Here's Why SpaceX's $2 Trillion Valuation Could Crash by 84%

This summer, Elon Musk's industrial space giant, SpaceX, is expected to launch its intial public offering (IPO) at a valuation of as much as $2 trillion, giving investors access to a profitable industry leader with a track record of success spanning more than two decades.

But investors who plan to buy the stock at such a high price might not get what they expect. During the past few years, SpaceX has been quickly transitioning into a highly speculative AI company that may offer more risks than potential rewards. Let's dig deeper to see why the company's valuation could collapse by as much as 84% as the market develops a more realistic view of its future.

SpaceX's AI pivot is a long shot

Since the launch of OpenAI's ChatGPT, companies around the world have been scrambling to incorporate generative AI into their business models, even when the synergies are not readily apparent.

SpaceX has joined the trend by acquiring Musk's social media and AI company, xAI, in a $250 million deal that gives the space company ownership of X.com (formerly Twitter) and a large language model called Grok. The deal was an amazing windfall for X investors who helped Musk take the company private for just $44 billion in 2022. But it's much less clear how SpaceX's shareholders will benefit from the combination.

Many other companies are investing in AI data centers, including the cloud computing industry leader, Amazon, which has committed $200 billion in capital expenditures to the opportunity this year alone. It's hard to see how SpaceX plans to compete with rivals that enjoy established client relationships, better economies of scale, and have more money.

According to Musk, SpaceX could get around this problem with space-based data centers that could take advantage of limitless solar power to overcome Earth-based energy constraints. But many experts agree this is a long shot, citing concerns about space debris, radiation, and the difficulty of in-person repairs and maintenance.

Why SpaceX may be worth only $320 billion

Image source: Getty Images

SpaceX's AI business is unlikely to create value for shareholders and is more likely to detract from its valuation than add to it. With that in mind, SpaceX is best analyzed based on its legacy space industrial business, which was estimated to generate roughly $8 billion in profit against $15 billion to $16 billion in revenue in 2025.

A price-to-earnings (P/E) ratio of 40 would give SpaceX a modest premium over the S&P 500 average of 36. But it would drop the company's valuation from $2 trillion to just $320 billion, an 84% decline, which indicates plenty of room for a potential crash.

Is the stock guaranteed to crash?

The stock market is now littered with hyped-up IPOs that failed to live up to expectations. Electric-vehicle maker Rivian has fallen by 89% since its launch in 2021, while AI start-up C3.ai has collapsed by 92% since 2020.

Both of these companies promised to help pioneer disruptive new technologies, but their share prices fell back down to earth when reality didn't meet expectations. SpaceX could find itself in a similar boat because of its xAI losses and the possible unfeasibility of its business strategy. To be sure, the stock has something the others don't: Elon Musk.

So far, markets have shown a willingness to afford Musk-linked companies a premium they might not deserve. This is why Tesla trades for a P/E of about 400 despite its struggles with competition and narrowing margins. And similar dynamics could keep SpaceX's valuation elevated for several years until the reality becomes too stark to ignore.

Investors should avoid buying SpaceX stock, but short-selling it may also be risky while Musk-related hype remains so powerful in the market.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.