The unconventional logic behind SpaceX's $1.75 trillion price tag

Synopsis

Wall Street is employing unconventional benchmarks, comparing SpaceX to tech firms like Palantir and AI infrastructure players, to justify a potential $1.75 trillion IPO valuation. This approach aims to capture the company's unique secular growth potential, moving beyond traditional aerospace and telecom comparisons. Investors are betting on Elon Musk's vision and SpaceX's disruptive capabilities in space and connectivity.

Wall Street is reaching for some unusual yardsticks to price Elon Musk's SpaceX. At least one of SpaceX's large institutional investors is privately benchmarking the rocket and satellite company not against aerospace rivals like Boeing or telecom giants like AT&T, but against market darling Palantir Technologies and AI infrastructure plays like GE Vernova and Vertiv - in a bid to justify a $1.75 trillion valuation ahead of what could be the largest IPO in history.

The framework, described to Reuters for the first time by a source familiar with the company's thinking, illustrates the unusual challenge of pricing a company with no obvious public peers - and the lengths to which Wall Street is going to rationalize a premium valuation. SpaceX has confidentially filed for a U.S. IPO, Reuters reported last week. The company is scheduled to hold an analyst day on April 21, Reuters previously reported. At a potential valuation of $1.75 trillion, SpaceX looks expensive by many traditional measures, including comparisons to the earnings and revenue multiples at firms often cited ‌as reference points for parts of its ⁠business. In space ⁠that means Boeing and Lockheed Martin, whose United Launch Alliance joint venture competes with SpaceX in launch services. In internet access, the peers would be AT&T and Verizon.

But financial backers of the firm, on track to raise $75 billion in an IPO this year, contend that comparisons to established firms in legacy businesses miss the point of SpaceX and other Musk companies - to take advantage of the emergence of long-term, "secular" economic shifts at a time when few competitors are equipped to do so.

Musk's companies have historically commanded rich multiples in part because investors are betting on him personally - Tesla being the clearest example - and SpaceX investors expect that dynamic to carry over into any public offering.

It's "pretty darn exciting" to sell into "the largest total addressable market in human history" - a potential $370 billion in space business, SpaceX CFO Bret Johnsen told IPO bankers on a conference call this week, according to two people familiar with the matter. He tabbed the potential market for the firm's Starlink internet service at $1.6 trillion, the people said.

SpaceX did not respond to a request for comment.

Rethinking comparables

Finding the right comparables for SpaceX lies at the center of a fierce debate over the pricing of the massive IPO, as bankers and investors grapple with how to value the company despite few, if any, closely comparable public peers.

It is common for investors and bankers to sort for comparables by ⁠sector, using the ‌longstanding assumption that industry is a good proxy for financial opportunity and risk. But many investors contend that comparable companies do not need to operate in the same industry - because, in this view, what matters are a firm's potential cash flows, growth profiles and risk characteristics. This approach holds that a better comparison for SpaceX comes from companies selling into the AI data-center buildout, which have famously been rewarded with rising shares and high multiples.

For smaller funds, the calculus ⁠is different, said Jay Bala, portfolio manager at Toronto-based AIP, which manages roughly $100 million in assets, a large portion concentrated in SpaceX. "I'm piggybacking on the largest funds in the world. A huge amount of due diligence has already been done. I'm not going to second-guess some of the biggest investors on the planet," he said. He acknowledged it is difficult to obtain detailed financial information about SpaceX: "You can only get so much. It's hard to get numbers sometimes."

Starlink vs legacy telecoms

For Starlink - or what SpaceX calls its "connectivity" business - the reflexive benchmarks are legacy telecom firms, but some investors argue those comparisons are skewed by aging fixed infrastructure, saturated domestic markets and years of modest growth.

"I wouldn't look at a legacy AT&T and Verizon as being very relevant to the economic model for Starlink, even though they're both in the business of giving you communication," a senior executive at one of SpaceX's large institutional investors told Reuters, speaking on condition of anonymity to discuss confidential internal work.

Instead, SpaceX investors point to Palantir for its secular growth, high return on invested capital, good margins and asset-light composition - qualities that fans say justify the high multiples the stock commands and suggest greater opportunities down the road.

Palantir is well known as one of the priciest stocks in the market, recently trading at 43 times expected revenue and 75 times earnings. Skeptics say those levels are likely unsustainable, but SpaceX fans contend that the figures show that premium valuations are ‌attainable if backed by outstanding financial performance.

That said, at $1.75 trillion, even Palantir would be cheaper on some of these measures than SpaceX, which would trade at 110 times 2025 revenue estimates, according to a PitchBook calculation.

"Investors should size positions with the understanding that they are paying a platform premium today for infrastructure-monopoly economics tomorrow," PitchBook analyst Franco Granda said in a note last month.

Rocket manufacturing comparisons

For the rocket manufacturing side of the business, SpaceX investors contend that the firm's accomplishments - for instance, it has built a reusable launch system, driven down unit costs dramatically and ⁠expanded into a commercial market where demand for launch capacity continues to grow - demand valuations far above those prevailing at Lockheed, which traded recently at around 20 times next year's expected earnings. Boeing's current high multiples mostly reflect its state as a turnaround story.

Instead, they turn to industrial names such as GE Vernova and Vertiv - companies whose stocks have soared on the back of AI data-center spending - arguing that SpaceX's launch operations deserve a similar re-rating to the "picks and shovels" of the data-center age.

Even these preferred comps do not look a lot like SpaceX, however. GE Vernova was recently trading at around 30 times expected cash flow and four times last year's revenue.

Vertiv, which sells power and cooling equipment for data centers, traded recently at 19 times expected operating profit and 6 times last year's sales.

Messy pricing and rationalisations

Bankers and investors say SpaceX is difficult to price because of the company's unique space operations and AI business, which is particularly difficult to value at an early stage.

"Pricing is always going to be messy here," said Aswath Damodaran, a valuation expert and finance professor at New York University's Stern School of Business. "Nobody else has that capacity to launch satellites in numbers and at the price that they can do -- that's their big advantage."

He adds that much of the current pricing reflects investors justifying their decision to purchase the shares rather than relying on traditional metrics. "They're hoping there's enough mood and momentum behind SpaceX, and when it goes public, the mood and momentum will take the stock up."

"They've made the decision already that SpaceX is a great buy," Damodaran said. "Now they're looking for some way that they can justify that, and this pricing sounds like that exposed rationalisation."

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