Why is Morningstar so bearish on SpaceX’s IPO?
We value SpaceX at $63 per share, which is a 53% discount to the upcoming IPO offering price. Our assessment is more a result of mathematics than suspicion. With such a wide range of possible outcomes for the company’s financial future, we created forecasts and valuations for three scenarios and probability-weighted them.
Even at $63 per share, we give SpaceX plenty of benefit of the doubt in two of the three scenarios, in which we believe the company can get a fast reusable Starship rocket that can enable multiple launches per week. And Successfully commercializing data centers in space. None of these engineering problems have been resolved, and we do not expect them to be until at least 2028.
In our most optimistic “moonshot” scenario, the company would be worth $1.97 trillion, or $154 per share. This is 14% above the offering price and given the widespread investor enthusiasm about SpaceX, artificial intelligence infrastructure and the IPO, shares could reach that level even in the short term after its public launch. However, we assign this scenario, in which both Starships are reusable and the scaled orbital data center is highly successful, to have a 7% chance of happening, which is one reason why our final fair value estimate of $63 is much lower than $154.
What does SpaceX need to do to get a ‘Buy’ rating from Morningstar?
Morningstar’s consistent and independent equity research methodology is designed to help long-term investors find a stock’s intrinsic value and weigh it against its current market price. Furthermore, with a very high uncertainty rating for SpaceX, we would only think that shares offered an attractive risk-adjusted return (and thus earn 5-stars).
) Less than 50% off for us. For example, to get Morningstar at the IPO offering price of $135, our fair value estimate, all else equal, would have to be $270 per share. Here are the assumptions we made to arrive at our more realistic valuation.
What are the building blocks of fair value estimation?
Our analysis of fair value focuses on the profit drivers and forecasts for the company’s businesses described in our full report. Some items that add to our fair value estimate do not change with our scenarios. We believe the company will raise $85.7 billion for the 639 billion shares offered in the IPO, which is equivalent to our fair value estimate of $6.50 per share. Add $1.80 of existing cash and investments, subtract $2.30 per share of debt.
Our valuation for the core space and connectivity businesses adds up to about $40 per share (we believe a slower growth scenario for Starlink after 2028 would reduce that estimate to $5). Our probability-weighted average of the three comprehensive AI scenarios adds $16.50 to our overall valuation estimate, which we consider similar to the value of a call option on the commercialization of orbital AI infrastructure. The math: $6.51+$1.80-$2.30+$40.00+$16.50=$62.51 (we rounded up to $63.00).
What assumptions about SpaceX drive the forecast?
In all three scenarios, we apply base-case forecasts provided by PitchBook for Space and Connectivity Businesses, in which we assume that by 2035, SpaceX will be able to launch 340 Starship missions (about one a day), and the rocket reusability rate on these missions reaches 85%, leading to cost and time savings beyond the reuse of boosters in the upper stage spacecraft. We then made predictions for three scenarios to see what AI businesses could achieve.
moon
First, in our most optimistic scenario, SpaceX’s orbital AI platform takes off, achieves operating cost advantages over terrestrial computing, and ultimately deploys and commercializes one-fifth of our forecast AI infrastructure computing capacity (excluding Russia and China) by 2040. We apply estimates provided by SpaceX that it can engineer and deploy satellites equivalent to 100 kilowatts of AI processing capacity each and eventually fit more than 100 of them. Fairing a Starship, the result we estimate will be an orbital computing cluster of approximately 59,000 satellites by 2035, providing the equivalent of 11.6 gigawatts of AI computing capacity and generating $225 billion in annual revenue.
no go
In our negative scenario, orbital data centers would not work or provide any benefits compared to terrestrial data centers. Our guess is that the company, having invested tens of billions to figure it out, will cut the project sometime around 2028, much in the same way that management walked away from Tesla’s plan to build multiple small car factories. We believe SpaceX will continue to commercialize its terrestrial Colossus data center but will not capture a meaningful share of global computing capacity.
minimum viable product
In our most likely scenario, orbital data centers prove viable subject to some capacity constraints, but SpaceX also benefits from declining costs to launch large payloads on Starship, and the company successfully deploys and commercializes about 4% of our estimated AI computational capacity – perhaps best served in those use cases that can tolerate high data transmission latency. This is a project that requires some unproven engineering to succeed, but we see SpaceX as being best positioned to pursue it.
In this scenario, we estimate that SpaceX will engineer and deploy satellites with the equivalent of 50 kilowatts of AI processing capacity each and eventually fit more than 90 of them in the fairing of each Starship launch, resulting in an orbital computing cluster of approximately 48,000 satellites by 2035, providing the equivalent of 2.4 gigawatts of AI computing capacity and generating $47 billion in annual revenue.
How do scenarios add to the fair value estimate?
- We give the optimistic moonshot scenario a 7% chance of occurring. it shows Joint Chances are the starship is reusable 85% of the time And Orbital data centers scale well commercially. This scenario would add $108 to our fair value estimate, unweighted, and it increases the final result to $7.56 per share.
- We assign a 43% chance of the no go scenario occurring, meaning that even if Starship is successful, orbital AI data centers may not be, which would automatically shave $6.20 off our fair value estimate, and have a weighted average of $2.67.
- We consider the minimum viable product scenario to be the most likely (though far from guaranteed). It is valued at $23.50, which adds $11.75 to the fair value at a 50% probability.
What about chips on the Moon and building cities on Mars?
SpaceX has a long list of other projects and ambitions, including actual Moon and interplanetary colonization. These will likely absorb large amounts of investment, may be dilutive to shareholders, and may have a wide range of potential payoffs, positive or negative. As such, we view them all as having potential “alternative” value, and it is a matter for investors to decide what they think the payoff could be and how much of a premium they place on each project.
We have not explicitly modeled or forecast these projects, so we would say that either our valuation is agnostic to them or it effectively gives the projects as a group a net present value of zero.
What would be the fair value of SpaceX at $135 per share?
Like the Orbital AI Computing Cluster, we see SpaceX as the best-positioned firm to pursue such ambitious projects. One way to evaluate the value of these opportunities is to use the logic of pricing call options, in which an investor pays an upfront premium to purchase a project at a predetermined price. If the project is successful and is worth more than the strike price, the investor wins. But if it does not, the investor loses his premium and the option expires without value.
If our weighted $63 fair value estimate of SpaceX is accurate, then at the $135 offering price, investors are adding a $72 per share “option premium” to their investment for the right to participate, no matter what, in a long list of future projects to be launched by SpaceX. The more you believe there will be cost-competitive orbital AI data centers, the closer SpaceX’s reevaluation price will be to the offering price, and those additional projects may be viewed as free options. Using the above inputs and our scenarios of 77% probability for a moonshot and 23% probability for an MVP, excluding the no go scenario, the valuation is equal to the offering price of $135.
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