Is SpaceX Stock a Buy at a $2.5 Trillion Valuation?

Space Exploration Technologies (NASDAQ: SPCX) made its public debut on June 12 at a valuation of nearly $2 trillion. As of June 18, just a few days later, SpaceX has added another roughly $500 billion to its market capitalization. Is it worth buying at this price?

Three businesses, one stock

The company is really three businesses under one roof: space, connectivity, and artificial intelligence (AI). The first involves developing and launching rockets. Connectivity covers Starlink, the company's satellite internet service. And then there is the AI segment, which includes the social media platform X as well as xAI, Elon Musk's answer to OpenAI and creator of Grok.

Of the three, only one makes money. While the launch business is the face of the company, Starlink is the financial engine. You can see a basic breakdown of SpaceX's financials by segment in the table below:

Source: Securities and Exchange Commission filings.

Now to the question at hand.

Is the valuation justified?

With a market capitalization of $2.43 trillion and revenue of $18.7 billion, SpaceX stock trades at a price-to-sales (P/S) ratio of 130. There's no doubt that such a P/S multiple is extreme by any normal standard. But people aren't buying based on where the numbers are today; they're buying based on where those numbers are headed and the story of how they'll get there.

Starlink's growth has limits

Much of that story rests on Starlink. Billionaire investor and vocal bull Ron Baron says that he sees Starlink reaching 300 million subscribers and $1 trillion in annual revenue by 2036. I think he's off by an order of magnitude at minimum.

One trillion dollars is 80% of global telecommunication revenue today -- roughly $1.2 trillion. If current growth rates hold industrywide, $1 trillion will still represent roughly 60% of the global telecom market in 2036. That's ambitious to say the least.

Then consider that the bulk of telecom revenue comes from customers in urban areas. Starlink's technology is less effective in densely populated areas. That means a huge swath of the total telecom market isn't even really addressable by Starlink.

It also means that, over time, Starlink will face pricing pressure if it wants to keep expanding. The growth opportunities will increasingly come from developing nations, where users, on average, cannot afford to pay nearly as much as their counterparts in, say, rural America.

We're actually already seeing this pricing dynamic at work: Average revenue per user has been falling -- from $86 per month at the end of 2023 to $66 per month last quarter.

The launch business: smaller than you think

The launch business has a lot of opportunity, and it's clear that SpaceX is miles ahead of the competition. But this is a relatively modest market. The global launch business is estimated at just north of $22 billion today and is expected to grow at roughly 15% over the next decade. So let's generously say $100 billion in 2036.

Even if SpaceX maintains its dominance and fends off its numerous challengers, the market actually available to it is significantly smaller. Major markets outside the U.S. -- especially in nations like China, India, and Russia -- will likely be out of bounds for SpaceX given national security concerns.

The AI wild card

And finally, you have SpaceX's AI division. This is, according to the company, actually where most of the opportunity lies -- more than 90% of it. Right now, it is far and away the worst-performing unit, burning cash at an alarming rate, and its flagship model, Grok, has failed to keep pace technically with ChatGPT, Claude, and other frontier models. It has also failed to gain users or penetrate the market.

Now, the company has just announced several deals to lease compute capacity to other model builders. That should shift its financial picture radically, generating significant cash flow. It sounds great on paper -- and it is, at least in the here and now -- but it actually undermines the whole valuation narrative.

That doesn't sound to me like a potentially world-changing business addressing a $26 trillion market; it sounds like a neocloud, and that is a whole different ballgame with a much more limited ceiling.

The bottom line

So is SpaceX a remarkable company? Yes. Is it worth north of $2 trillion? No. There are plainly major growth opportunities for the company, but not nearly enough to justify a valuation even close to this level.

Johnny Rice 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.