Don't Buy SpaceX Shares Before Considering the 20 Most Important Words in the Company's Prospectus

SpaceX (NASDAQ: SPCX) has seen soaring demand for its shares -- during its historic initial public offering and its first day of trading. As the IPO approached, press reports said the IPO was largely oversubscribed, with demand exceeding the number of shares available, so it's clear that investors were eager to get in on this technology and industrial powerhouse. And after its market debut, the stock rocketed higher, delivering a 19% gain.

This early performance and the fact that many investors who wanted to participate in the IPO couldn't suggest that buying may continue through the first few trading days, lifting the shares. SpaceX offers a fascinating portfolio of growth businesses: rocket launches, artificial intelligence (AI), and satellite-based internet services. And they are complementary, with advances in one helping boost the others. Investors seeking the next big growth story clearly are watching SpaceX closely.

But, before you decide on whether to buy the shares, particularly at today's lofty valuation, it's crucial to consider the 20 most important words in the company's prospectus.

Image source: Getty Images.

An orbital launch leader

So, first, let's talk about SpaceX's business and accomplishments so far. The company operates the three units I mentioned above. Last year, it completed the most orbital launches of any company, and it's making important progress in its development of reusable rockets. For example, NASA says that back in 2010, SpaceX's Falcon 9 cut launch costs by 85%. And in the second half of this year, Starship, the company's first fully reusable rocket, is set to start delivery of payloads to orbit.

Starlink, SpaceX's satellite-based internet service, is the company's breadwinner at the moment, generating the most revenue, followed by the space business. Last year, Starlink brought in $11.4 billion, while the space unit generated $4.1 billion -- that's on a total of $18 billion in revenue for the company. At the end of the first quarter, Starlink subscribers topped 10 million across 164 countries.

Meanwhile, the AI business has required, and probably will continue to require, significant investment. Last year, capital expenditures within that unit totaled more than $12 billion and pushed the company to a $4.9 billion net loss.

As I mentioned, these businesses are complementary, with the space business being particularly key to the general plan since many of Musk's goals involve launching materials into orbit. The ability of SpaceX to transport its own material needed for the connectivity and AI businesses is a huge advantage as it results in cost savings -- particularly through reusable rockets -- as well as flexibility and control.

20 important words

All of this sounds good, with the exception of the capex needed to support the AI business -- this represents a risk that investors shouldn't ignore. And now, let's consider the 20 words in the SpaceX prospectus that are crucial to consider before buying SpaceX stock right now.

Many of the company's plans and efforts "involve significant technical complexity, unproven technologies or technologies that do not exist, and such initiatives may not achieve commercial viability," SpaceX wrote. These include initiatives such as developing large-scale AI data centers in space, producing AI chips at scale, and transportation to the moon and beyond.

Why are these words so important? SpaceX is clearly stating that if the technology doesn't work out, some of its biggest goals may not be accomplished. Of course, this is the worst-case scenario, but it is a risk. This is because SpaceX's future success is closely linked to reaching at least some of these big goals.

Consider your risk tolerance

So, what does this mean for you as an investor? It's important to think of your feelings about risk before diving into the SpaceX story, particularly at today's levels. SpaceX closed at more than $160 on its first day of trading. Morningstar says the company is worth about $780 billion -- a far cry from its valuation today -- and that puts the share price at $63. The risk of buying at today's price is that, once the excitement settles, investors may focus more on the financial picture and risks, and the stock could decline. And farther down the road, if SpaceX doesn't meet its goals, earnings and the stock price could be in trouble.

For those reasons, it's clear that SpaceX isn't the best choice for you if you're a cautious investor. If you don't mind some risk, though, and have a well-diversified portfolio, SpaceX could make an interesting investment -- but instead of jumping in now, you may aim to wait for an opportunity to buy on the dip.

Adria Cimino 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.