3 Warren Buffett Quotes You Must Read Before Buying SpaceX Stock

Few companies have grabbed the attention of investors this year like Space Exploration Technologies (NASDAQ: SPCX), better known as SpaceX. The company's public debut last month briefly made CEO Elon Musk the world's first trillionaire.

The company is setting out to accomplish things no other company has even considered before it, just as it did with reusable rockets, and the long-term potential could be huge. Its registration statement for the initial public offering (IPO) said it has an overall estimated total addressable market of $28.5 trillion.

Investing in SpaceX requires a long-term mindset. And few investors are better known for the long-term mindset than Warren Buffett. He can provide some excellent insights for investors considering SpaceX for their portfolio. Here are three must-read quotes.

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Buying into IPOs

SpaceX had the biggest IPO in history last month, raising over $85 billion once the underwriters exercised their option to buy additional shares. But the fact that the company had no issues raising that much capital from the market speaks to an undeniable truth.

It's why Buffett says he's never bought any IPO: "The idea of saying the best place in the world I could put my money is something where all the selling incentives are there, commissions are higher, the animal spirits are rising, that that's going to be better than 1,000 other things I could buy where there is no similar selling enthusiasm ... just doesn't make any sense."

IPOs are a seller's market. The company holds all the cards; underwriters are incentivized to pump the stock. The odds of making a good purchase are against you.

Most IPOs experience a first-day pop in price, but the long-term results aren't usually any better than the overall market. Since 1980, the average IPO has slightly underperformed the market average over the three years following its debut if you could buy the shares at the offer price. That's despite underwriters intentionally underpricing IPOs to drive demand for the stock and a good first-day result.

With SpaceX trading around its IPO price, investors should still exercise some caution.

A business with a future that's hard to predict

SpaceX's future depends on many variables. A lot has to go right for it to achieve the potential the market is already pricing into the stock.

It has to successfully launch and scale up its fully reusable Starship heavy-lift spacecraft. It has to use that to lower the cost of putting new satellites into orbit to scale up its Starlink service, and it has to sell that service to consumers worldwide. It has to prove the viability and cost competitiveness of orbital data centers. And it has to out-innovate leading artificial intelligence (AI) labs with its own AI model.

Buffett's take on this subject: "Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables."

I think it's fair to say Buffett would put SpaceX into the "too hard" pile. He wouldn't be able to determine a fair value for the business because there are too many variables in a highly dynamic market. There are many stocks in the market that are far easier to understand than SpaceX. If you can't wrap your brain around its fundamentals and how it generates significant returns on its capital over the long run, it's worth exploring other options first.

Speculating is bad for your investment returns

Buffett produced phenomenal results for investors by buying companies when he had a high degree of confidence he was buying the stock at or below its intrinsic value. His top holdings have durable competitive advantages that all but guarantee they can produce above-average earnings growth in the long run. Ultimately, that's reflected in the stock price.

Or as he put it succinctly, "I would rather be certain of a good result than hopeful of a great one."

SpaceX holds a lot of promise. But space-launch services are still a relatively nascent industry. The potential for its Starlink to disrupt broadband and mobile internet services is reliant on significant capital and scaling.

And its AI business, which accounts for the bulk of its estimated total addressable market, is still in the very early stages. Not to mention that things like Mars colonization are capital-intensive undertakings over decades with no clear payoff.

Yes, if SpaceX successfully accomplishes all it has set out to achieve, it could be the most valuable business in the world by a wide margin. But there's such a high degree of uncertainty about its future right now that it's hard to justify its current valuation. There are many other investments in today's market that you can buy with a high degree of certainty that they will produce good results.

Adam Levy 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.