There has been no shortage of rapid ascent and descent in the share price of Space Exploration Technologies (NASDAQ: SPCX) since the rocket company listed in June. Down well over 20% from its peak, SpaceX stock is a lot cheaper than it once was.
Still, over the past couple of weeks, it has been regaining lost ground quickly.
So, could it now be a bargain? Or might there be more falls to come?
Why is this share so volatile?
The way SpaceX stock has moved around so much points to a key thing to understand when looking at it.
This is a company that is growing fast, in business areas that are also evolving at speed.
So, the current share price bears only limited relation to how the company is doing now. After all, a $1.9trn market capitalisation makes little if any sense for a loss-making company.
Instead, I think the only possible justification for both the valuation and the volatility is that investors are taking different views on how well SpaceX is likely to do in future.
The company has galactic ambitions, fast-growing sales, and a focus on business areas with unknown ultimate potential. SpaceX’s long-term value is accordingly much harder to judge with a high degree of confidence than if it was a longstanding, stable business in a mature industry.
This could turn out to be a bargain
So, does the lower price now than at its peak mean SpaceX stock could be a bargain?
Not necessarily.
Just because a share is cheaper than before does not alone make it a bargain. A bargain is a share that is cheaper today than it will ultimately prove to be worth (factoring in the cost of tying up capital in the share while waiting), not one that is cheaper now than it has been in the past.
However, in the end, I do think today’s stock price could potentially come to be seen as a bargain in years to come, depending on how the business performs.
For that to happen, I think two main things need to occur.
First, the growth needs to keep coming. SpaceX’s most recent quarterly revenues were 92% higher than the same period in the prior year.
Keeping up growth like that year after year is difficult — and gets harder over time as the baseline gets bigger.
Still, I think SpaceX needs to do that to justify its current share price, let alone a higher one.
I’m sitting this one out
Secondly, the business needs to demonstrate that its model can sustainably make profits.
Even on a price-to-earnings (P/E) ratio of, say, 30, the firm would need to earn over $60bn per year to justify its current valuation, let alone a higher one.
To me a P/E ratio of 30 is expensive, but a growth company doing well could command such a valuation easily in today’s market, I reckon.
But SpaceX is burning through cash, faces growing competition, and has yet to demonstrate the commercial rationale for some of its activities, such as its social media business.
I am looking not just at the opportunity but the risks, too, and I think SpaceX stock looks overvalued even now.
Instead of buying, I am hunting for more attractively priced growth companies that are already profitable.
Should you invest £5,000 in SpaceX right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
