Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 0.7% this week.
  • The hyped IPO of SpaceX stock has attached a valuation to the name that does not appear tethered to the reality of its financials. That does not mean the market is necessarily “wrong”.

Stocks are financial assets that represent a shareholder’s claim to a firm’s earnings. Those earnings are expected to occur continually into the distant future. A stock’s “intrinsic value” is what all those future profit flows are worth today, in one tidy share price.

Immediately, one can see the difficulties in deriving a stock’s intrinsic value. How much will those profits grow? What is the right discount rate to apply to those future earnings to account for the time value of money? It is hard to understand what some tech companies do today, much less what they will be doing five, ten, or twenty years from now.

Investors who use intrinsic valuation frameworks were asking themselves these types of questions as the IPO of SpaceX hit the public market on Friday. It could reasonably be labeled the most-hyped IPO of all time.

The firm is selling less than 5% of its shares to the public. Given individual investor excitement and its inclusion in some major indexes, which will further compel the purchase of the stock, there is tremendous demand for the name. Its IPO price values the firm at $1.8 trillion.

How does SpaceX look through an intrinsic valuation lens? It looks pricey. Justifying that valuation requires some extremely optimistic expectations. Intrinsic value investors buying SpaceX for its future earnings flows must be expecting some serious growth. There are plenty of analysts who have made a dispassionate assessment of the available financials and who conclude that the numbers do not come close to defending a $1.8 trillion valuation.

How does SpaceX compare to other big tech IPOs in the recent past? When Google went public, it was offered at a multiple of 7x its annual trailing revenue per share. Facebook listed at 20x its revenue. SpaceX is listing at 95x its annual revenue. It began trading on Friday at well over 100x revenue.

Intrinsic value models rely heavily on projections, which means they are often wrong. It is impossible to say what SpaceX will become, so, in a sense, the debate over its valuation on day one of its trading is somewhat tedious. Over time, the market is efficient at discovering the “correct” intrinsic value of any company. However, it is not perfectly efficient. Information will become available, and the market will learn.

Editor’s note: The weekly update is on hiatus and will return at the end of June.