Wall Street Thinks SpaceX Is a Buy. Here's Why I'm Not So Sure

Space Exploration Technologies (NASDAQ: SPCX) has been a hot topic on Wall Street since it went public in June in what was the largest IPO in history. Many analysts are quite excited about the company's prospects. SpaceX's one-year average price target, according to Yahoo! Finance, is $222.32 (as of writing), which implies a 58% upside from current levels. Price targets run as high as $450. That's quite ambitious for a company that, since going public, has actually declined from its $150 opening price. Despite Wall Street's optimism, I am rather skeptical that SpaceX can deliver such outstanding returns over the next year.

Image source: The Motley Fool.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

Why SpaceX has moved south since going public

SpaceX's business encompasses artificial intelligence (AI), satellite-based internet services, and spacecraft launch services. The company has made meaningful progress across all three segments this year. Let's start with Starship, the company's next-gen, fully reusable rocket. Starship is still in testing, and in late July, SpaceX conducted its 13th successful test flight. Starship is central to SpaceX's space ambitions.

It could help improve the economics of this unit by decreasing launch costs and improving margins and profits. In the company's AI business, SpaceX landed a major customer earlier this year Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

Now moving to SpaceX's internet service, Starlink, the company deployed 20 of its Starlink V3 satellites, its next-generation satellite that supports much faster speeds than previous versions, during Starship's 13th test flight. Beyond meaningful operational progress, SpaceX also posted impressive second-quarter results.

The company's revenue increased 92% year over year to $7.8 billion, and its net loss shrank to $541 million, much better than the $1 billion net loss recorded in the prior-year quarter. Why, then, is the stock down from its $150 opening price? There are likely many reasons, but let's consider two.

First, significantly more of SpaceX's shares will be available for sale over the next year or so. Here is why. When a company goes public, there is a period during which company insiders aren't allowed to sell their shares -- called the lockup period. Once it expires, they can sell freely, and if they do so in large quantities, it can put significant downward pressure on the stock.

SpaceX navigated its first lockup expiry test with flying colors, but as many more shares become available, through the middle of next year (roughly), it's hard to predict what will happen. Some investors are worried about that. Second, and more importantly, SpaceX arguably trades at a significant premium. The company's price-to-sales ratio is currently 65.7, as of writing.

SpaceX is making genuine progress, and its latest earnings report was strong. But its share price apparently already reflected all of that from the moment it started trading on public equity markets. That's a key reason the stock has moved slightly down from its initial levels.

What's next for SpaceX?

Wall Street thinks the stock can grow 50% over the next year from current levels, but what would that take? Strong financial results alone likely won't be enough. Again, the market already expects that. And if SpaceX falls short, that could, instead, send the stock price down significantly. But SpaceX could move genuinely higher -- perhaps by as much as 50% or more -- provided several things occur beyond strong financial results. If lockup periods expire with little selling, that could boost the stock price. SpaceX could also see its shares move higher if it signs massive AI deals with one or several other major corporations.

Another potential catalyst would be the company proving it could become a major mobile carrier and challenge the well-established leaders in this field. That could significantly expand Starlink's addressable market, and investors may reward SpaceX for that. Last but not least, Starship's progress will be critical, too, and it may even be the most important potential catalyst. If SpaceX can conduct multiple successful flights and significantly increase launch cadence, expect the stock to rise.

But notice that's a lot of IFs, with little room for error and massive potential downside if any number of other things happen (competition starts to catch up, SpaceX loses some government contracts, Starship's progress stalls, etc.). SpaceX's business looks strong, and its prospects are attractive too. But the margin of error is practically non-existent right now, which makes the stock risky and incredibly challenging to forecast over the next year (although it's always hard to know how any stock will move over 12 months). For all those reasons, I don't share Wall Street's optimism, and I am staying on the sidelines for now.

Prosper Junior Bakiny has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.