toward AI infrastructure, accounting for $15.8 billion. That's an enormous bet. But it isn't necessarily a bad one.

SpaceX's AI-related revenue surged 247% year over year to approximately $2.6 billion. The company also turned the AI segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) positive during the quarter. In other words, SpaceX isn't simply spending billions on an idea with no customers. It's building infrastructure for a rapidly growing business.

The only question left is whether that spending will generate attractive returns. That's the part investors don't know yet, and should keep a close eye on.

Starship has become a major catalyst

Then there's Starship. If you're new to SpaceX, here's what you need to know.

Starship is SpaceX's next-generation rocket system, designed to be fully reusable and capable of carrying far more cargo into orbit than its existing Falcon rockets. For perspective, the tech company puts 2,500 tons of mass into orbit per year via Falcon. But with Starship, it aims to deliver well over 1 million tons per year and probably ultimately 10 million tons per year.

The idea is simple. SpaceX wants Starship to make launching things into space dramatically cheaper, making many of SpaceX's future businesses more economical.

More Starlink satellites. Larger satellite networks. More commercial launches. More government missions. And potentially entirely new businesses built around cheap access to orbit. That's why Starship isn't simply another rocket in SpaceX's product lineup. It could become the infrastructure underneath SpaceX's next chapter of growth.

But there's a catch. Starship is still under development. That means every successful test can increase investor confidence, while delays or technical setbacks can have the opposite effect.

What should investors make of the volatility?

I don't think the recent decline means the SpaceX story is broken. If anything, the volatility is telling us something useful. The market is beginning to separate SpaceX's incredible potential from the price investors are willing to pay. That's healthy.

At roughly $225, expectations were extraordinarily high. At around $140, investors are paying considerably less for the same long-term vision. But that doesn't automatically make the stock cheap. SpaceX is still valued at roughly $1.9 trillion, against a quarterly revenue of less than $8 billion. That's a valuation that demands extraordinary execution.

For long-term investors, I'd therefore pay less attention to the day-to-day stock price and more attention to three things: first, SpaceX's overall growth and profitability; second, the returns SpaceX generates on its enormous AI investments; and third, the progress of Starship.

If all three continue moving in the right direction, the recent volatility could eventually look like nothing more than noise. But if one of them starts moving materially in the wrong direction, the stock could face enormous pressure.

Lawrence Nga 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.