SpaceX Could Weather a Recession. But Its Stock Might Not. Here's Why.

A recession can hurt almost any business, but some companies are better equipped to handle one than others.

Space Exploration Technologies (NASDAQ: SPCX) has several advantages on that score. Its Starlink satellite broadband business generates recurring revenue, its operations are growing rapidly, and it has substantial financial resources.

The company's latest results make the case even stronger. In the third quarter, revenue surged 161% year over year to $14.6 billion, and the company earned $4.4 billion in net income.

Yet investors should not confuse a resilient business with a safe stock. SpaceX's business could continue to grow during an economic downturn, but its shares could nonetheless fall sharply. The question is whether its future profits will justify the price investors are paying for its stock.

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Starlink gives SpaceX a defensive advantage

Starlink is one of SpaceX's most important assets. It provides internet connectivity to households, businesses, ships, government agencies, and customers in remote areas.

Unlike a company selling luxury goods or other discretionary products, Starlink provides a service that many of its customers rely on every day. Even during a recession, people still need internet access for work, education, and communication.

Its subscription model also provides recurring revenue, giving SpaceX's financials a degree of predictability. Also, the business is growing rapidly. In the third quarter, connectivity revenue increased 69% year over year to $5.2 billion. Its Starlink subscriber base surged to 13.6 million, up from 7.2 million a year before.

However, there is an important detail investors should not overlook: Starlink's average monthly revenue per subscriber fell from $83 to $69 over the same period, partly due to its international expansion and lower-priced plans.

This does not necessarily signal trouble. Offering cheaper plans can help Starlink attract more customers and expand into new markets. But it shows why subscriber growth alone is not enough. Investors also need to consider how much revenue and profit each customer generates.

In short, Starlink could help SpaceX weather a downturn, but its long-term success depends on turning subscriber growth into sustainable profits.

SpaceX is spending aggressively -- and that brings opportunity and risk

SpaceX is investing heavily in its next-generation rockets, satellite infrastructure, and artificial intelligence (AI) computing capacity. These substantial investments could create enormous value over time, but it will be quite a while before their full benefits become clear.

Consider its AI business. The recently renamed "super intelligence" segment generated $7.6 billion in third-quarter revenue, making it SpaceX's largest business. It also reported operating income of $431 million.

But the cost of building this business is enormous. SpaceX spent $19.6 billion on capital expenditures in the quarter, including $16.4 billion on AI infrastructure. That sum was more than its entire quarterly connectivity revenue.

If AI demand continues growing, these investments could create substantial long-term value. But if customers spend less than expected, competition intensifies, or the returns on investment take longer to materialize, that level of spending could become a burden.

SpaceX ended the third quarter with $90 billion in cash, cash equivalents, and marketable securities on its books, thanks to the $85.7 billion it raised through its IPO in June and the $25 billion in bonds it issued less than two weeks later. That is a substantial cushion. Still, it was down from $100 billion a quarter ago, reflecting the company's prolific capital spending.

In short, the company has the financial resources to pursue its ambitions. The question is whether its investments will generate attractive returns over the long term.

Why the stock could fall even if the business remains strong

Here is the distinction investors must remember: A company's business performance and its stock price performance can be two different things.

During periods of economic turbulence, investors may become less willing to pay high prices in anticipation of a business' future growth. They may also demand clearer evidence that expensive projects will generate attractive returns. So, SpaceX could continue adding Starlink subscribers and expanding its AI business while investors simultaneously become less confident about the returns on their investments.

In that scenario, the business might continue to grow, but its shares could still decline as the market lowers its expectations. It doesn't help that the stock has a sky-high valuation. As of this writing, SpaceX's stock has a price-to-sales (PS) ratio of 64 (calculated based on its annualized revenue of $31.2 billion).

That is why investors should be aware of the valuation risk -- that even if everything goes relatively smoothly for the business, the stock price can still slump if investor sentiment turns sour.

What does it mean for investors?

SpaceX has meaningful advantages that would support it during an economic downturn. Its AI business is expanding rapidly, Starlink generates recurring subscription revenue, and its substantial financial resources give it room to pursue long-term opportunities.

But its ambitious investment program creates uncertainty, and even a strong business can't protect shareholders from the risk that an excessively optimistic valuation will prove unsustainable.

For investors, the key question is not simply whether SpaceX can survive a downturn or recession. It is whether the company can keep generating attractive returns -- and whether its stock can weather any disappointments.

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.