Prediction: 3 Reasons SpaceX Could Fall 50% Over the Next Year

When Space Exploration Technologies(NASDAQ: SPCX) debuted last month, it became the largest initial public offering (IPO) ever. However, after a blistering start, the stock has fallen back down to earth and now trades around its IPO price.

Let’s look at three reasons I think the company (commonly called SpaceX) could lose half its value over the next year.

Images source: The White House.

1. An extreme valuation

It’s not uncommon for IPOs to debut at frothy valuations, but SpaceX takes this to a whole other galaxy. The company has a nearly $2 trillion market cap, making it one of the 10 largest companies in the world. However, its revenue increased by only 33% to $18.7 billion last year while the company recorded an operating loss.

The company is expected to see a meaningful acceleration in revenue this year, with Morgan Stanley projecting sales will climb to nearly $45 billion. Nonetheless, that still values SpaceX at a forward price-to-sales (P/S) multiple of 40 times for what is ultimately a business with high capital expenditures that is likely to burn cash for about the next decade. In fact, Morgan Stanley does not project that it will become free cash flow positive until 2035.

As such, not only does the stock carry an extreme valuation, but it will also need to take on debt or issue equity on top of that.

2. Unrealistic goals and timelines

With not much to justify its current valuation in the form of revenue or profits, CEO Elon Musk instead has made a bevy of promises and predictions to get investors excited. Eventually, these will have to be realized, or investors may lose faith. However, Musk has a poor track record in this area, with TheNew York Times recently reporting that fewer than 20% of his past predictions were delivered on schedule.

Among Musk’s recent promises for SpaceX have been a data center in space by next year, the company generating $1 trillion in revenue by 2030, and launching five uncrewed ships to Mars later this year with a fleet of Tesla Optimus robots. All are unlikely to happen.

The Mars Mission and orbital AI data centers both have big technical hurdles that still need to be overcome. For the Mars Mission, the biggest obstacle is refueling, as its largest rocket, Starship, uses up most of its fuel to reach low Earth orbit. Musk has a history of making promises about landing on Mars, but has consistently missed deadlines.

Meanwhile, putting a data center in space would require the company to solve the issue of chips being affected by cosmic radiation and to devise a way to cool a system in the vacuum of space. Coming up with solutions for those obstacles will take time and won’t happen in the next year. Meanwhile, $1 trillion in revenue by 2030 is an outlandish number that would need everything to go the company’s way.

Missing out on Musk’s predictions could eventually weigh on the stock.

3. Lockup expirations

Perhaps the biggest catalyst for SpaceX shares to plummet over the next year is that many more of them will hit the open market. At its IPO, fewer than 5% of its shares were available to be traded, but the number to hit the open market will expand exponentially over the next year as the company faces 15 lockup expirations over this period.

The first lockup expiration will come later this month or in early August after the company’s first earnings release, when insiders will be permitted to sell 911.5 million shares. That’s more than the 555.6 million shares the company initially offered in its IPO.

With a flood of new shares hitting the market over the next year, the likelihood of SpaceX missing deadlines, and an extreme valuation, the stock could easily see its price cut in half over the next year — and it would still arguably be expensive.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.