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Chapter 1: What is the main topic discussed in this episode?
welcome back to the rundown interview edition today i am talking to nicholas owens an equity analyst over at morningstar nicholas covers spacex which just had a record-breaking ipo last week and the stock continues to surge at the time of this recording spacex stock is trading above 200 a share but nicholas believes the actual value of the stock should be closer to 63
So in this conversation, we get into why Nicholas is so bearish, how he actually got to that number, if space in general is overrated, and also take a look at SpaceX's AI strategy moving forward. This was a really good conversation. I think you guys are going to really enjoy it. So let's get into it. All right, guys, today we are talking to Nicholas Owens, an equity analyst from Morningstar.
Chapter 2: Why does Nicolas Owens value SpaceX at $63 per share?
Nicholas, welcome to The Rundown. Thanks for having me, Zaid. I'm super excited for today's conversation. We're talking SpaceX. Your report before the IPO about SpaceX caught my attention. It caught a lot of people's attention because in your report, you said that you were assigning a value of $63 a share to SpaceX.
Now, since the IPO on Friday, SpaceX stocks is just, I mean, the stock went up 19% on day one, 20% on Monday. I think it's up another 10% today on Tuesday, the day we're recording this. Did you expect this to happen after the IPO, despite your bearish outlook?
Would you believe? Yes. I think the real tension here is between what Morningstar would call an intrinsic value or fundamentally based valuation of the stock, which I can talk about.
And let's say the market for the stock, like supply and demand, what you see in the stock chart, I had every reason to believe that there's a lot of enthusiasm for the stock, for Elon Musk's companies in general, and the way the IPO price was set. with a relatively small float. I fully expect it to sort of stay high here for a while.
And we can even talk really about what the differences are between what I view and let's say what the market seems to be pricing in. But yeah, the market was primed for this stock to go up. That doesn't surprise me. But the real tension is what are investors buying or what are they paying for at these prices and what's reflected in the expectations, if that makes sense.
Well, what I'm surprised, though, is I'm with you.
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Chapter 3: What assumptions are behind SpaceX's ambitious projects?
I kind of felt the same way that the stock would rally post-IPO because a lot of factors here, the small float is one of them. But the fact that it's been kind of like a smooth ride up, right? It wasn't like a Figma style where you had to jump, I don't know, 50%, 60%, 70% on the first day. It was like 19% on the first day, 20% on the second day. It's just slowly, slowly going up.
And the fact that it wasn't herky-jerky is kind of surprising to me. No big drop on the second day or third day, and it's just – It's kind of like a rocket ship up.
Oh, yeah. A rocket ship. You got it. Yeah, I mean, I guess we've sort of reached the limits of what I would consider my expertise in terms of, you know, looking at, you know, volatility weighted float and volumes and stuff. That's kind of not my my area. It may get choppier. It may stay smooth. You know, I think the underwriters are active in sort of days and weeks after the IPO and
kind of managing what they call an orderly market, because they're still moving some of those shares around. So I guess I don't, I think the story for me more long-term will be where will value shake out. In the next year, you'll have potential dilution as the lockups expire. You'll also have index funds buying it because it's a big piece of the market now. And so we'll see.
Well, let's talk about the math behind your $63 number that was making the waves. You said this was a mathematics more than skepticism. Now, we don't need to get into the full DCF model here, but can you kind of break it down? How did you come up with the $63 number?
Sure. And I think it's really, I really want to emphasize that it's, I'm not like disagreeing with the market about the potential for this company to do amazing things.
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Chapter 4: How does Starlink's market opportunity compare to expectations?
And, you know, even let's say unprecedented things, looking at the rocket business and Starlink, you know, the way they've developed the Falcon rocket and its reusability is incredible. And they literally changed the math on what you'd even consider to be feasible to launch into space or, you know, the dollars per kilogram to launch is incredible. radically come down because of SpaceX.
The way we do it is I valued, let's say the unknown here really is the AI piece of the business that they acquired. You had a rocket company and satellite company that acquired the AI business from Elon Musk in February. And they're heavily investing in that, which is part of kind of the wider AI theme, people investing tens of billions of dollars in infrastructure and servers and stuff.
And basically, we look at that as unknown outcome, right? So will they succeed? The biggest project on the books is putting data centers in space. There's a whole debate about whether that's even possible from an engineering point of view. People talk about the radiation or cooling. I've actually become convinced that on an engineering basis, it's doable.
I think SpaceX has a video showing kind of like a mock-up or a prototype, and they can leverage some of the same tech that, let's say, that they've developed for Starlink. What is unknown to me and where we modeled a handful of different outcomes is how commercially viable or competitive will a data center in space be compared to a terrestrial data center.
The way I interpret it is the company has a cost advantage in its ability to put stuff into space. And they kind of rinsed and repeated that many, many, many times, many more times than any competitor. And so there's a possibility that they could have a data center in space that has an operating cost, slight edge compared to terrestrial because the solar energy is free and the cooling is free.
So let's sort of, Leave that as the depth of the science that we would get into. If you so if you believe that and you believe that it's compelling, let's say from a financial point of view, that's one scenario that we modeled. And I think that's the scenario that the market is assuming is totally true.
And that's where you get to the, you know, one hundred seventy dollars on the first day and two hundred something a day. as a share price. We valued that scenario at $154 a share. The problem is it's not 100% likely to be that way, right? So the two things that need to happen are Starship, the giant new model rocket, the top part of that has to be reusable
In order for them to launch all these satellites, they have put in a permit request for up to a million data center satellites, which I think is a bit high. You don't need that many for it to work. But thousands of satellites, they need to launch these like hundreds of launches a year, like more than one a day.
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Chapter 5: What is the significance of SpaceX's AI ambitions?
And that requires the Starship to be able to relaunch quickly, not like after six months having all the tiles replaced or what have you. And so that's not proven. They just did a test run of Starship. They didn't reuse the top portion. And so we'll see in the next year or two how the engineering plays out. I give them the benefit of the doubt that they can do it most likely.
but it's not baked in as a certainty to my scenarios. And then the second piece is whether data centers in space will be cost effective. Again, I'm assuming they're doable engineering wise, but that's how we get to the $63 is we're probability weighting this outcome against other scenarios where the data centers may not be cost compelling or where Starship is less reusable, less frequently.
So I hope that helps kind of put it in context.
Yeah, so from my understanding, it's like you're thinking best case scenario, right? Everything works. Like the starships work, which they're still having some engineering issues there, but let's assume they get that figured out because they have historically gotten this stuff figured out. Let's assume data centers in space works. Let's assume, you know, all of this works.
They overcome the engineering challenges. And you're assigning that $154 a share value. And the way you back up back down to 63 is by assigning each one of those segments a percentage of actually happening, right? Correct. And that's how you come up with a 63.
Yeah. And the real problem, you could say, you know, that lowers these percentages is that two things have to happen. Starship has to be reusable and data centers in space need to be compelling. So the kind of combined probability, the way we looked at it, was only 7% for that best case scenario.
And if we learn something tomorrow, which I don't think we will quite so soon, but if we learn more about either of those, I can change the percentages and that would move my valuation. But in reality, kind of just being honest, it's still, even at 154, that's still meaningfully below the market price.
So I think you have people also pricing in kind of other moonshot, Mars shot, long range projects as added value to the company that, again, might work out, but aren't a solid 100% probability in my book.
When you guys were going through this exercise, I'm sure it was, you know, you guys were, you know, digging into the stuff. Was there a conversation like maybe we need to add a coolness multiple, right? Space is cool. People want to get into the cool industries. And then also an Elon multiple. I mean, obviously, like Tesla is a great example.
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Chapter 6: What are the potential challenges for SpaceX's reusable rockets?
full stop. And I do my best to model, in this case, a range of scenarios and weigh them into what I would call the most likely outcome or the set of most likely outcomes. And in the long term, we believe that stocks tend to arrive at those fair values. Obviously, we will have new information over time as well.
I'm not really in the business of trying to guess what the market will pay in the next minute or hour or day. That's gonna be where these multiples and the Elon premium and all those factors will come in.
Chapter 7: How does the acquisition of Cursor impact SpaceX's AI strategy?
I will say this though, I tried to reflect some of that in these percentages, And then I would say I would give any other company lower probability of success for these projects. Right. I mean, again, I'm trying to. So it is built in essentially in your analysis because of the historical president.
To be honest, like not to pick on any one competitor or another, but another rocket company that said the same stuff, I would say maybe zero percent probability of that upside scenario. See what I'm saying?
Yeah. Yeah. And speaking of just space in general, see, my personal opinion is just I feel like space is just overrated as a whole. Right. I think I think it's just it's still so unknown. There's all this like like talks of obviously data centers in space has gotten a lot of hype recently. But there's also like talks about mining on the moon and this and that.
Chapter 8: What could trigger a decline in SpaceX's stock price?
And to me, it's just everyone's throwing out all these crazy TAMs. for space. And again, I think it also plays up to like the sci-fi factor of it. And it kind of plays to people's imagination and especially retail investors. So I think that is all overrated and bad. That's also baked into like the premium that SpaceX is trading at right now.
Yeah, I hadn't thought about the, you know, no pun intended space being an overrated space. I looked at this company, particularly with its AI venture, but then also the longer term goals, you know, putting a city on Mars or a mine on the moon. Those are, let's say, debatable value propositions. But again, I think this is the company best position to go after that.
And the way I really modeled it is essentially as an infrastructure play, almost like building the railroads 130 years ago, putting that infrastructure and the supply chain in place to be able to do that. And it very much hinges on Starship being able to go there and back again many times, etc., It's a, it's a, it's a very kind of ambitious and, you know, fantastical project.
But here it's happening, you know, 15 years ago, did we think there'd be reusable rockets with posters landing, you know, two minutes after launch? No, but there they are.
Yeah, and don't get me wrong. I'm just with you. I feel like the technology is incredible, the progress, what they're able to do, catching the rockets with the chopsticks. I mean, it's absolutely insane what they're able to pull off. But to me, I'm just like, even if they're able to dominate 100% of that market, what is the actual business upside for just – you know, dominating rockets.
Like, is it actually the crazy tan that people are projecting? I'm a little skeptical about that, but what I wanted to ask you about speaking about rockets is like the Starlink part of SpaceX's business. You know, your report, again, I recommend everyone read your report. It's fantastic.
You estimated that the tan for Starlink is closer to 129 billion versus what SpaceX is estimating, which is like 1.6 trillion. That's a pretty big difference. So can you break down where that gap comes from?
Absolutely. And yeah, so TAM, the total addressable market is the way I interpret those numbers. And it's interesting, actually, that the smaller of the three that they put in their registration statement was for the rocket piece. Right. Yeah.
So the one point six trillion addressable market that they list for the Starlink business, that's one point six trillion is pretty much what every human spent on telecoms on Earth this year. So what I interpret from that, like you said, it's as if they're saying we could go get or dominate 100% of this market.
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