Pod Insights The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network TIP830: SpaceX (SPCX): Is It Really Worth $2 Trillion Dollars? w/ Kyle Grieve & Shawn O'Malley About this episode In today's episode, Kyle Grieve and Shawn O’Malley analyze SpaceX's blockbuster 2026 IPO, dissecting the company's three segments: Space, Connectivity, and AI. They’ll also look at its history, moats, capital allocation, debt, and incentive structure. They’ll stress-test SpaceX's aggressive $28.5 trillion total addressable market claim and walk through the key risks facing the business, from key-man dependence to regulatory exposure.
IN THIS EPISODE YOU’LL LEARN:
(00:00:00) Intro(00:06:56) How Elon Musk's early rocket failures almost sank SpaceX(00:08:36) How Space, Connectivity, and AI segments actually work(00:10:56) Why reusable rockets are reshaping launch economics(00:12:04) Whether the AI segment is worrisome(00:29:57) What's really driving Connectivity's improving margins(00:31:16) How to think about SpaceX's R&D and capital spending(00:38:45) Why SpaceX's debt picture is more nuanced than it looks(00:44:19) How Musk's pay package ties to Mars and market cap benchmarks(00:48:08) What risks could derail the SpaceX growth story(00:55:57) Why its claimed market opportunity may be overstated(01:01:36) Whether SpaceX's valuation can be justified by the numbers(01:05:16) Intrinsic Value of SpaceX(01:07:05) Whether Kyle and Shawn will add SpaceX to the Intrinsic Value Portfolio
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
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Transcript 14,361 words · 4 speakers
0:00 Speaker 00 You're listening to TIP.
0:03 Speaker 01 All right. So I genuinely never thought we'd be discussing Twitter or X or whatever you want to call it on the show these days. And then at the same time, you're telling me that we're going to get to talk about Mars colonies in today's episode. This is going to be a fun one.
0:17 Speaker 02 Yeah, me neither. But believe it or not, Twitter is now part of SpaceX's AI segment.
0:22 Speaker 01 But like, come on, Mars colonies? Objectively, super, super cool. This is something we're talking about as investors in 2026.
0:30 Speaker 02 Right. And with that Mars colonization, Elon has to populate it with a million inhabitants just to unlock his incentives.
0:40 Speaker 00 Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Kyle Grieve.
1:26 Speaker 01 Hey, folks. I'd say that we own a few splashy names that are well-known and attract a lot of attention in markets, from Amazon to Alphabet to Uber. There's definitely some blue chip businesses that we hold in our portfolio. But today, we're going to discuss one of the most popular and also polarizing companies to go public in recent memory. And that's none other than Space Exploration Technologies, or SpaceX. And part of what makes SpaceX so popular is simply all of the investors who made an absolute fortune by following Elon Musk into past investments. And we know that Elon is a pretty polarizing figure in himself. He tends to be somebody that you either love or hate with very few people in between, I've found.
2:11 Speaker 02 Exactly. And part of the reason that I chose SpaceX was that it's simply just a fascinating business. I'm no Elon Musk fanboy, but I think the business case of what SpaceX is trying to do really speaks to that eight-year-old kid inside me who loved rockets, Star Trek, and just the unknown. So you know SpaceX is really just dealing directly in all of those areas. But instead of it being a daydream or a fantasy, it's now reality. And when you look at it just as an investment, I also see the appeal there, you know, at least at a shallow layer. Tesla has been a 260 bagger since it IPO back in 2010. And I spoke into more than one person who's literally bought their entire home with proceeds from their Tesla investment windfalls. And I'm sure you have similar stories, Sean.
2:52 Speaker 01 Yeah, definitely with Tesla and Nvidia for sure. I mean, those are the two where it seems like a lot of everyday investors really struck it rich in the past. And yet I think we both personally missed out on those bets. So as much as I've argued at times that Tesla is just obscenely overvalued. It has objectively created an unbelievable amount of wealth. So I do think, you know, the intellectually honest thing to do is to try and look at a business like this, whether it's Tesla or SpaceX with sober eyes and try to at least understand how the market is able to justify valuations like 100 times sales for SpaceX or 400 times earnings for Tesla.
3:35 Speaker 01 When with Tesla, the business has not grown for three years now, but I digress.
3:41 Speaker 02 Yeah. And another great reason I think SpaceX is interesting to cover is just simply because of my affinity for understanding market psychology. You know, I think one of the best authority figures on understanding bubbles was John Kenneth Galbraith. And one of his best points about understanding bubbles was that they tend to exhibit quite consistent psychological characteristics. Now, while I wouldn't say SpaceX is in a bubble by any means, it definitely does share many characteristics with past bubbles. And when I see these characteristics, it's a pretty strong signal to me to really dial in on what I'm looking at to determine whether the price makes any sense. So one of Galbraith's factors contributing to speculative euphoria is a specious association between money and intelligence. Galbraith clearly didn't care much about hurting people's feelings.
4:23 Speaker 02 But his point here is very important because there are a ton of very rich people taking part in the SpaceX deal. Either they already own shares from previous private rounds of fundraising, or they're just part of these institutions that are taking part. So you can see how there may be an inkling of truth that investors are following the wealthy, hoping to tap into their intelligence and just kind of sidecar alongside them as SpaceX hopefully rips up.
4:44 Speaker 01 Well, so that's what I'm really excited to see today because I actually privately passed on a chance to invest in SpaceX last year because I thought the valuation was absurd, even though would have already 5X'd for me already. And when you experience something like that, you realize why investing with a long-term mindset, like Buffett, going off the fundamentals, everything we'd always talk about every week, can be so challenging because that sting of regret and FOMO can really be painful. And what you don't want to do on the flip side of that is to then pile into SpaceX at some IPO-related price peak during market hype cycles and then actually lose money. But at the same time,
5:25 Speaker 01 if there is any merit to the vision for SpaceX that the market is painting, you want to make sure you at least fully understand why you disagree with it. Because I certainly don't want to be somebody who just lets pride, kind of being the old man yelling, "Get off my lawn," of this is how investing should be and you shouldn't invest in companies that have 100 times sales. You want to understand how the market is justifying it and sort of make an informed conclusion of, okay, this is truly overrated or not. And so, a lot of people felt they had already missed out on owning businesses like Alphabet, Microsoft,
6:07 Speaker 01 and Apple a decade ago, for example. And yet, those have been some of the best performing stocks during that period, with the point being, even after reaching what seemed like considerable valuations at the time and people believing that they were wildly overvalued, those stocks have continued to do very, very well because the underlying businesses are just so good. And anyways, my hope for today is to better understand whether we're likely making the same mistake by continuing to sit on the sidelines with SpaceX. And to be clear, I do have my biases here against SpaceX, but I want to be as open-minded as possible,
6:49 Speaker 01 at least during today's episode. So, before we get off on too much of a tangent, let's get to the actual business of SpaceX.
6:56 Speaker 02 Yeah, let's do it. So, I want to go back and start back in 2001. So, at this time, Elon Musk had been ousted as a CEO of PayPal. So he ended up attending this Mars Society Convention where he donated just about $100,000. But more importantly, he learned that NASA had no concrete plans for human missions to Mars. And that insight is what basically sparked something in Elon to build something that would provide a solution to that exact problem, rather than just accepting that space exploration was stuck in place. Now, a year later, PayPal had been bought out by eBay and that netted Musk about $180 million to reinvest into new ventures. In that same year, Musk met with some aerospace engineers to discuss creating a space launch company. And Musk ended up investing half of his PayPal winnings into this new business.
7:40 Speaker 02 But at that time, success was very, very far from certain. Looking back at this time, Elon Musk said, "I didn't even let friends invest. I was convinced they'd lose everything. I'd rather go broke myself." But by 2006, SpaceX had actually launched its first rocket, which was the Falcon 1, which actually failed on its first three launches. For SpaceX, you know, the third time wasn't a charm. It was actually the fourth, but even this launch ended prematurely due to a fuel leak and a fire. Now, at this time, the business was still bleeding cash, but they made it work. And by 2008, SpaceX became the first privately owned company to send a liquid fueled rocket into space, even securing a $1 billion contract with NASA.
8:18 Speaker 01 You hear these stories of devoted entrepreneurs, literally sleeping on the factory floor. And say what you want about Musk, but it does seem like he's had a pretty fanatic devotion to working on his companies over the years. So just to take us to the present, though, what does SpaceX look like today? Because I'm sure a lot has changed.
8:37 Speaker 02 That's right. So today SpaceX has three segments to its business. Now, let's start with the space segment. The space segment is SpaceX's arm that's responsible for, pretty simply, going to space. They built rockets that are cheaper and they're reusable. These characteristics are very, very important, simply because they're making space travel economically viable when it just never was before. They also have a very strong track record with over 650 successful space launches. Now SpaceX is vertically integrated on these rockets. They handle the design, the manufacturing, the launch, and the refurbishment of the reusable rockets. Now of those 650 successful launches, they've had about a 99% success rate and they delivered somewhere around 7,400 tons of payload to orbit. Regarding revenue generation, space segment has two revenue streams.
9:22 Speaker 02 The first one is launch services. So this is a service offered for commercial, civil, international, and government customers through their reusable Falcon 9 and Falcon Heavy rockets. This part can deliver things like satellites, cargo, and crew members. SpaceX is the only non-NASA rocket that delivers their astronauts to the International Space Station. So these are on fixed kind of one to five-year contracts. The second is in launch and development. This service helps develop spacecraft using SpaceX's rockets. So a few recent examples of this are NASA's contracts with SpaceX to resupply research supplies and vital equipment to the International Space Station. SpaceX has even launched a few autonomous missions to help deliver this equipment. Now, these tend to be on even longer contracts, which range up to 14 years in length.
10:07 Speaker 01 It's pretty incredible and inspiring to see what SpaceX has been able to accomplish. And my dad worked in satellites for most of his career, and we have a member of our mastermind community who is actually a rocket scientist. And so by all accounts, SpaceX has really just reinvented the entire industry from what I've heard. But the logical next question for me is, does this space segment include revenue from launching its own SpaceX satellites? Or what actually goes into this?
10:37 Speaker 02 Yeah, so the short answer there, no. So the satellite portion of SpaceX actually is its own segment. So they don't count revenue there, which would be kind of a double accounting no-no. I'd also add that the revenue split between launch services and launch and development. So as of Q1 2026, 53% of space revenue comes from launch services, while 47% comes from launch and development. But probably the most important aspect of the space segment, I think, is SpaceX's lead in launch costs. So in 2026, the average Falcon 9 launch cost about $74 million, but this hides much of the cost reduction that comes from building these reusable rockets. For instance, I've seen that the average launch cost for NASA is $2.5 billion. So there's simply just no price competition in this example, which is why NASA is using SpaceX so much.
11:22 Speaker 02 And SpaceX continues to spend billions of dollars in R&D to improve its rockets going forward. They're getting bigger, they're getting cheaper at delivering payloads. For instance, their first reusable rocket was that Falcon 9, which I mentioned, and that had a payload capacity of about 23 tons. Next up was the Falcon Heavy, which could deliver 64 tons. And their newest rocket is called Starship, which can deliver 100,000. 100 tons. They place so much importance on this that they have their own KPI, which is mass to orbit, which they track. But as the space segment, you know, scales, they're going to be able to take advantage of economies of scale. The average cost per kilogram for SpaceX is simply just dropping with estimates for the Falcon 9 around 2,000 per kilogram versus only 100 per kilogram for Starship. So as the mass to orbit increases, this segment will see significant expansion in margins.
12:05 Speaker 01 Well, before we get carried away with mass to orbit conversations, just to translate that to plain English, as SpaceX is able to deliver more cargo to space while bringing down the launch costs, the economics of the business can improve dramatically and we're already basically seeing evidence of that. And but now I want to turn our attention to the AI segment of the business. So I know you're not as bullish on.
12:31 Speaker 02 Yeah, that's entirely correct, Sean. But first, let's do another little history lesson here. So Elon Musk acquired Twitter in 2022 and the price tag was around $44 billion. Once that sale was complete, it was then taken private. It was later rebranded as X and added an AI component to the business via Grok, its AI chatbot, which maybe you have used Sean, or many of our listeners have used. So in February of 2026, XAI and SpaceX ended up merging. Now, the reason that I'm not crazy about the AI segment of SpaceX is simply that it just doesn't have anywhere close to the same economics as either the space or the connectivity segment, nor does it offer anywhere close to the competitive advantage of these segments. Yes, you can make the argument, as Elon has, that there's a lot of great synergy between them.
13:15 Speaker 02 For instance, Elon sees AI data centers being in space in the future. And in that case, all three segments would have synergies as the equipment, you know, obviously has to be transferred to space via the SpaceX rockets, and then the signal would need to be transferred back to Earth via SpaceX's connectivity segment. But as of now, you know, that just simply doesn't exist. AI has two revenue streams. First, you have advertising, you know, obviously, if you've scrolled through X and you see ads, that's one way that the segment is monetized. And then you have the AI solutions and infrastructure. This covers X's premium subscriptions as well as higher tier Grok offerings.
13:48 Speaker 01 So this is where my biases are going to come out, I think. But XAI is not exactly leading the LLM race compared to Anthropic and OpenAI. And in fact, I'm pretty sure they're not even fully utilizing their data center investments. So they're actually licensing out this compute to others, which is sort of telling to me. And then with X or Twitter, it's pretty shocking that this business is in the public markets once again, after being private for four years. And can you imagine telling someone four years ago that Twitter would return to public equity markets after Elon Musk had purchased it for $44 billion or whatever it was? And now it's returning attached to a $2 trillion enterprise.
14:32 Speaker 01 It's just unbelievable. And so it sounds like an incredible comeback story, but I actually don't think the implied value of Twitter has really grown at all. And if anything, a lot of value has arguably been destroyed. And you've seen that with the decline in users on the platform and also the quality of the advertisers. I mean, gosh, some of the ads I've seen on Twitter just makes you question what happened to the more legitimate corporate ad budgets that used to allocate dollars there. And I'm guessing a lot of that money has moved to Facebook and TikTok and Reddit and so on. But that's enough ranting for now. I should mention that I know the AI segment is also working on an initiative called TerraFab,
15:12 Speaker 01 which is a mixture of developing semiconductors and sort of this superintelligence factory. And the end goal is to achieve a terawatt or a trillion watts of AI computing capacity to help meet the growing demand of AI compute from autonomous vehicles, humanoid robots, which is something Tesla has talked about, and AI satellites. And it all just sounds like very science fiction-y to say out loud.
15:40 Speaker 02 Yeah, it's an insanely ambitious project and it's not just an XAI initiative as they have backing from Tesla and Intel as well. So just to give you an idea, global AI data center capacity is somewhere around 30 billion watts, which is just 3% of the goals of the tariff app. Now, I'm not going to pretend like I have any special insights into this, but you know, it sounds like it's a net positive for the companies that are involved in AI. And XAI is obviously going to be able to monetize that AI compute capabilities and generate recurring revenue once it's done, assuming that it works as originally planned. But before we move to the connectivity part, I just want to say that the AI segment is in heavy reinvestment mode right now. It's investing far more money than it's even generating in revenue. So in 2025, the segment had revenues of 3.2 billion with losses from operations of
16:24 Speaker 02 6.3 billion dollars and the segment spent 12.7 billion in capex for future growth.
16:29 Speaker 01 Elon has never shied away from ambitious projects, to be fair, but man, spending four times your annual revenue on capex is, is pretty insane. And SpaceX is certainly not alone in making those massive data center investments though. How about now we discuss the final segment of SpaceX, which I think is the most attractive one from an investment perspective, and that's the connectivity business. And so you actually recently pitched American Tower to me and we covered that business on the podcast a few weeks ago. And so SpaceX's connectivity segment seems like it would be an emerging competitor for American Tower. And yet you mentioned that American Tower sees satellite internet as a complement to
17:13 Speaker 01 what is already available via terrestrial connectivity, not as a direct competitor. But my assumption is that Elon thinks he'll be able to capture a pretty big chunk of what is now AMT's market share.
17:26 Speaker 02 Right. And here's the thing. So if satellite internet scales well and the product can be offered at even lower prices with no difference in services, then that would clearly pose a very, very big risk to a business like AMT. But I won't get into that too much right now as I want to focus on arguably SpaceX's crown jewel, which is the connectivity segment. So I think connectivity is the crown jewel because as of now, it's the part of the business that is really subsidizing the money losing AI business. Connectivity currently has about 40% operating margins and 63% adjusted EBITDA margins. So comparing this to AMT, the margins are still a touch below AMT's 67%. Connectivity and Starlink are essentially the same thing. So if I refer to it as Starlink, I'm talking about the connectivity segment.
18:08 Speaker 02 Now, Starlink currently has about 9,600 satellites orbiting around the earth, which is quite an interestingly high number. And these satellites serve just 10.3 million subscribers in 164 countries. Starlink satellites make up about 75% or so of all active satellites in orbit. Now, Starlink has four segments. The first one is consumer broadband. This is basically hardware revenue from selling things like Starlink kits, which maybe you've seen before, Sean, as well as monthly recurring subscription revenue that they get once those kits are sold. This segment has already doubled its customers in the last 12 months. The second is enterprise. This segment does the same for consumers, just on a much larger scale. Customers would include enterprises in more remote locations,
18:50 Speaker 02 such as remote work sites, drilling rigs, cruise ships and trains. Third, you have government. So Starshield is their secure satellite network, built specifically for national security applications. Customers are international and on multi-year contracts. And then lastly, you have Starlink Mobile. So this is their satellite to mobile offering. Starlink has partnered with about 30 different mobile networks on six continents, just to help cover more regions and cover areas that are underserved.
19:17 Speaker 01 I remember reading about this segment, and there was something crucial that caught my attention. And it's related to their KPIs, which they use as subscriber counts and then average revenue per user, or ARPU. And so they're actually moving in opposite directions with subscribers rapidly growing, but then ARPU is falling. So as they get more customers, they're making less money per customer. And so ARPU has recently decreased year over year from $88 per user to 66.
19:50 Speaker 02 Now, this is normally not a good thing, but similar to a business like Wise, which is making fees cheaper for its customers over time, I think it's actually great for customers. So if we go back to the AMT comparison for a moment, it looks like since satellite connectivity is in its infancy, Starlink isn't really concerned about flexing its pricing power at this point. And since Starlink will at some point help with creating AI compute power, they just kind of want to improve their capabilities in that area. So I would assume once Starlink has a larger share... Of the world's satellite connectivity and cannot grow as much. They may follow in AMT's footsteps of having these fee escalators, but as of now, they didn't mention anything about escalating fees in their prospectus. And as a matter of fact, SpaceX actually expects ARPU to continue to decline over the next few
20:33 Speaker 02 years, and this is due to the addition of more lower-priced plants. But because of the scale of the business, it probably is going to continue to be a cash generator for this business into the future.
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23:30 Speaker 01 That's J O I N B I L T dot com slash T I P. Use our link so they know we sent you. Terms apply, subject to approval and eligibility. Built cards are issued by Column N A, member F D I C pursuant to license from Mastercard International, Incorporated. All right, back to the show. And so what's this chatter I've seen about Starlink's V3 satellite? I assume the performance is continuing to improve on the satellites as new ones are continually being sent into space.
24:05 Speaker 02 Exactly. So Starlink's first generation satellites were the V1. The current generation is the V2 mini and the V2 minis reduce the satellite's manufacturing costs by three X per gigabyte of capacity compared to the V1. And in the last half of 2026, Starlink is actually going to be releasing the V3. Now, the V3 is by far the most powerful satellite that they've created yet with 20 times a throughput capacity of the V2. So the economics of the V3 are also really, really good. They expect a nine times cost reduction per gigabyte between the V3 and the V1, which is further going to increase the efficiency of these satellites.
24:39 Speaker 01 So that was a great breakdown of what exactly SpaceX does at a high level. And from my viewpoint, it looks like SpaceX has some really interesting assets and one less interesting one. But I want to hear more from you about how you think of SpaceX's moat. It seems pretty robust to me when you're citing NASA as a competitor and yet NASA needs to use SpaceX because SpaceX can service the International Space Station at a fraction of the cost. It seems like a pretty good setup for the business.
25:11 Speaker 02 Yeah, I think SpaceX definitely has some sort of moat. But my issue with SpaceX is that it actually brings back some kind of bad memories that I've had from my investment into Alibaba. So Alibaba had this China e-commerce segment, which was exceptional, but it was really just subsidizing all the other segments, none of which at the time were turning a profit. And I remember after selling it, I made a new item on my investing checklist. And it was if the business has multiple segments, does it have at least two profitable ones that are likely to be cash cows for many years? Or is one segment just carrying the entire business where the business would be better off just getting rid of the rest of the business? So when I ran SpaceX through my checklist, I was very sensitive to this very specific question because as of now, the connectivity segment is essentially subsidizing the entire business.
25:57 Speaker 02 And I'm just not crazy about the AI segment, as I think both of us have made clear today. But you know, the space segment also looks quite promising.
26:04 Speaker 01 Yeah, it's a, it's a mixed bag and sometimes leadership really knows what they're doing and bets on reinvesting into businesses that build their flywheel at the expense of GAAP net income, which Amazon, as we know, did for a long time. And then other times, the market rightly sniffs out that billions of dollars of capital are being wasted, like it did with Mark Zuckerberg's spending on the metaverse, which we're still waiting to pan out. But SpaceX, at least for now, is certainly giving the benefit of the doubt that these other units aren't holding back the company, even if they're being subsidized, as they're building an ecosystem that will create lots of value for shareholders, or that's a thought.
26:44 Speaker 01 And so maybe we start to analyze this ourselves by going over what you don't like about the AI segment, because this is really where the big bets are being made and the big subsidies are being made.
26:58 Speaker 02 Yeah, I think my main issue with the AI segment is that I think it just has the weakest moat out of the entire business, you know, if you can say it even has one. So you could argue that X has, you know, network economies, X has 1.3 billion accounts, meaning they can continue showing their users ads. But like you said, the quality of those ads have gone downhill, and I've noticed that as well, and continue to make money that way. But other than that, I kind of find it hard to find any real competitive advantages. Grok is basically an LLM, and I've used many different LLMs. And unfortunately, there just isn't that much difference between them. The perspective says that SpaceX has an advantage because it can train its own LLM, operate its own compute infrastructure, and that is vertically integrated. But this seems to be, you know, exactly what the other tech titans are doing today. So I
27:42 Speaker 02 find it pretty hard to believe it's that much of a competitive advantage. But I will say, you know, this segment is in its early stage. So perhaps Elon has exactly what it takes to get a decent return on these AI investments. And I think that there's a chance that this segment is helpful for SpaceX in terms of connectivity in space in a more holistic way, as, you know, AI data centers in space, like I mentioned earlier, would require the use of all three of SpaceX's segments. But I think it's going to continue to be kind of this capital incinerator for many years to come before it actually turns a profit, or before we can actually assess whether it's a good investment or not.
28:17 Speaker 01 When you look at Alphabet's spending on data centers, there's a much clearer argument for me as to how that spending will create value, right? AI is already being used at scale to optimize advertising and to make these algorithms even better at connecting sponsors with the right potential customers at exactly the right moment. And then you have all the research that Alphabet does, and the medical world, for example, so looking at genetics, and reversing aging and curing diseases. And so, yeah, I don't have to be an expert on LLMs to recognize how these technologies can help them progress on these challenges. And point being, you already have several incredibly profitable businesses at scale, from YouTube
28:58 Speaker 01 to Google Search, that almost certainly benefit from having access to cutting-edge LLMs. And Google's LLM Gemini benefits From having access to all this unique training data that Alphabet has. And then even in more speculative areas like biotech that I was mentioning, it seems so much more plausible to me how they're going to be able to leverage spending on data centers to support that research. And so with SpaceX, I guess I just can't connect all the pieces together. Or it's not as obvious to me how these investments will pay off and complement each other. So I want to now dig in though, to what you like about the business. When I was talking to you before we hit the record button, you said you actually do like parts of this business.
29:43 Speaker 01 So I assume there are some competitive advantages that you think it can keep compounding.
29:50 Speaker 02 Yeah, that's right, Sean. So obviously we've been harping here a lot on the XAI segment, which I don't really like, but the connectivity in space segments, I kind of do like. They're very, very interesting. So I think that they both have some pretty strong modes that are probably likely to continue to widen over time. So let's start with space here. So the idea of reusing rockets was really just a dream until SpaceX actually made it happen. There are other companies that are popping up around the world attempting to make reusable rockets. So it's definitely not a monopoly by any means, but I think SpaceX is just really, really far ahead on that curve. Musk is definitely part of the advantage here because simply put, he's just one of the best minds in manufacturing that has ever lived. The Falcon Heavy cut the cost of orbit to about $1,400 per kilogram, which was 92% below the historical averages.
30:35 Speaker 02 And just to give you an idea of how much of the market that SpaceX owns, they alone delivered about 2,213 tons to orbit in 2025, more than the entire world combined. So with their ability to deliver payloads for a cheaper price and the fact that this is only going to get cheaper and cheaper, I think it's going to be really, really hard for new businesses to develop the technology and manufacturing capabilities to compete on price. Now SpaceX, you know, they've been around since 2002. This isn't a brand new company, even though it just IPO'd. So replicating what they've done over the last 24 years is no small task. It would require billions of dollars in investments. It would require an entrepreneur with the drive and an intelligence of an Elon Musk, and just simply put, a lot of time. And once they built something that was even close to what SpaceX has built,
31:19 Speaker 02 I think there's a good chance that SpaceX will have already significantly improved on what they currently offer.
31:25 Speaker 01 So it's maybe safe to say that's this space segment specifically has some sort of low cost provider type of advantage.
31:33 Speaker 02 Yeah, I think that's completely accurate. As the rockets have improved, the tonnage they can drag to space, they've dropped that price. So it started with the Falcon 9, which costs somewhere around 2,900 per kilogram. And the Falcon Heavy dropped that price to about 1,400 per kilogram. And the goal for Starship is to bring that cost down to just $100 per kilogram. The SpaceX perspective stated that they want rocket launches and landings to be as routine and commonplace as airline flights. So, you know, that's why they have to improve this process, make it safe and make it economically feasible. With Starship, they are set to reduce the average costs of reaching orbit by 99% compared to historical launch costs. And then in the communication segment, you can see that they continue to drop their ARPU as you went over. It's a little harder to compare this segment versus a common competitor that it is brought
32:18 Speaker 02 up to in ASTs. ASTs has a fundamentally different business model from Starlink. I'm not going to get into too much detail here, but, but you can think of ASTs as an expansion of ground networks that simply expands a customer's reach. If a cellular provider has a customer who goes to an area where cellular towers won't provide a signal, the user can then opt into using ASTs space-based internet, allowing them to continue using their mobile device in areas that would otherwise be completely unserviceable. With Starlink, you're relying more on their hardware and paying a monthly fee. So ASTs can cost something like maybe $15 a day. Starlink might cost you something like $100 a month. So depending on how often you're outside of a standard cell tower range, both products can make sense.
33:01 Speaker 02 If you're out of range for more than a week per month, then Starlink makes, I think, a lot more sense than ASTs would.
33:07 Speaker 01 We've mentioned a few times how SpaceX has been able to bring down costs over time, especially compared to NASA, for example. So it does seem like the business has demonstrated maybe some economies of scale. Do you think that's right?
33:24 Speaker 02 Yeah, this is an area that I thought they would have had more of a competitive advantage in, but the numbers didn't really support it. I think this is a trait that's most obvious in the connectivity segment. So in this segment, operating income improved by 15% while revenue grew about 32% from this quarter to the last quarter. Now, everything from cost of revenue to R and D to SG and A grew faster than revenue in percentage terms. I was actually quite surprised by this, but as it looks now, this segment is in full growth mode as well. So if you zoom out a little bit and look at the numbers from 2025 versus 2024, they look a lot better. Operating margins in 2025 improved to about 39% versus just 26% in 2024, which is quite impressive. And the connectivity saw operating leverage
34:06 Speaker 02 across all segments of its business. So I would say it's a little tougher to decide which direction this segment is really going. I tend to trust the numbers over longer periods. So I'd like to believe they have some operating margins here that are going to continue to improve. But since they're just investing so much money into the business here, it's really hard to have that much conviction into which direction it's going to be headed.
34:26 Speaker 01 Well, since you just brought up that this business is investing a lot into itself, I think it's probably a good idea to talk a little bit more about that. And my guess is it will be pretty tough to assess their capital allocation so far, given that the business is still losing money. But I think what you're doing by going into each segment is really the best way to do it, at least to see which segments are allocating capital best and which are not doing as well.
34:52 Speaker 02 Yeah, and that's sort of the best possible way to do this, in my view. We can, of course, look at the figures from the consolidated statements, but given that SpaceX is still losing money and has a negative NOPAT, ROIC just isn't that useful at this point. Net income is also negative, so we can't look at consolidated ROE figures either. But I think we can at least flag a few things for future considerations. So the first thing we can model is the amount of money that's been invested into the company so far. The first simple number to note is shareholders' equity. Now, as of the latest quarter, that number is about $34 billion. I generally look for businesses with an ROE in the high teens to 20%. So going forward, whenever SpaceX does become profitable, which is a big if, I don't know when that's going to happen.
35:34 Speaker 02 Want to see them producing profits somewhere around the $7 billion range. And when that happens, obviously, anyone's guess. Now, invested capital for the ROIC use case requires a little more work. So I use Michael Mobison's operating approach to calculate the invested capital for 2025 and 2024. The latest invested capital is around $44.3 billion and that's up from $29 billion in 2024. So in 2025 alone, SpaceX spent $19.7 billion just in capex.
36:02 Speaker 01 And SpaceX originally planned on raising $75 billion from its IPO. But given all the interests that there's been in the business and the really sharp price action, they actually ended up being able to raise $85.7 billion in what was really truly a record breaking IPO. And so I think interestingly, one of our portfolio holdings, Alphabet, also recently raised capital and was oversubscribed, which meant that there was more demand than really they expected and brought in about $85 billion. So right now you have this interesting phenomenon on markets where a lot of equity is being issued
36:43 Speaker 01 after many, many years of the big tech companies being on net stock repurchasers. And now you have, basically, we'll see how this affects equity markets where you have companies raising a ton of money at IPO and tech giants instead of buying back their stocks, issuing equity to raise tens and tens of billions of dollars.
37:05 Speaker 02 That's right, Sean, and I would say just fair warning to investors, you know, when IPOs tend to pop up at a very, very fast rate, tends to be somewhat associated with bubbles. So, you know, if you're looking at the market right now, as I am and you are Sean and Daniel is, you know, you have to just kind of be careful because with a lot of recently new issued companies coming out or companies, like you said, diluting themselves by issuing equity to raise money, it just brings a lot of interest to the market, you know, you can't kind of go on to go and look at your news app and not see something about some new company IPOing or some sort of new AI initiative going on. And it just creates a lot of upwards pressure and interest in the market. And I'm just saying, you should just.
37:44 Speaker 02 Be careful. So getting kind of back to your Google point there. Google's obviously basically planning on putting a lot of those funds that are raised to work specifically in AI. Whereas SpaceX is going to be spreading it upon multiple areas. So this includes the expansion of their AI compute infrastructure enhancements to their launch infrastructure for the space segment. Improvements on those rockets and then increasing the scale and capacity of their satellites. So in my opinion, they worded it pretty vaguely. They basically just said they're going to reinvest it back into the business in general. But needless to say, the proceeds will go across the entire business. Now, how long will it take to spend all this? I really can't say, but it's a very, very large cash infusion, so large that
38:24 Speaker 02 if you net it out from the invested capital number, it's actually going to be negative until they spend that cash, which they probably won't have much of an issue doing. Now, after the IPO, SpaceX announced another acquisition in the AI segment, which was Cursor. Cursor is an autonomous AI agent that can help in coding. This was an all stock deal valued at about $60 billion that will close in the third quarter of 2026. It's worth noting that Cursor has an annualized revenue of about $4 billion. So the price tag on this was 15 times revenue. The deal was announced on June 16th, when SpaceX's share price had already climbed to an all time high.
38:57 Speaker 01 It certainly helps when you can issue shares at an all time high to fund acquisitions. That's actually ends up being a pretty good use of of capital allocation. But actually, how about we look at capital allocation more through the lens of shareholder distributions, which we were just sort of talking about a moment ago. But you know, what you would normally expect for a rapidly growing tech company, especially one pouring so much into capex is that there is of course, no buyback or dividend policy in place. And I'm pretty sure that's the case here with SpaceX.
39:27 Speaker 02 Yeah, that's completely correct, Sean. I mean, that's exactly what you'd expect for a business like SpaceX, which is clearly in investment mode, there's just no reason to distribute any money back to shareholders in the foreseeable future. So when I was going through SpaceX's prospectus, I had to admit that while the financial statement looks pretty ugly, it also reminded me of one of Adam Cecil's case studies from his excellent book, Where the Money Is. I know we've had Adam on the Mastermind community to do a Q and A, and he's been a great guest on TIP as well. But his main point Was that many tech businesses hide valuable assets on the income statement, which clearly provide a lot of value, which also end up depressing GAAP profits. So in SpaceX's case, you can certainly make an argument that part of their R and D spend, which is 100% expensed, should actually be placed on their balance sheet as an intangible asset.
40:12 Speaker 02 In 2025, they spent about 8.6 billion in R and D and the space segment was about $3 billion of that. And so that's kind of where I wanted to focus on.
40:20 Speaker 01 So before you get into that, I'm assuming you don't think the AI segment should be capitalized at all, which just means to recognize them as having any residual value on the balance sheet going forward, given what you've said about this segment and not only the fact that the spending may not pay off, but also the useful life of a lot of the cutting edge AI chips that are used is really only three to five years. So the depreciation piles up very, very quickly.
40:47 Speaker 02 Yeah, I definitely would not be comfortable with capitalizing those at this point. So AI is an asset, but it's just has this much shorter history of success. And of note, Anthropic and Google are still paying XAI about $26 billion per year in compute capacity. So at least they're making something. But in terms of the viable lifespan of that hardware, really hard to say. And I think you're right, it's probably closer to three to five years. But getting back to the space segment, I think that's where SpaceX really has a good history of success. This segment spent about $3 billion of R and D in 2025. And if you capitalize a portion of that, maybe say 50%, you're instantly adding about $1.5 billion to operating earnings. I just wanted to mention that because if you make that adjustment, then SpaceX gets a little closer to being GAAP positive in operating income.
41:33 Speaker 02 But getting back to capital allocation, I just think it's too early to say. We're really diving into uncharted territory here. So it's really hard to say how these investments will end up working out into the future. They've clearly worked out well for the connectivity segment. But until we see what kind of scale benefits SpaceX can get in space and the AI segments, it's really hard to properly assess their capital allocation skills so far.
41:55 Speaker 01 So while we can't really judge SpaceX on the capital that they've allocated so far, or how we assume they'll spend that, call it $86 billion in IPO proceeds, we can still observe how SpaceX is being financed through the obligations that they have to their lenders.
42:13 Speaker 02 Yeah, so in terms of debt, they're actually looking quite good on a pro forma basis. So current cash on the balance sheet is about $15.8 billion. We're going to end up adding $85.7 billion, bringing total cash to about $101.5 billion. Now, on the debt side, they have about $30 billion in total debt. I prefer to see businesses with net debt to cash flow of less than three times. And since SpaceX has negative cash flow, they don't pass a test on this end. But if we add back the cash on pro forma numbers, they have negative net debt of $71.3 billion. So that's definitely a bonus that gives them much greater safety here going forward.
42:47 Speaker 01 It is good to see how the IPO helped them get into what I would say is objectively a much stronger financial position, but even on that debt number, they will have to continue paying interest expenses. So do you see them having any issues with servicing the debt while they have this negative cash flow?
43:06 Speaker 02 No, not really. So in their fiscal 2025, they generated about $6.5 billion in adjusted EBITDA. Their interest expense was $1.9 billion. So the leverage ratio on that end is about 3.4x. But I think the question here is, are they going to let the number continue to rise? Or do they have a limit imposed to them from their lenders? And given the covenants on their loans, it looks like they can't really let these numbers rise too much from where they are today. The consolidated leverage for their bridge loan and credit facility is set at about 3.75x. And if they want to make an acquisition, they can set that up to about 4.25x. So they technically breached the covenant by acquiring XAI, but they amended the agreement. So it seems like they have quite a bit of leverage on their debtors to go out there and breach their covenants if the right opportunity arises.
43:52 Speaker 01 So you did mention something about this debt to me that you came across during the research process, and that is that they actually have a big portion of debt that's maturing soon.
44:02 Speaker 02 Exactly. So they have this $20 billion bridge loan that they entered into in about March of 2026, and the loan is unsecured, which is just great for SpaceX. But the maturity date is only in September of 2026, meaning it was just a six-month loan. SpaceX can extend it for another half year if they're in a good financial position and are willing to pay a fee of about 0.25% on the outstanding principal. Now, this loan is very interesting because it depended largely on the IPO being successful. And given the short period until maturity, the lenders clearly believe that there was a very high probability that they would be repaid. And it's written into the detail that it's going to be paid off specifically with the proceeds from the IPO. And since the SpaceX IPO has been incredibly successful so far, I think it's a loan that clearly worked out very, very well for SpaceX.
44:48 Speaker 01 Makes sense for them to use a bridge loan ahead of the IPO, but you do have to deduct that, let's say, $20 billion to repay the bridge loan from their IPO proceeds. So it's still a massive amount, but they basically tapped some of that IPO money before actually IPO-ing by taking on this loan. And to the extent they use this bridge loan at a lower rate due to the short term and relatively high certainty of payoff to pay down higher yielding debt, well, then that is a pretty savvy approach to capital allocation. And we've discussed debt here in some detail. And while it's clear to me that SpaceX needs debt to continue chasing its goals
45:30 Speaker 01 because of that negative cash flow we talked about, since they're also not profitable, it's important that management has some skin in the game, which is a topic we always want to dive into a bit when we are considering companies for our portfolio. And so, you know, we want to avoid businesses where it feels like the management is playing with money that is not theirs in a highly risky way. So it's something that's come up quite a lot with a company we follow closely in Adobe, where the stock looks very cheap fundamentally, but the conviction we can have in it is sort of caft because insiders aren't putting their own money where their mouth is.
46:11 Speaker 02 Yeah, great points on there. And while I don't require that businesses have managers who own, say, you know, a 10% stake in the business, it certainly doesn't hurt, you know, when they have that larger stake. So looking at the cap table, we can see that Musk owns about 12.3% of the stock. Generally, for a business worth billions of dollars, you don't see an insider with this big of a stake, but SpaceX, as of the time that I was writing this, is worth two and a half trillion dollars. But there's clearly some very, very good insider ownership, even outside of Elon, with Antonio Gracias owning 7.3%. Gracias was an early investor and a friend of Musk and resides in the company's board of directors. So altogether insiders own about 20.2% of the shares, which I think is a very, very good number.
46:51 Speaker 03 Let's take a quick break and hear from today's sponsors.
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49:02 Speaker 01 On Friday night, about 20 of us crowded around a long table at a family-style Italian spot near Times Square. Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind community. That is the community I host with Kyle Greve and Daniel Manca. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers. And a few times a year, like New York this fall and Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same, apply for free at
49:46 Speaker 01 theinvestorspodcast.com/mastermind. If your application stands out, I'll be the one to reach out to you personally. All right, back to the show. It just goes to show you how magnetic Elon's personality is in some ways and the type of very wealthy investors he's attracted over the years, as well as people who are willing to hold on to their shares for the long term with a lot of belief in his vision. For a company with a $2.5 trillion valuation to have insider ownership north of 20% is not something you see every day. And just to give some context, the biggest portfolio holding in our intrinsic value portfolio is Alphabet, and their insider ownership as a multi-trillion-dollar company is only 3%.
50:29 Speaker 01 And so it's great to see high insider ownership. I'll definitely give SpaceX that, but I would like to see how executives are being paid inside of SpaceX. And whether you think it aligns well with creating shareholder value, because too much insider ownership can also be a sign of egregious stock-based compensation.
50:50 Speaker 02 That's right. It most definitely can. And another yellow flag here is that Elon holds 85% of the voting power. So he doesn't require shareholder approval really for anything, which isn't necessarily a bad thing, given the direction I think he's taking the business. But just realize that if you are a shareholder, you may as well just make Elon your proxy, because whatever he votes for is going to be passed. But let's get to the base salaries of the executives here. So they all seem pretty cheap, to be honest, for a business of this size. Musk makes a laughable $54,000 in base salary. The COO and CFO are making about $1,800,000. So from that standpoint, everything seems very, very good. But we have to remember, even though SpaceX is a multi-trillion dollar company, it's still a rapidly growing tech company.
51:32 Speaker 02 And so options tend to be a very popular form of compensation. So let's just see how that adds up. So the business has no short-term incentive program, which I know you, Sean, are a fan of. So at least we know that SpaceX is thinking long-term when it comes to incentives.
51:46 Speaker 01 That's a good thing. That's good to hear. I'm a little nervous, though, to hear about the long-term incentives, though.
51:51 Speaker 02 Yeah, so there are three forms of equity compensation. So you got restricted stock units or RSUs. You got stock options, and then you got performance stock units or PSUs. We only need to focus on Musk's structure as it towers over everyone else by a very, very wide margin. So the RSUs vest based on market capitalization milestones. But there are a total of a billion shares that Musk can unlock here as long as he's able to get the share price up. So current total shares outstanding are 12.5 billion shares. These are unlocked in 15 tranches, up to about 7.5 trillion in market cap. But the second part of this deal is what really, really caught my eye. So Musk has to establish a permanent human colony on Mars with a million inhabitants.
52:33 Speaker 02 Now, to unlock any of these awards, he must meet both the market cap milestone and the human colony on Mars. Milestone. So the market cap milestones seem much easier to me than the Mars colony milestone. My guess is that once there's a million people on Mars, the market cap of SpaceX will probably far exceed $7.5 trillion. So he'll unlock those PSUs all at once. My take on this is that I guess I don't mind it that much. Musk earns $0 beyond his paltry salary unless he creates shareholder value by increasing the share price. You can argue that, yes, in the short term, the share price is exposed to the whims of the market. I see that angle, but you know, the million people on Mars is a completely company specific KPI that I think Musk has complete control over.
53:18 Speaker 02 You know, if SpaceX hopes to establish that colony in space, the space segment will be required to get there. And I assume it's going to be generating quite significant amounts of revenue by that point.
53:28 Speaker 01 SpaceX is just thinking about things in a totally different way than 99.9% of companies. And that even might be understating it. I don't think there's really any company in the world, for better or worse, that takes this sort of approach to how they think about the vision for the future and then actually set up their long-term comp to match that, right? I mean, to have a target of a million people on Mars as part of your executive compensation is either really crazy, which I'm biased toward, or just ambitious in a way that we've really never seen from any other company. And so this clearly creates a lot of uncertainty in the business. I'm not sure how to capture a million people on Mars in a financial model or DCF.
54:13 Speaker 01 But Musk has made a lot of money during his career dealing with uncertainty. And he's definitely accomplished some incredible things with the odds stacked against him. So I don't know, maybe you won't have a million people on Mars, but maybe it'll be, you know, 10,000. But I want to look now at some more of the of the risks underlying SpaceX, because I think with all three of these segments being in industries that are to very extents brand new, from social media to rocketry and AI, there are all sorts of risks out there that we can only imagine now. But there's so many unknown risks that we just probably can't even imagine.
54:56 Speaker 01 And so how do you account for that when thinking about the fair value of of a company?
55:01 Speaker 02 Yeah, you're completely right, Sean, and I completely agree with you. I mean, you go back 10 years ago and discussing things like AI data centers wasn't even mentioned other than in the most esoteric Silicon Valley circles. But now I've had multiple conversations about it with very, very intelligent investors, and it's been pretty eye opening to see just how far we've come. And not only that, but just how quickly the pace of innovation is moving. And I think the biggest risk is the most obvious one when looking at SpaceX, not just as a business, but as a stock. You know, I've done a lot of research into bubbles and right now SpaceX, the stock, has a lot of embedded risk in it. So as of June 18th, the business is priced at 110x revenue and somewhere around 500x adjusted EBITDA. And that's annualizing the latest quarter and adding the 4 billion in revenue from Cursor.
55:45 Speaker 02 So I assume revenue probably is going to continue to climb up. But I think you get my point here. The stock is very expensive. Now, you have to assume incredibly high growth rates here to make any type of return. And in order to support that growth, you need a massive market. I won't spoil the evaluation, as we'll get to that later, but needless to say, I'm very skeptical that this would make a good investment at this time.
56:08 Speaker 01 A good reality check to do if you're trying to figure out whether you're buying the top of an absurd bubble is to think about, okay, what would it take to have a multi-bagger return on this? What would have to be true? What valuation would have to be reached? And so for a $2.5 trillion valuation to get a four-bagger, which is, to be clear, a great return, but we often are really looking for 10 and 100 baggers on a 30-year time horizon. So to get a four-bagger at current prices with no dilution along the way, right? You would need SpaceX to become a $10 trillion company, which is, for context, bigger than India and Japan's economies combined.
56:53 Speaker 01 And so I say that sort of tongue in cheek because the math behind those values are not a one-to-one comparison. There's a stock to flow difference, but still, it just highlights to me the magnitude of the numbers we're talking about here and how there seems to be so much more potential downside than upside based on current valuations.
57:11 Speaker 02 Yeah, that's right, Sean. I mean, if you're even contemplating SpaceX, you essentially have to look out into the future and you have to make assumptions that things are going to work out very, very well. You know, this isn't some sort of value play where you can look at the sum of the parts and, you know, buy it for less than liquidation value, not even close. So, you know, if you are looking at this business, and I think by now we probably lost any real value investors talking about the numbers here, but I digress. Let's get back to the risks here. So, some of the other risks that I see are actually quite similar to some of the other businesses that I've covered here. So, I recently, we discussed QXO and Brad Jacobs, and that risk obviously was key man risk. So, let's be honest here, you know, if Elon Musk weren't the CEO of
57:53 Speaker 02 SpaceX, it wouldn't have anywhere close to the amount of fanfare that I think it does. And if we were to take him away, you know, I just don't think this business is nearly as good. He'd also be losing Musk's ability to tell a story, which I think he excels at. Plus, he has arguably the largest audience of anyone in the entire world. Now, I've spoken about the concept of reflexivity before, but I think it really applies to SpaceX. The concept, as outlined by George Soros, states that an investor's perception and biases can influence the economic fundamentals that they are trying to observe, which in turn alters their perception and future actions. In SpaceX's case, I think the fact that Elon Musk is always providing content helps improve investors' perception of SpaceX. And that's why they can go out when their shares have risen, you know, 67% since the
58:38 Speaker 02 IPO, and make these all-stock deals like they did with Cursor.
58:42 Speaker 01 There's a saying on Wall Street that with Tesla, the product isn't the product, the product is the stock, right? That Elon is always just selling the stock, and what that just means is hyping up what's possible. And so, it seems like that same model has very much been cloned here with SpaceX, and we're talking about million-man colonies on Mars. And I also think it goes without saying that there's a tremendous amount of reflexivity here. And, you know, I can't believe we haven't said this yet, but Musk is also simultaneously the CEO of Tesla. And so, it is truly striking how well he's been able to do at running both for a while now. But I don't know, unless he's a cyborg, I just... Don't see how it's humanly possible to run both well indefinitely.
59:26 Speaker 01 And so you know me, Kyle, it feels like we, in every episode we do, I'm always asking you about how regulation is going to affect an industry with SpaceX involved in AI, space launches and wireless communication. It is also hard for me to believe that they aren't operating in industries that are either already highly regulated or will be in the future. So from regulation to simply Musk time and the narratives that are being sold, I think that you can count a number of very substantial risks here.
59:58 Speaker 02 I knew you'd mentioned regulations here, Sean, and I think it's, you're completely correct. I think it's highly relevant when discussing SpaceX. If you look at the launches, you know, SpaceX needs federal aviation administration licensing. It holds a bunch of government contracts in NASA and defense as well. If Musk, you know, were to get on the wrong side of the US administration, they could easily make it their aim to make Musk's life a nightmare, which would definitely affect SpaceX's underlying economics. Now, as for the connectivity segment, SpaceX appears to be in an oligopoly right now. As long as they are cutting prices, I don't see that much room for regulators to, you know, have a stink about that. But if we look a decade from now, when SpaceX is already cheap and maybe their growth levers kind of run their course and they don't have the runway that they once did, maybe they'll start playing around with things like pricing power.
1:00:42 Speaker 02 And in that case, you know, regulators might get involved. Now, as for the AI, you know, we just saw the US government shut down Anthropic's most advanced AI model yet in Fable 5. The US government demanded that Anthropic suspend all access to any foreign national. And soon after, they took Fable 5 offline for everyone. While this isn't an existential threat to Anthropic's business model, as it has other AI models that are working, it's still, you know, just a nuisance. And with these models continuing to get better and better, I wouldn't be surprised if SpaceX's AI segment at some point doesn't get into the crosshairs of US regulators.
1:01:17 Speaker 01 It actually does feel like the political risk has dialed down a bit here. But I mean, just last year, you had Musk falling out with Trump, which he did while running the Department of Governmental Efficiency, which was yet another responsibility he took on. And so anyways, it feels like he could clash with any global leader at any time. That was sort of my takeaway from that episode. And maybe that bravado has contributed to his success. I think it probably has, but as a shareholder, man, seeing him get into what was, I think, objectively speaking, like fairly juvenile arguments with the President of the United States, that would have me really questioning his risk management as CEO.
1:02:02 Speaker 01 But anyways, I want to double click on something you said earlier, and that was regarding the TAM for SpaceX, which has been a pretty controversial topic, to say the least. I don't think this is necessarily a risk to the business, but it's a risk for analyzing the business because it feels like SpaceX's numbers are just totally out of left field. And to the extent that you think any of their projections are plausible or not, really determines what you think of the valuation of the business.
1:02:33 Speaker 02 Exactly, Sean. And what you're referring to is SpaceX's proposed TAM of about $28.5 trillion that they outlined in their prospectus. Now, this assumes a TAM of about $370 billion for space, 1.6 trillion for connectivity, and 26.5 trillion for AI. Now, just to give you an idea of how big these numbers are, the worldwide GDP is $123.6 trillion. So you're looking at a market that is proposed to be about 23% of worldwide GDP. And this just seems far too ambitious to me on the face of it. But let's dive into it in a little more detail in each segment. So let's start with the small space segment first. So SpaceX is getting a $370 billion number from EuroConsult's figures. The problem with this number is that launch services,
1:03:18 Speaker 02 which is SpaceX's core business, doesn't make up 100% of that TAM. So that leaves the actual global commercial launch market. Now, it's really hard to get Accurate numbers on what exactly that market is. I've seen numbers as low as 5 billion and I've seen numbers as high as 14 billion, but we can definitely assume the segment is growing and at a pretty high rate. Another potential area SpaceX could work in is the lunar economy. So I recently had a conversation with a PhD physicist who mentioned that perhaps SpaceX will help with the construction of infrastructure specifically in space. Think of things like bridges or large infrastructures constructed specifically in space then brought back down to earth. Now, obviously, this is way too speculative, so I'm not really going to give this any weighting at this point in the market, but you understand what I'm talking about. You know, there's a lot of potential out there.
1:04:03 Speaker 02 Now, with all that said, I think a more realistic number is probably closer to 50 to 100 billion dollars over a long time period.
1:04:11 Speaker 01 Probably emphasis on over a long time period. And that is a much smaller number than a 370 billion dollar projected TAM. But we have to remember that during the IPO process, businesses are incentivized to create as much hoopla and excitement as possible so that they can try and raise capital at a higher valuation, which allows them to get more bang for their buck, you know, more dollars per share issued. And obviously SpaceX did not disappoint on that front. But maybe we can talk more about the connectivity segment, which I think we both agreed is probably the most promising part of the company. But also they've cited it as having a 1.6 trillion dollar TAM.
1:04:56 Speaker 02 Yeah, I'll give you a hint here, Sean, and I think the TAM for all segments is overstated, but let's look at connectivity here. So the SpaceX claims are in three segments. You have Starlink Broadband, Mobile and Enterprise and Government. For broadband, they assume that the entire world is outfitted with satellite-based internet. Now, if you have 1.8 billion households paying $31 a month, then you get to that kind of 670 billion dollars per year. But you know, I find it hard to believe that they will both penetrate every household on earth and have 100% usage on households that are penetrated. You know, they currently have 10 million customers. So that number that they are using to get to Just seems very, very, very far off and probably impossible to actually reach.
1:05:41 Speaker 02 We have to also take into account that not every household has the same amount of disposable income. I think their market, you know, maybe is more like 10% of global households at a price closer to maybe $25 a month. That alone cuts the TAM to $65 billion. The mobile assumption is $740 billion, but they run into similar problems. They will never take 100% of the market, nor will 100% of the market be willing to spend that kind of money on satellite connectivity. So if we assume 15% penetration and an average spend of about $16, you get a TAM of $52 billion. The enterprise and government TAM seems somewhat reasonable at 200 billion, and that takes us to about $300 billion.
1:06:20 Speaker 01 I think listeners can probably tell here that during this work is based on estimating an uncertain future and that we are really going off estimates that are impossible to validate until we can see the future unfold. But I do think it's probably not a bad thing to bring some skepticism to the estimates that SpaceX is presenting here.
1:06:43 Speaker 02 Yeah, I think you kind of have to bring it. Otherwise, you can really make any value for SpaceX makes sense to you, and then you just go and buy the shares. But you know, I think when I look at the space and connectivity segments, we're going to see new competitors popping up that SpaceX will need to compete with. And that's going to put further pressure on how much TAM they can actually take. So the AI segment at $26.5 trillion is pure dream world. In my view, given what it will actually service. So the biggest segment is the enterprise applications, which they estimate is worth about $22.7 trillion. They're including the entire digital economy, but this total includes services that SpaceX just doesn't offer. For instance, it includes the TAMS of businesses such as Salesforce, Azure, Amazon Web Services and Google Cloud,
1:07:27 Speaker 02 as well as many other large, very well-established businesses that I just don't think that XAI will compete with. I would estimate that the AI segment TAM for SpaceX is maybe closer to $200 billion. Perhaps they can expand that by adding new AI-related services. And you know, that's still a very, very large number, but if we add that all up, we get to about $600 billion. Still, you know, a massive, massive number, but nowhere near the TAM that SpaceX released.
1:07:52 Speaker 01 So I don't think this has been the most ringing endorsement up until now of us thinking that SpaceX likely has an intrinsic value that justifies the pop in the stock post IPO. But we are at that time of the show where we need to discuss intrinsic value. And I think with all the uncertainty about margins and TAM, to say the least, it is going to be a very difficult business to fundamentally evaluate. So I'm excited to see where you landed on it with your model.
1:08:24 Speaker 02 Yeah, I mean, as you already alluded to, this is not an easy business to evaluate, just given all the uncertainty into the future. But you know, we do at least have some numbers today that we can base things on. But you know, we don't really have a very long history of these numbers being very, very secure. And we don't have a very, very long history of the growth, simply because SpaceX is involved in these brand new industries that I think have a very, very wide number of outcomes. But you know, let me take a stab. So the current valuation of SpaceX is insanely forward looking, as I already discussed. If I just look at its EBITDA, I get 589 times, which is just mind blowing. Now, the revenue multiple is 129 times.
1:09:08 Speaker 02 By the time you hear this episode, it could very well be different, given how much volatility the stock prices has. But when you're looking at a business like SpaceX, you kind of have to be forward looking. Nobody is honestly looking at SpaceX as some sort of value play. I don't mind looking out into the future when analyzing a business, but with SpaceX, there's just, there's so many moving parts to account for. And the growth that is currently being priced in is obviously very, very high.
1:09:30 Speaker 01 We've actually invested in two companies that in hindsight were pretty wildly overvalued at IPO with Uber and Airbnb. But the difference is that we bought them after the business fundamentals had caught up to the stock price. Whereas with SpaceX, if my life depended on guessing what would happen, so it says with little conviction, but if you're forcing me to make a guess, I would probably say that most likely I think the stock will be down. A number of years from now, maybe, you know, let's just call it, let's say 50% in five years from now. And in that sort of arbitrary hypothetical, perhaps we would find it attractive,
1:10:09 Speaker 01 right? You would have some moderation of the valuation plus some, you know, five more years of progress in the underlying business, then it might actually be a compelling investment. But I'm getting ahead of myself. So how about we go a little bit more over your valuation and the assumptions that you've made of what would be a fair value for SpaceX today?
1:10:35 Speaker 02 Yeah. And before I do that, Sean, I just want to comment on something you said. So I looked briefly at Uber and Airbnb when they IPO'd. And to me, it was very obvious that businesses were really, really good. But that's kind of the whole point of the IPO process is that a really, really good business can make for a really, really bad investment. And I think if you invested in the IPO of Uber and Airbnb, I'm not sure, I don't have the numbers in front of me, but I don't think you did very, very well. Whereas if you took a strategy of, okay, I'm going to watch this business for a time and let's see what happens. That makes more sense because both Uber and Airbnb decreased significantly after the IPO, which allowed investors like us to get entry into those businesses and make a half decent return. So I want to get back to
1:11:17 Speaker 02 your question here about the evaluation. It was pretty fun because it actually reminded me of QXO, a business that I recently pitched to you. And the similarity was that they both have these very, very fast growth rates going forward. Much higher growth than basically any business that I've ever looked at on the show. So for my base case, my assumptions are that the business is going to continue growing at about a 37% annual growth rate in its top line. I chose this number because it's in line with what analysts are forecasting for by about 2028, but I made it even more conservative and had that forecasted out to 2031. The prospectus has a revenue kegger at about 34% since 2024. But we have to remember that the AI segment is likely to accelerate revenue, albeit at lower margins compared to the other segments. From
1:11:59 Speaker 02 there, I'm going to assume that margins continue to rise. Even though the AI segment will be a drag on margins, I still think that we continue to get margin expansion from economies of scale. I estimate EBITDA margins rise to about 26%. I then apply a 30x EV to EBITDA multiple on this, which I think is actually probably quite conservative.
1:12:17 Speaker 01 In the context of everything else we've talked about today around SpaceX's numbers, yeah, it does seem fairly conservative, but I don't know, what makes you say that it is actually so conservative?
1:12:28 Speaker 02 Yeah, I felt the exact same way when I wrote that, but you know, if you look at Tesla, so it has half the margin city that SpaceX currently has and trades at 131 times EBITDA. So that's why I think this is a somewhat conservative number despite the fact that it's optically expensive. Tesla is still growing revenue over the longer term at about 15%. Now with all this, I get a value of about $110 in 2031, which is a downside kegger of nearly 10%. So to account for the massive uncertainty, I also feel much safer applying a pretty big margin of safety of 40% and this gets the return all the way down to negative 18% compounded annually. So you can see here that either the market is heavily overpricing the business or my
1:13:11 Speaker 02 assumptions are completely off and I'm just being way too conservative. So keep in mind with my revenue numbers, SpaceX is taking about 15% market share from the TAM that I already covered.
1:13:21 Speaker 01 And yet that still implies a pretty negative return for a while. You know, I'm glad I didn't have to try and tackle valuing this one, but I'm also glad we did cover it though, because when a company instantly adds over $2 trillion in market cap to US stock indexes overnight, that really is something worth investigating. And yeah, I don't feel like I need to say much here because I clearly, this one is just way too rich for our taste at 110 times sales and at a fraction of that price in the private markets, I thought it was too rich and apparently that was a mistake, but we'll see how long this can persist for.
1:14:02 Speaker 01 And maybe I come across as bitter for missing out on it, but I don't find myself with too much FOMO here, you know, when we start talking about Mars colonies, I don't mind waiting on the sidelines.
1:14:16 Speaker 02 Yeah, I completely agree with you. This business just has just too much uncertainty for me to really ever get comfortable with having any money in this. And even if the price were to get to, say, a hundred bucks, I just can't see myself ever wanting to make this into a position that would be anything more than a highly speculative, you know, 1% position. So I agree with you, but this just doesn't belong in the portfolio. I still think, though, you know, it's going to be fun to see what happens. But given how Musk's businesses always seem overpriced, I think there's a pretty small chance this business ever gets interesting, specifically in terms of price anytime soon.
1:14:50 Speaker 01 All right, folks, that's going to be it for today. I want to leave you with a quote. This one comes from one of the best venture capital investors of all time, Peter Thiel, who says, "I would never bet against Elon in anything. That's hard rule number one. If you ask what's been the innovation in SpaceX or Tesla, it's what I describe as complex coordination, where you just have to take a lot of different pieces and the innovation is to combine them in a new way." So Elon Musk has been a master at doing just this, and I do think that praise is deserved from Peter Thiel. And I think we are still wanting to give him credit here for what has been accomplished
1:15:35 Speaker 01 with SpaceX. We definitely don't want to be betting against Elon, but we just don't feel like the market has valued the business in a way that is attractive to us. So on that note, thank you for listening and we'll see you again next time.
1:16:26 Speaker 00 Sell any security or other financial product. Hosts, guests and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services or advertisers do not constitute endorsements and the Investors Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network. All rights reserved.
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