Does History Suggest Buying SpaceX Stock in a Market Crash? The Answer Might Surprise You

As the old market adage advises, it's usually best to buy low, sell high. When looking at a potential investment, investors typically prefer to pay less rather than more.

But real-world investment decisions can be more complicated than that. In many cases, a business's stocks falls as it prospects diminish. This is especially true for unprofitable companies that need to sell shares and raise cash to survive. As their share price declines, their ability to stay afloat often falls in tandem, even as the valuation appears more attractive to investors.

What about Space Exploration Technologies (NASDAQ: SPCX)? If a market crash arrives, will this space stock be more or less attractive as its valuation shrinks? The answer might surprise you.

SpaceX's future is directly tied to its market valuation

Market crashes tend to hit certain stocks harder than others. That list often includes unprofitable businesses, high-valuation stocks with big expectations priced into their shares, and speculative tech companies with positive cash flows only expected far in the future.

Unfortunately, SpaceX fits all of those categories. In a stock market crash, I wouldn't be surprised to see the shares take a hard tumble as the market penalizes risk and capital grows scarce.

If you've been waiting to buy into SpaceX, a market crash might initially seem like a great buying opportunity. And while that may prove true, there's one risk investors should carefully consider.

Image source: Getty Images.

One reason unprofitable, high-multiple, long-duration stocks are hit hard during market crashes is that achieving projected growth becomes significantly more difficult. When asset values fall, raising additional necessary capital becomes more expensive and, in some cases, impossible. Without profits, these companies struggle to self-fund growth. That lowers near-term growth expectations, pushing out distant projected positive cash flows even further than expected. It's a perfect storm for stocks like this.

SpaceX posted a net loss of $4.9 billion last year. And while losses narrowed significantly last quarter, the company will need to ramp up spending aggressively during the coming years. Last quarter, capital expenditures surpassed $18 billion, nearly $16 billion of which was dedicated exclusively to artificial intelligence (AI) infrastructure. According to SpaceX, AI represents more than 90% of its long-term growth opportunity. Given this, the company has already outlined $350 billion in spending through 2030.

In short, SpaceX will require tapping capital markets again and again to realize its growth potential -- a growth potential that the market has seemingly already priced into its shares. If the company's valuation plummets, raising capital gets far more expensive and difficult.

Because nearly all of the company's growth opportunities are highly capital-intensive, SpaceX's entire growth runway could be under threat. That's especially true given many of SpaceX's biggest AI competitors are already profitable, with similar or even larger market caps. These companies will still be able to invest aggressively during a market crash, whereas SpaceX may need to sharply pull back spending.

"We're seeing an emerging arms race where no company believes it can afford to let competitors get ahead of it on a new technology," according to AllianceBernstein. "Not investing to be at the front here ... definitely has much more significant downsides," adds Sundar Pichai, the chief executive officer of Alphabet. "The one way I think about it is when you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here. Even in scenarios where if it turns out we are overinvesting, these are infrastructure which are widely useful for us, they have long useful lives, and we can apply it across and we can work through that."

What would happen to SpaceX in a market crash?

SpaceX's valuation may look significantly more attractive during a crash as its lofty valuation falls. But its competitive positioning may be much worse as a result. That could be true not only of its AI division but also of its rocket and satellite divisions. If capital grows scarce and more costly, SpaceX may need to divert funds meant for rocket development or satellite launches to building more terrestrial data centers. That could allow other rocket and satellite companies to catch up. In many ways, then, a market crash could have a lasting negative impact on SpaceX's competitiveness.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.