SpaceX Stock: Boom or Bust?

One stock that has divided investors since its debut in June is Space Exploration Technologies (NASDAQ: SPCX). The Elon Musk-backed company had the largest IPO ever, and the stock has been volatile ever since, shooting up to over $225, then crashing to under $105 before settling in around its current price of roughly $135.

Let's dig into why this growth stock could skyrocket higher and also why it could eventually crash.

The bull case

SpaceX is a bet on the future and the vision of Elon Musk, who isn't afraid to make big, bold bets, and SpaceX has become his primary vehicle for that. Eventually, I would expect the company to acquire Tesla to put all his ambitions under one roof.

Perhaps the most important technological achievement the company has attained thus far is building reusable rockets. This greatly reduces launch costs and sets the company up for its future space aspirations. It is now working to take this technology to its massive Starship rockets, which would then open the door to putting data centers in space.

This is a potentially huge market for the company, and data centers in space would offer several advantages. The biggest is that they can be run by nearly continuous solar power. AI data centers are energy hogs, and putting them in space would help solve this major issue. It also would avoid local grid congestion and zoning issues, while bypassing congested fiber lines in favor of high-speed satellite optical laser links that could quickly transmit data across regions.

SpaceX's core terrestrial data center business currently has strong economics, with it saying it is getting a payback on its investments in less than a year. Meanwhile, its Starlink satellite internet business is a gem, giving it a strong recurring revenue business that is growing quickly. The company is also looking to potentially offer voice services to compete with traditional wireless carriers.

The biggest reason to own SpaceX, however, is the multitude of business opportunities it has and the industries it could disrupt.

Image source: The Motley Fool.

The bear case

While SpaceX has a lot of opportunities in front of it, it will also have to overcome a lot of technical hurdles. The company still needs to solve a multitude of engineering problems with Starship, including heat shield durability and catching the upper stage of the rocket with its launch tower. Being able to catch an expensive rocket and relaunch it shortly afterward is really the key to its business model.

If it can do that, it will then need to overcome the challenges of deploying data centers in space. One of the biggest hurdles is cooling systems in the vacuum of space, as the technology to do so has not yet been invented. Chips would also need to be developed that can withstand cosmic radiation, as high radiation levels can flip computing bits, corrupting them, and, over time, cumulative damage tends to degrade chips' performance. Meanwhile, a large-scale data center won't fit on even a mega-rocket, so an advanced robotic system would need to be developed to assemble it in space.

While Musk is undoubtedly a visionary, his track record with timely predictions is spotty at best. At the same time, what he is trying to accomplish will cost a considerable amount of money for a company that Morgan Stanley projects won't turn free-cash-flow-positive until 2035. As such, SpaceX is going to need to raise a lot of cash through debt and equity offerings to fund its capital expenditures.

Valuation is also another big issue. The stock trades at over 40 times price-to-sales (P/S), which is much higher than even Tesla traded at in its early days.

The verdict

Over the next few years, SpaceX is likely to trade more on investor sentiment and emotion than fundamentals, likely leading to a lot of volatility. That said, given its valuation, already massive market cap, and the capex-heavy nature of its pursuits, it's not a stock I'd buy at these levels.

Geoffrey Seiler 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.