Elon Musk has turned science fiction into reality for the better part of two decades, making believers rich and earning the benefit of the doubt from many on Wall Street. Away from rockets and electric cars, his companies are bending reality on another plane – convincing analysts to stretch their traditional valuation tools, and assign multiples based on what one academic calls “optionalities.”
Musk’s propensity for futuristic plans has drawn analysts to view Tesla Inc. as a robotics company rather than an automaker and has laid the groundwork for SpaceX to target a $2 trillion valuation when it goes public in the coming weeks. Skeptics point to nosebleed valuations, but when the market has voted with its wallet in favor of Tesla’s ambitions, many have already decided the greater risk from SpaceX’s IPO is not to invest.
Aswath Damodaran, a New York University finance professor and author of several books on corporate finance and valuation, isn’t sold on the targeted valuation. Yet though he wouldn’t buy at $2 trillion, preferring a number closer to $1 trillion, he believes SpaceX ultimately has a lot of potential upside.
“The optionality is richer with SpaceX than Tesla right now,” he said in an interview. “Right now SpaceX is so far ahead of the competition that it’s in better shape than Tesla to deliver on the optionality.”
The valuation premium analysts assign to Tesla’s arguably more speculative businesses is based on Musk’s track record of transformation – in short, he’s made a lot of people money. For SpaceX to justify a valuation of more than $2 trillion, as Bloomberg News has reported it’s seeking, any model will need to incorporate that Musk premium.
Damodaran highlighted the success of Tesla and SpaceX to date: “You have to give him credit because he created two companies that are truly technological marvels.”
Tesla’s Upside
For years now, Tesla has traded at a valuation that grossly outstrips even its most expensive Magnificent Seven peer, with a forward price-to-earnings multiple more than five times that ascribed to Apple Inc.
No Wall Street analyst gives Tesla much long-term credit for its car business. None really care that it plans to spend more than $25 billion this year. To see upside from the company’s $1.59 trillion market value, analysts are focused on artificial intelligence, driverless cars and a robot project, Optimus, that has been more than four years in the making.
More than two dozen buy-rated analysts credit the company for long-delayed offerings like Cybercab and Optimus in place of car sales that have grown modestly.
Tesla bulls are banking on the carmaker to deliver nationally available Robotaxis as well as humanoid robots to carry the baton, with a straw poll of sell-side analyst notes showing Optimus and Robotaxis account for more than half of their sum-of-the-parts targets. And the majority are willing to look into the future for those offerings to deliver profits.
For example, Piper Sandler analyst Alexander Potter called vehicle sales a “minor long-term revenue source” in a note May 10 that discussed Tesla’s future and his view that “Tesla isn’t a car company.” Car sales are expected to peak in about five years with Robotaxi rides, full self-driving licenses and subscriptions as well as insurance making up the bulk of estimated sales decades into the future.
Skeptics are equally vocal. UBS analyst Joseph Spak warned clients about the expensive nature of building out physical AI, cautioning that the $25 billion of planned spending this year is only the beginning. He also viewed Musk’s comments in its April earnings call as “more subdued” on the pace of Robotaxi and Optimus.
SpaceX’s moonshots are if anything even harder to value. Beyond core businesses such as contracts with the US government for launching rockets and Starlink’s satellite internet, much of a $2 trillion valuation would likely depend on Musk’s stated plans to put data centers in space, build a base on the moon, and eventually build a colony on Mars. The theoretical total addressable market is infinite, at least to starry-eyed believers.
The fact that Tesla has seen shares soar by nearly 3,000% over the past decade and made believers wealthier than they could’ve imagined grounds the SpaceX pitch in something more observable: the fear of missing out.
“A lot of analysts have already pre-decided that they’re going to buy SpaceX because you can’t afford to not be in, that’s the way they see it,” said NYU’s Damodaran. “The FOMO is strong because they’ve seen what happens when they miss out.”
Ark Investment Management, an existing investor in SpaceX and a long-time holder of Tesla, argued that a $1.75 trillion valuation is “grounded in a plausible trajectory” for the rocket and AI company’s core businesses.
“Musk’s goals are ambitious by any historical standard, and SpaceX has repeatedly demonstrated the ability to compress the timelines that skeptics once assumed,” the firm wrote on April 20. “Though not a guarantee, we believe that track record is a meaningful data point.”
Skeptics Versus Musk
Musk’s tendency to prove skeptics wrong — or at least get enough long-term investors to buy into his broader vision — isn’t convincing his critics, who see projections that just don’t add up.
For Michael O’Rourke, Chief Market Strategist at Jonestrading Institutional Services, who has been on Wall Street for more than 30 years, the sales pitch is difficult to justify. “You’re talking about 100-times revenue,” he said of SpaceX’s targeted valuation when compared against reports that it delivered roughly $20 billion in sales last year.
Even if data centers in space become a reality, investors have little indication they will be cost-efficient versus facilities on earth, for example.
“You’re paying for success that has not been earned yet and it’s a situation with a lot of hype and whether it’s retail enthusiasm, it doesn’t relate to investing in a company that’s valued on generating a profitable return,” he said.
Whether or not it makes sense to assign such a high multiple to business lines that are at an early and undeniably speculative stage, a key question is whether individual investors loyal to Musk will show up in full force for the IPO and in the first days of trading. The company is planning to sell as much as 30% of the shares to retail traders, which in a $75 billion share sale would amount to $22.5 billion.
Such a number would more than double the total net buying that Tesla has seen from individual investors over the past year, according to Vanda data through May 14. In fact, it would be larger than the total net inflows to all assets — from individual stocks to exchange-traded funds — over the past month, the data show.
For Jonestrading’s O’Rourke, SpaceX’s IPO may indicate that the good times won’t last forever.
“These are things you see near market tops and in bubbles,” O’Rourke said. “When we look back a year from now I think it’ll be a key signal.”
Lipschultz writes for Bloomberg.
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