Fantastic News for SpaceX Stock Investors

Space Exploration Technologies' (NASDAQ:SPCX) highly anticipated IPO broke records, becoming the largest in history and underscoring how excited many investors were about the company's prospects. However, SpaceX has moved sideways (at best) since going public. Thankfully for the bulls, there are still good reasons to think SpaceX could beat the market over the long run, and a recent development highlights that.

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SpaceX conducts another successful flight test

SpaceX's current workhorse rocket is Falcon 9. The company first launched it in 2010 and describes it as the first orbital-class, rapidly reusable rocket. Falcon 9 has been instrumental in helping SpaceX significantly reduce launch costs and in building a constellation of Low Earth Orbit satellites for its connectivity business. The company now dominates the satellite-based connectivity and space launch markets.

However, SpaceX is working on a next-gen rocket, Starship, which is designed to be fully reusable. Starship is still undergoing test flights, and it recently achieved a major milestone with its 14th flight test. For the first time, Starship reached orbit (it flew in safer suborbital paths in its previous flights). The flight was shorter than expected due to an engine issue during ascent, but overall it was another successful mission for the company.

The importance of Starship

Starship is central to some of SpaceX's ambitions. Consider the company's connectivity business, which currently generates higher operating profits than its two other segments. SpaceX wants to expand its connectivity business, and it has built more powerful Starlink satellites to that end. These newer, Starlink Version 3 satellites are too large for Falcon 9. Enter Starship, which, during its 14th flight test, deployed 26 Starlink V3 satellites. So, Starship will be instrumental in helping SpaceX scale its connectivity segment.

It could also help the company achieve some of its ambitious artificial intelligence (AI)-related ambitions. The company wants to launch AI satellites into orbit, partly to circumvent some of the limitations and demands of the AI build-out on Earth. One of these demands is power. Data centers require significant power to run, and AI compute capacity is being built faster than new power can be brought online.

SpaceX's proposed solution is to send AI satellites into orbit and have them run on readily available solar power. The company has identified a $26.5 trillion opportunity in the AI market, far higher than the combined opportunity of its two other business segments. And AI satellites could help it tap into this opportunity. But it needs Starship for that. Of course, Starship will also enable the company to remain the leader in space launches.

While this unit isn't profitable right now, Starship is the largest and most powerful rocket ever built. If it achieves full reusability, as SpaceX hopes, it could help the company reduce launch costs even further (and significantly), leading to higher margins and operating profits in this segment.

Is SpaceX stock a buy?

SpaceX is performing well financially. In the second quarter, the company's revenue increased 92% year over year to $7.8 billion, while its net loss was $541 million, significantly lower than the $1 billion net loss reported in the prior-year quarter. In addition, the company is making meaningful progress on various fronts. Starship has undergone two successful test flights since SpaceX went public, and the company has signed additional AI compute deals.

Yet, the stock has basically moved sideways since its IPO a little over three months ago. Why isn't it crushing the market? There are at least two reasons. First, there is significant uncertainty with SpaceX. The company's plans don't just depend on its innovative abilities; there are potential legal and regulatory obstacles (among others) that could disrupt its progress.

It's also possible that SpaceX's addressable market will be far smaller than it thinks. Second, the market appears to have already baked SpaceX's success into its share price. The company is trading at 200x forward earnings. That reflects the significant opportunities ahead for SpaceX, but the stock could fall off a cliff if it fails to meet expectations. So, is SpaceX stock a buy? The company does have massive upside potential, but the downside risk is huge as well.

Only investors comfortable with significant volatility should consider investing in SpaceX at current levels.

Prosper Junior Bakiny 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.