The SpaceX IPO Looks Expensive on the Surface. Here's What Investors Should Know.

Reports suggest SpaceX is targeting a valuation of $1.77 trillion. That's on the higher side of earlier reports, which speculated that the company would target a valuation somewhere between $1.5 trillion and $2 trillion.

Many experts are sounding the alarm about this lofty valuation, especially considering SpaceX remains unprofitable to this day. A recent report from Morningstar, for example, values the company at around $780 billion. Yet according to a recently disclosed prospectus, SpaceX believes it is chasing a total addressable market of $28.5 trillion.

For a historical perspective, it's very reasonable to think that SpaceX's targeted $1.77 trillion valuation is scarily overpriced. That's because most of the company's potential has yet to be realized. Pricing the stock, therefore, becomes mostly a practice of what the company can become, not what it is today.

What exactly might the company become? If you decide to participate in the SpaceX IPO, there's one major opportunity that most of your money will be betting on.

Here's what the SpaceX IPO valuation is betting on most

SpaceX's only profitable business right now is its Starlink service, which offers broadband satellite internet and mobile connectivity services. Last year, this division brought in roughly $11.4 billion in revenue, earning $4.4 billion in operating profit.

The company's rocket business, meanwhile, is perhaps the most advanced in the world. If SpaceX can successfully commercialize its Starship megarocket, payload costs could drop dramatically, giving the company a strong leading position globally in both cost and capacity.

Image source: Getty Images.

But here's the thing: Most of SpaceX's target valuation doesn't deal with these two divisions. Just $2 trillion of SpaceX's claimed $28.5 trillion total addressable market deals with Starlink and rockets. The rest deals with a single opportunity: artificial intelligence.

The problem is that SpaceX's AI division is still unprofitable. And few still understand exactly how this division will scale, or how successfully or profitable it will be. Even SpaceX admits to this uncertainty.

"Our AI business is in a relatively early stage, it is being integrated into our organization, its business strategy is still developing, and it will require significant capital expenditures to fund compute, infrastructure and power generation, model training, and product development," the SpaceX IPO prospectus warns. "Additionally, our AI business is subject to challenges inherent in a nascent, highly competitive, capital intensive and rapidly changing industry."

So yes, SpaceX's IPO valuation looks steep. But most of it relies on the potential of its nascent AI business, which it believes is chasing a $26.5 trillion total addressable market. If the company succeeds with this opportunity alone, the $1.77 trillion price tag could be more than justified.

Ryan Vanzo 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.