Elon Musk has spent much of the last two decades turning science fiction ideas into real businesses. In the process, he enriched those who bet on him and earned the trust of much of Wall Street. Now, beyond rocket ships and electric cars, their companies are also changing the way analysts value companies, pushing the use of multiples based on what some academics call “optionalities.”
Musk’s futuristic planes have convinced analysts to view Tesla Inc. as a robotics company rather than an automaker. It also laid the groundwork for SpaceX to aim for a $2 trillion valuation when it goes public in the coming weeks. Skeptics talk about exorbitant valuations. But after the market backed Tesla, many believe the biggest risk of the SpaceX IPO is left out.
Aswath Damodaran, a finance professor at New York University and author of several books on corporate finance and valuation, is not convinced by the valuation sought. Although he wouldn’t buy a $2 trillion valuation and would prefer one closer to $1 trillion, he believes SpaceX has huge upside potential.
“Optionality is richer today at SpaceX than at Tesla,” he said in an interview. “Right now SpaceX is so far ahead of the competition that it is in a better position than Tesla to realize that optionality.”
The valuation premium that analysts assign to Tesla’s most speculative businesses is based on Musk’s transformative track record. Simply put, he made a lot of people a lot of money. For SpaceX to justify a valuation above $2 trillion, as Bloomberg News reported it seeks to achieve, any model will have to incorporate that premium associated with Musk.
Damodaran highlighted the success achieved so far by Tesla and SpaceX: “We must give them credit because they created two companies that are true technological wonders.”
The case of Tesla
For years, Tesla has been trading at a valuation that far exceeds even its most expensive peer among the Magnificent Seven. with a forward price-earnings ratio more than five times that of Apple Inc.
No Wall Street analyst gives much long-term credit to Tesla’s automotive business. Few really care that it plans to spend more than $25 billion this year. To justify upside potential on the company’s $1.59 trillion market capitalization, analysts are focusing on artificial intelligence, self-driving cars and Optimus, a robot project that has been more than four years in development.
More than two dozen analysts with a buy recommendation believe that projects like Cybercab and Optimus are worth more to Tesla than its car sales business, which has shown modest growth.
Tesla optimists bet that the automaker will manage to deploy Robotaxis available nationwide and humanoid robots that take over. A survey of analyst reports shows that Optimus and the Robotaxis account for more than half of their sum-of-parts valuations. And most are willing to look far into the future for those initiatives to turn a profit.
For example, Piper Sandler analyst Alexander Potter called vehicle sales a “minor source of long-term revenue” in a May 10 note about the future of Tesla and his view that “Tesla is not a car.”. Auto sales are expected to peak in about five years. Afterwards, Robotaxi rides, fully autonomous driving licenses and subscriptions, and insurance would come to represent the majority of revenue.
The skeptics are also forceful. UBS analyst Joseph Spak warned his clients about the huge cost of developing physical AI, saying the $25 billion in spending expected this year is just the beginning. It was also noted that Musk’s comments during the April earnings call were “more moderate” regarding the pace of progress for Robotaxi and Optimus.
SpaceX’s futuristic bets are, if anything, even more difficult to value. Beyond core businesses such as contracts with the US government. to launch rockets and Starlink satellite internet, much of a $2 trillion valuation will depend on Musk’s plans to set up data centers in space, build a base on the Moon and eventually create a colony on Mars. The theoretical potential market is infinite, at least for those who blindly believe in that vision.
The rise of almost 3,000% in Tesla shares in the last decadeand the enormous profits for its followers, give SpaceX’s speech a tangible support: fomo, or fear of missing out, which translates as fear of being left out.
“Many analysts have already decided in advance that they are going to buy SpaceX because they feel they can’t afford to be left out; that’s how they see it,” said Damodaran of New York University. “The fomo is strong because they saw what happens when they miss an opportunity.”
Ark Investment Management, a current investor in SpaceX and a long-standing shareholder in Tesla, maintained that a valuation of $1.75 trillion is “based on a plausible trajectory.” for the company’s core rocket and artificial intelligence businesses.
“Musk’s goals are ambitious by any historical standard, and SpaceX has repeatedly demonstrated the ability to shorten timelines that skeptics took for granted,” the firm wrote on April 20. “Although it is not a guarantee, we believe that this history is relevant information.”
Musk against the skeptics
Musk’s ability to disprove skeptics, or at least convince enough long-term investors to back his vision, does not persuade its critics, who consider that the screenings simply do not close.
For Michael O’Rourke, chief market strategist at Jonestrading Institutional Services, with more than 30 years on Wall Street, the sales pitch is difficult to justify. “We’re talking about 100x revenue,” he said of SpaceX’s target valuation, compared to reports that it generated roughly $20 billion in sales last year.
Even if space data centers become a reality, Inverters have little sign that they can be more cost-efficient than onshore installations.
“You are paying for a success that has not yet been achieved and it is a situation loaded with exaggerated enthusiasm that, whether driven by retail investors or nothas no relationship to investing in a company valued based on its ability to generate profitable returns,” he said.
Regardless of whether it makes sense to assign such high multiples to lines of business that are at an early and clearly speculative stage, a key question is whether individual investors loyal to Musk will appear en masse during the IPO and in the first days of trading. The company plans to sell up to 30% of the shares to retail operators, which in a US$75 billion share placement would be equivalent to US$22.5 billion.
That figure would more than double Tesla’s total net purchases by individual investors over the past year, according to Vanda data through May 14. In fact, it would be higher than the total net inflows into all assets — from individual stocks to exchange-traded funds — over the past month, the data shows.
For Jonestrading’s O’Rourke, SpaceX’s IPO could be a sign that the good times won’t last forever.
“These are the things you see near market tops and in bubbles”O’Rourke said. “When we look back a year from now, I think that will be a key sign.”
