Was Cathie Wood's Ark Invest Too Conservative With Its SpaceX Valuation?

Cathie Wood and her team at Ark Invest look for disruptive and innovative technology companies for their various funds. One of the biggest technology innovators in the market is SpaceX, which is likely to go public this summer. Ark Invest currently holds a stake in SpaceX in its ARK Venture Fund (NASDAQMUTFUND: ARKVX). It's currently the fund's largest position, accounting for over 17% of the fund's value.

The fund's investment in SpaceX in late 2023 was predicated on SpaceX's massive lead in reusable rocket technology, which dramatically lowers the cost of launching satellites (or anything else, for that matter) into space. Its Starlink low Earth orbit satellite business could quickly grow to a substantial revenue source with high returns on invested capital, thanks to lower launch costs. Last summer, Ark analysts updated their model, giving SpaceX an estimated enterprise value of $2.5 trillion by 2030. The IPO planned for this summer could value the company at between $1.75 trillion and $2 trillion.

Investors may be wondering if Ark's model was too conservative. Can the business grow much bigger by 2030, justifying its massive IPO price?

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A lot has changed since last summer

SpaceX is not the same company it was last summer, when Ark Invest last updated its model for the company. Earlier this year, SpaceX merged with xAI, Elon Musk's generative AI lab, which also owns X, the social media company. At the time of the merger, SpaceX was valued at approximately $1 trillion, and xAI was valued at $250 billion.

The deal was arguably dilutive for SpaceX, but it now has a vertically integrated opportunity: Orbital data centers. The argument is that if SpaceX can reduce the cost to launch satellites into space, it can dramatically increase its satellite constellation, harness solar energy, and theoretically run a massive data center in space at a much lower cost than terrestrial data centers. Given the amount of money big tech companies spend on new AI data centers each year, the opportunity is massive if SpaceX can execute.

That said, the near-term opportunity for SpaceX hasn't changed. The primary engines driving its financial results are its launch services and Starlink, and that should remain the case for years to come. The addition of xAI's operations may have added some value to the overall business, but it's a loss-making operation, and there's still a significant gap between its models and the models from leading AI labs like OpenAI. As such, the biggest factors affecting SpaceX's value will still be tied to Starlink and its ability to launch rockets.

Is SpaceX worth $2 trillion?

In Ark's previous analysis of SpaceX, it estimated that Starlink could generate $300 billion in annual revenue once its satellite constellation is complete, about 10 years from now. The cost of maintaining the Starlink constellation could be kept low as the cost of launching rockets and reusing them declines. As a result, it could produce significant profits for the business.

Ark's analysts model Starlink and its government-focused Starshield business to generate $165 billion of revenue by 2030, up from about $7.4 billion in 2024 and $11.4 billion in 2025. Meanwhile, launch revenue won't grow very much at all, as SpaceX focuses on getting as many of its satellites into orbit as possible. The analysts model launch revenue growing from $3.2 billion in 2024 to $4.6 billion by 2030.

The estimated growth for Starlink seems very aggressive, and it's partly based on SpaceX's launch costs continuing to decline at their historic pace. That's far from guaranteed and adds significant execution risk. While the pace of cost reduction could slow, the business could still be viable for satellite internet, but margins wouldn't be nearly as good. What's more, the "data centers in space" idea might not be viable at all without meaningful cost reductions and without overcoming some technological hurdles.

That risk might not be priced into SpaceX's current valuation. At $2 trillion, it's valued at roughly 75 times sales expectations and 160 times estimated EBITDA. That's a significant premium to pay for a stock with so much uncertainty about its future. While there's tremendous upside in the stock, focusing more on the near-term realities and less on the far-off, optimistic vision for the company could prevent investors from overpaying for it.

Ark Invest's analysts are typically aggressive in their outlooks for the companies they invest in. They only have to be right on a handful of picks in order to see excellent results. But the odds are that they're too aggressive on SpaceX as well. Even if their valuation proves mostly accurate, investors aren't receiving enough of a return to justify SpaceX's planned IPO price.

Adam Levy 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.