Should You Buy SpaceX Stock Right Now?

Space Exploration Technologies (NASDAQ: SPCX) attracted a lot of buzz heading into what became the largest IPO in the stock market's history. Elon Musk became the world's first trillionaire, and some investors want to ride the momentum.

While investor enthusiasm has helped the stock stay above its $135 IPO price, it's down more than 30% from all-time highs, and losses could continue to widen from here.

Image source: Getty Images.

The valuation doesn't make sense

SpaceX is currently worth more than $2 trillion but generated only $4.69 billion in first-quarter sales. Assuming SpaceX maintains that quarterly revenue rate for the entire year, the stock is easily looking at a price-to-sales ratio above 100.

And the company is still burning through money. SpaceX reported a $4.28 billion net loss in the first quarter, underscoring the need to raise funds through its IPO and bond sales.

SpaceX gets its high valuation due to Starlink, the potential for data centers in outer space, and, most importantly, Musk himself. The eccentric entrepreneur believes SpaceX can reach $100 billion in annual revenue by 2028.

Some contracts with tech giants support that possibility. SpaceX reached a multi-year deal with Alphabet that will average to $920 million per month, starting in October. SpaceX will provide AI infrastructure, such as GPUs, CPUs, and memory chips. It also reached a three-year deal with Anthropic that almost reaches $45 billion. Anthropic's deal includes at least 300 megawatts of computing capacity at SpaceX's Memphis data center, with capacity at a second facility as well.

The combined value of those contracts stands at approximately $26 billion per year. A few more contracts like these make the $100 billion figure more realistic, but it's not guaranteed and can take a while.

But for now, SpaceX's valuation is in another orbit from Tesla's valuation. Tesla receives complaints that it is an overvalued stock, yet its 15.4 price-to-sales ratio is much lower than SpaceX's.

Excitement is masking bad fundamentals

It's entirely possible that SpaceX reaches $100 billion in annual revenue by 2028, but what if it doesn't? The forecast anticipates that SpaceX will increase its revenue more than twentyfold in less than three years. Even if SpaceX achieves the milestone with Starlink and AI compute contracts, it won't mean as much if net losses continue to accumulate.

The path to $100 billion in annual revenue in such a short time requires perfect execution. While Musk is a brilliant entrepreneur, he has been known to set overly ambitious goals that don't always pan out. We were supposed to see 1 million robotaxis and operational hyperloops by 2020 and a Martian colony by 2024. If Musk's SpaceX projection is woefully off, it will weigh on the stock.

Setting ambitious goals can certainly help a company gain market share faster. It embraces the idea of shooting for the moon and landing among the stars if you miss. However, investors need much more clarity and certainty about a company that burns through billions of dollars each quarter and trades at a price-to-sales ratio above 100.

Musk's involvement in the company and people's desire to be on the ground floor of the next big thing are the major catalysts driving the current stock rally. Starlink's broadband internet services, terrestrial AI infrastructure, and potentially data centers in space may be major contributors in the future, but investors have to look at present fundamentals in addition to perfect-case projections.

Investors can choose from many growth stocks that have better balance sheets and revenue growth rates. Most of the next few years are already baked into SpaceX's $2 trillion valuation, even if it reaches $100 billion in annual revenue by 2028.

Marc Guberti 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.