Inside the Math of Team RB's SpaceX Price Target

In a recent edition of Breakfast News, we gave a five-year price target for Space Exploration Technologies (NASDAQ: SPCX), or SpaceX, of $141.84 in response to TMF co-founder and CEO Tom Gardner's $217.52 on behalf of Team Hidden Gems.

Our figure came from the mean of separate analyst price targets. Today, we'll delve deeper into some of those predictions. Fool on!

By Toby Bordelon
Team Rule Breakers

I think this business is very overvalued, even with the decline we've seen since the IPO. Getting cut in half over the next five years would make it more reasonable, but still perhaps way overpriced. SpaceX is a challenge to evaluate given the disparity of its business lines, including two (space and AI) that are evolving, cutting-edge, overhyped industries that will likely see substantial change over the next five years. Given that, I think placing any kind of price target at all on this company is probably nonsensical.

In terms of the artificial intelligence (AI) business, I'm skeptical that SpaceX will be a big winner unless things change quickly. If your best use of your data center compute power is leasing it to other AI companies, then that suggests either 1) your AI products and services are not very good, or 2) you have no compelling monetization ideas, or 3) you think the bottom is going to fall out of this market soon and you're trying to recoup as many of your costs as you can before it does. But it's not a good signal, in my opinion, that you really believe in your long-term strategy. Unless that strategy is to become a data center REIT, in which case we should probably value it as such.

On the space business, space is exciting, but very hard. Look at the challenges the company is having with the Starship. Are they making progress? Yes. Is that progress fast enough to meet the timeline of Artemis and the moon missions? Maybe not. Delays are a fact of life with space exploration, but being NASA (government agency, no profit motive) is very different from being a for-profit business with much of your business tied to successful, profitable launches. I have a hard time giving SpaceX a trillion+ valuation when other space companies are so much less. It's a Musk/hype premium, and I doubt it persists over the next five to 10 years.

SpaceX's valuation seems mostly vibes and hope, an idea that this company will be massively profitable in the future, at some point, with no real connection to the reality of today.

SpaceX is also suing the state of Minnesota to overturn a law that bans apps that allow users to create non-consensual sexualized content. So we're talking about a company that seems to believe banning non-consensual porn is a threat to its business. That is very problematic in my opinion.

Also, my price target assumes a merger with Tesla (NASDAQ: TSLA) in the next five years. At least Tesla is making money and generating cash, so a merger would likely be a stabilizing force, financially, and it would eliminate the problem of Elon Musk's attention being split. If no merger is forthcoming, I might have to lower my price target a bit.

By David Meier
Team Rule Breakers

Let me walk you through how I came up with the $157.14 target that I submitted to the project. To set the stage, here is a table with SpaceX's revenue by segment over the past 3 years.

Source: S&P CapitalIQ (dollars in millions).

With a quick look at the past, let's look into the future, because that's what we'll need to make projections about in order to make a valuation estimate today and a 5-year price target for the future.

Analysts expect significant revenue growth at SpaceX. Let's assume revenue in 2030 is $350 billion, which is a little bit less than analysts estimate. Capex requirements will likely remain elevated, and I agree with analysts that SpaceX will not be generating free cash flow.

To get to the price target, let's assign a reasonable EV/Sales multiple of 7. After all, the company is still growing, would have a strong margin profile, is generating operating cash flow, and has plenty of opportunities to invest that capital. From there, I calculate a five-year price target of $157.14 (please excuse the significant digits) based on 14 billion shares outstanding at the time.

By Asit Sharma
Team Rule Breakers

My price target range ($180-$220) reflects some deep pessimism on the actual financial numbers working out within the next five years, the eventuality (I believe) that SpaceX will dispose of some assets/businesses to raise more capital, plus investors' willingness to be repeatedly diluted via equity and debt in the short term in order to look ahead to the 2030s.

This is based not on nihilism but the case study in hand: just look how Tesla investors have supported that business over the years, from negative returns to profitability and positive free cash flow. Despite the potential for losses, it won't surprise me if SpaceX can add another $70 to $100 to the share price by 2031.

To be clear, I'm deriving my price range from narrative and intuition, because my standard valuation model can't supply a useful swag on a business that will likely sport not just negative free cash flow, but capital expenditures in excess of sales for the next couple of years. In a weird twist, GAAP profits for SpaceX will arrive a lot sooner than positive free cash flow. And SpaceX is going to have to invest in its space business and AI infrastructure madly for years to justify its valuation today.

I believe SpaceX will be one of the hungriest consumers of capital that we'll encounter in our investing careers. It's easy to see how Elon Musk can supply the funds SpaceX will need through economic and shareholder dilution (Tesla merger, anyone?!) through the end of the decade. The harder question for me is what happens in years five to ten, when I think the buy thesis either solidifies into outsized returns, or just breaks completely (to quote the Beatles, "All the money's gone, nowhere to go").

One thing's for certain, however: there's no harm in waiting a few quarters to get a clearer picture of this business in order to make a "buy" or "take a pass" decision.

The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.