It looks to me like some of the banks went recruiting at the circus rather than at Harvard Business School in order to hire some of these people in.
Well, just looking at the underwriters of the SpaceX IPO is basically everyone. Goldman Sachs, Morgan Stanley, JP Morgan, Deutsche Bank, Raymond James, like everyone who is putting a buy on this thing, they all had a financial incentive within the bank.
Welcome to Prof Markets. Scott is off today, but we have got a very, very special guest filling in. Someone who a lot of you guys have been very excited about, the one and only Patrick Boyle is joining us. Patrick, great to see you.
Hello. Thank you for having me on as the fill-in bald guy for the channel.
It's funny. Last time we had Robert Armstrong, who is the Financial Times commentator, also bald, also very smart, also very insightful. So, clearly there's a theme going on here, but we love it. Good to see you. How are you?
Great, thanks. How are you?
I'm doing very well. I'm very glad you're here. You know, we're recording this before the England game for the World Cup, which I'm very excited about. But are you supporting anyone in the World Cup? I mean, your accent is Irish, so I have to assume that maybe you wouldn't want England to win. Like, where do you stand on this?
The way it works in Ireland is that we don't acknowledge sports that we're not good at. So, if we were in and doing well, it would be huge, but we just view it as a foreign sport that's, you know, it's not worth watching.
So, what are the sports then? It's basically just rugby.
Rugby's acceptable, but then there's also, you know, GAA football, which is better. We've got hurling. You know, we've got all of our own sports. We don't need your sports.
You know, hurling. You've got your own things going on. Don't need to participate in all of the popular sports, the sports that matter. But I won't continue down that path. Just for everyone who doesn't know, Patrick is a professor at King's College London and a portfolio manager with more than 20 years of experience. Many of you probably know him from his YouTube channel Patrick Boyle on Finance. Patrick breaks down these very complex topics in a very simple, understandable way and we just love his insights and he became our favorite person to discuss SpaceX with and we will be discussing it again today. Just before we get into the show, Patrick, I think a lot of people are like dying to know your origin story, how you ended up becoming this superstar YouTuber, but also professor of finance. Like, how did you get into this stuff?
You know, a lot of it, I was just asked to teach at originally Queen Mary and then King's College. And you know, I teach the masters in finance students and then I sort of always liked the cameras and things like that and so I started, you know, students will come to you with questions, they'll say, you know, can you explain that again and often I just thought it'd be easier to record it and be able to send that to the students. And that then turned into a whole YouTube thing.
So that's very interesting. Yeah. Scott often says that his history of being a professor was kind of a cheat code because he got to test out his material on his students and then if the students like it then he'll take it to the public then he'll take it to the big leagues and talk about it on TV. Clearly it works. Clearly it's a good system. So let's get into this. Today we've got three very interesting stories. We're going to be talking about SpaceX. We'll be talking about what's happening in the crypto markets, something that a lot of people are now calling the great rotation. We will be explaining exactly what that means and then we will be ending with a little breakdown on what is happening in the housing markets. News flash: prices are not going down. So let's start with SpaceX. Last week SpaceX officially joined the NASDAQ 100. It qualified under the new fast-track listing rules which reduced the required trading history to just 15 days and it also eliminated the minimum public float requirement. That same day, the stock received an overwhelming vote of confidence from Wall Street with 18 out of 19 analysts publishing a buy rating and only one publishing a hold rating, which was honestly quite surprising to me. I mean, as I think a lot of people know, I think that the stock is way overvalued. I know other people think that, too. I believe Patrick believes that as well, but we'll get his official views in just a moment. Despite all of that positive momentum, both those ratings from Wall Street, and also its inclusion in the NASDAQ, which essentially meant billions of dollars of passive investment, which should prop up the stock price. Despite that, SpaceX shares fell nearly 6%. And at the time of this recording, the stock is now down 13% over the past week and 34% from its peak. So despite all of that positive influence, things that should really be raising the stock price, the stock continues to fall and it's now trading below where it was on its opening day when it first IPO'd. So Patrick, I guess let's just start with your reactions to how the stock has traded over the past week, two weeks. It hasn't been great. What do you make of what's happening here?
I mean, the truth is it's above the IPO price. Like if you put in for the IPO, you got it at 135, you're pretty happy with the return. And it's sort of in line with what you get from IPOs. There's, I forget the name of the researcher, but there's a guy who's an expert on this and he's done all the research and it shows that typically IPOs jump about 18%. Which was right in line with what SpaceX did. Now, the thing is, if you bought it on the day of the release, you were buying post-pop, right? I think it hit the market maybe at some like 165 or something like that. So most people who didn't get a fill and bought it at the market open, they'll be down on it. But the truth is it's trading at a very high valuation and if you invested in it, you can't really claim to be too surprised and you've probably done all right out of that.
Just to break down the dynamics here, as you say, the IPO price was 135 and the IPO price was the price that was allocated to the insiders, people who had access to the IPO. But if you are a retail investor, if you were just buying it on Robinhood or whatever your trading platform is, the lowest price you could have gotten in at was what it was when it immediately went out, which was 150. And we're down from that price point. In other words, as we kind of predicted, everyone who bought this as a retail investor has thus far lost money. They're all down. And the guys who bought it when it was going close to 200, those guys are really down at this point, which was kind of what we all sort of expected. And it's certainly what you talked about as well. So just looking at the valuation now, they did a little over $19 billion in revenue in the past 12 months. So they're trading at 101 times sales which is already quite absurd and you've pointed that out. But then we get the price targets from Wall Street and I'm just going to read out these price targets and I want you to react to them. So Goldman Sachs's price target for SpaceX. This is what they think the stock should be trading at. Their price target is $250 a share. So that is a $2.7 trillion market cap. That implies a 139x price to sales multiple. JP Morgan, 225. That implies a 2.9 trillion market cap trading at a more than 150 times sales. Deutsche Bank says $255. That's more than $3 trillion in market cap. 173 times sales. Morgan Stanley, $300, nearly $4 trillion market cap, more than 200 times sales. Here's the best one, though. Raymond James, their price target is $800 a share, a $10.4 trillion market cap, an implied price to sales multiple of 542. What the hell?
I mean, you have to wonder if they built spreadsheets to justify this or they just pulled out the numbers because, you know, to people at home who aren't familiar necessarily with these ratios, like nothing trades at 100 times sales, like it doesn't happen. And the kind of thing that even could potentially trade at a very high price to sales ratio would be maybe like a software company where sales basically converts straight into profits, you know, where there's no real costs. There's massive, massive costs here. There's the cost of the rockets, you know, but that's not really what SpaceX claims to do anymore. It's an AI company, so it's the cost of all of those Nvidia GPUs and whatever. You know, they're burning I think about 5 billion a quarter. So, I mean, it's not just losing money, it's losing a shocking amount of money. And you're really paying up as if, well, it would be hard to justify paying 100 times because if you think about, if all of the sales passed straight through as profit, you're still, do you want to pay 100 times, you know, 100 years worth of profits for the next year's profit? Like you have to wait 100 years to get your money back. It doesn't make sense, you know, 300 years to get your money back. It's getting wilder. And then of course to the listeners who are going, 'Oh, oh, but what about growth, you know, because of course the revenues should be growing and hopefully will eventually become profitable.' It's not really growing that much either. I think it's, you know, SpaceX has a growth rate of around 15%. Which compares to when Google went public at I think 10 times sales or maybe it was less. Google was growing about 200% a year, right? So it's sort of an ex-growth company that's putting itself forth as primarily an AI and in fact enterprise AI business when they're not really much of an AI company. I think they've got a 3.5% market share. So it's, you know, it's just hype-based. And in truth, even why did it fall once it hit the NASDAQ index inclusion? Well, a lot of people were buying for that pop, you know, and so to a certain extent, you know, the thing everyone is waiting for has happened now. Like, I mean, what's the next hype? Like what's going to be so exciting? Like something's going to have to dramatically increase growth or, you know, you have to have another massive forced buyer out there.
So hearing all of that, and I appreciate you putting into context what it actually means to trade at 100 times sales. Like, yeah, what we're basically saying is that you got to make your money back on the earnings. We're not even talking about earnings. We're talking about the top line. So we're just ignoring the costs here. Which kind of begs the question, like how on earth are these Wall Street analysts justifiably setting these price targets? And I just want to get into some of the details that we got from the Raymond James research report on SpaceX. This is the one that their analyst, Brian Gwal, who set the price target at $800. I'm just going to give you some of the data points or his projections that how he justifies that valuation. So he estimates that SpaceX revenue will rise from $19 billion last year to $5.2 trillion by 2035. That's his estimate. He says that 94% of that revenue will come from AI. In other words, he thinks that SpaceX is going to generate $4.9 trillion in AI revenue in 2035. He says, quote, 'We see the company as one of the defining industrial infrastructure companies of the 21st century. Just as railroads, electric grids, and the internet reshaped prior economic eras, we believe SpaceX is building the foundational platform for the next generation of industrial capacity.' So, he's comparing it to railroads, electric grid, internet, essentially a bunch of things that were bubbles that all blew up. Like, you know, to talk about to be like, oh, it's a lot like investing in railway a couple of hundred years ago. It's like, and how did that work out? Or the dot-com bubble. Isn't that what they called the dot-com bubble? So it's a lot like many bubbles in the past in that the price could go up before it finds, you know, before gravity has its effect.
That's a very good point. I was going to make the point that if you look at all of those industries and the biggest companies at their peaks, you look at US Steel at its peak, it was worth 6% of US GDP. For Cisco, it was worth 5.5% of US GDP. You make a good point. They've since come way down. If SpaceX were to hit a $10 trillion valuation, which is what he believes this company is worth, it would be equal to a third of the entire GDP of America, which to me doesn't really make much sense at all. But if you think through what would the other AI companies be worth because this is the smallest one. This is 3.5% market share. Like the other, you don't want to own space. You know, the reason they have to say that it's an AI company is just that the, you know, the only thing that's kind of sort of profitable is the satellites, the satellite internet thing, but that can only grow so much, right? It's only ever going to get so big. So, you can't justify its current trillion-plus dollar valuation on satellite internet. The rocket launch business, you know, it's worth noting that that loses money and that most of the launches are launching their own satellites. So, when people even point out that the satellites are profitable and the launches are unprofitable, that's sort of like McDonald's saying, 'Well, we're profitable on the hamburgers, but we're losing money on the buns.' It's like, aren't they tied together?
That is a very, very good analogy. Look, maybe they should up the price they charge their biggest customer. Then the whole thing would be profitable.
Just going through some more of these analyst notes because to be clear, Raymond James isn't alone. This is basically the entirety of Wall Street that is in agreement on this. Deutsche Bank said that SpaceX is, quote, 'the apex of civilizational ambition.' They said the company is, quote, 'bending the arc of history.' JP Morgan said SpaceX's, quote, 'potential impact on humanity is bigger than any companies we've ever seen.' Morgan Stanley called it the final frontier of AI.
I think the report was called the apex of civilizational ambition, you know, which I looked at like other Morgan Stanley reports like the one on Exom Mobile or the one on, you know, many of the other companies that we think about, they never add such drama, you know, like they put the guy with the Hawaiian shirt analyzing this and he comes out with a title like that, you know, and I think the only other real company he covers is Tesla. It's worth noting.
So, yeah, exactly. Which is crazy. And by the way, just when we look at that price target, I was looking into that Morgan Stanley report. So their price target that they have set is $300. So again, that's like double where we are now. They say that the bull case on the high end, their target is $600.
Yeah, I guess there's a standard deviation around that, right?
Right. But then on the other side of it, they say that the bear case is $75.
So it's quite a skewed distribution.
Exactly. It could fall 50%, but it could also rise 300%. So you're basically not telling us anything.
I mean, it's a call option basically, right? Like it's...
Yeah, exactly. So when we were talking about this offline, you made a really interesting comparison to something that happened in the dot-com bubble with this guy named Henry Blodget. Could you just explain what the story is there and how it might have parallels to today?
This is quite a famous story. It wasn't just Henry Blodget, but he was sort of the biggest example. He was the internet analyst at Merrill Lynch at the time. And basically, you know, after the dot-com bubble burst, you know, there were a few investigations and they found that many of the analysts were privately sending emails describing companies as POS's, you know, which we'll work out what that means. While publicly going on TV and really like pumping them up and saying that they were the greatest companies ever. And so Henry Blodget, I think he was hit with a $4 million fine. He was banned from the securities industry. He since went on, he's now I think he founded Business Insider. So he's gone on to be a success. But during then in what was in 2002, Sarbanes-Oxley was passed and there were regulations put in place because they basically said that what was happening at the banks was that, you know, the banks were making a lot of money IPOing all of these internet companies and it was sort of tied into like, if you know, which bank will I let lead the IPO? Well, the one with the analyst who'll say the most good things about the company, right? We need to get the price up. And I think even back then, IBD, the investment banking division, got to put in as to how much of a bonus the analysts would get. So that was all separated. You know, investment banking couldn't influence, you know, research reports after that or at least that was the idea. But it's worth noting that SpaceX, which, you know, they raised, how much did they raise in the IPO? Was it 85 billion?
85 billion. There's a research report out from a guy called, he's got a Substack called Capefar Capital and he dug through the IPO prospectus and very carefully added up all the uses of funds, you know, because normally in an IPO prospectus there's sort of, you know, sources and uses of funds, like why are you raising this money, what do you need it for, and it was all spread out and like not very clear at all, but he added it all up and I think he worked out that they need $235 billion in spend between now and 2030, so 4 and a half years. So that actually means if you're working at, you know, Goldman Sachs, Morgan Stanley, any of the big investment banks, that Elon will be deciding, you know, they need to raise capital. They'll be asking the banks to raise that capital. Banks charge about, you know, a 1% fee. I think they charged less for SpaceX because it was so big, but there's big fees in the pipeline and if your analyst says that this is a POS, you know, you might not get that call from Elon. So it could be expensive to say the wrong thing. Now, you know, we believe that the banks are not supposed to be doing that anymore. You know, and it's reasonable. Maybe they just pick like the biggest Elon fanboys to analyze his stocks because otherwise, you know, I don't know that I would get a job as the Tesla analyst, for example. You know, should this go badly, which it's reasonable to think it could, I imagine, you know, that many of these people, you know, if you're on the index inclusion committee at NASDAQ or if you're, you know, at one of the bankers who claims it's going to be trading at an astronomical level, the likes no company ever has before, you know, you may get a nice day out in Washington while you attend some sort of congressional investigation into your work. I would say hold on to your spreadsheets, you know, and don't delete or no, do delete some emails maybe.
I mean, I think it's such an important point because I mean, what we saw with the dot-com bubble and what we learned is that there is structurally a conflict of interest embedded into equity research and that is, if you say something bad about a company, if you say that a company is a sell rating, then it's unlikely that the company will be interested in working with you to underwrite your IPO through which you would receive your 1%. And if they're going to be raising $230 billion over the next four years, that's more than $20 billion in fees. And it is literally the bank's job to figure out how to make sure that they can go out, pursue that deal, underwrite these equity offerings, maybe underwrite some debt offerings, maybe underwrite some M&A transactions, and pick up those fees. And so Elon is naturally going to choose whichever bank is nice to him. And we literally saw this exact same thing play out when there was the dot-com crash. So there was, as you say, Henry Blodget, Merrill Lynch, he writes this exceedingly positive research on all of these different internet companies. He privately calls those same stocks POS's, pieces of junk to his colleagues in private emails. And it ended up being that that was sort of what got him because it's illegal to publish research that isn't your genuine opinion. And that's how they got him.
And deeply unethical as well. Like even if we step outside, you know, the legality, I mean, what are you doing, you know, like this is, I don't know, to me it's just such awful behavior.
100%. And we saw, but he was not the only guy. I mean, this was a problem across the industry. There was another example of an analyst at Salomon Smith Barney. He said this company was a buy. He had privately called it a pig in an email to colleagues. And then there was another internal email that was sent by a Merrill Lynch employee. He said, quote, this guy had come to his senses clearly. He said, quote, 'We are losing people money and I don't like it. John and Mary Smith are losing their retirement just because we don't want an investment banking client to be mad at us.' So this is like a thing in the industry. It's a problem. Yeah. And as a result, we saw this regulation that was designed to prevent this stuff from happening. There was Sarbanes-Oxley and there was also the global research analyst settlement which I've been digging into since you brought a lot of this to my attention. And this was basically this agreement that the SEC came up with in 2003 that was designed to completely separate the research side of the investment banks from the investment banking divisions whose job is to go out and get those underwriting fees. And they literally said you cannot communicate with each other unless you have like a chaperone who's going to sort of oversee all of this stuff and make sure that you guys aren't kind of meddling with each other. We're going to make sure that the research guys have zero compensation tied to whatever happens in the investment banking divisions. So, I'm looking into this. I'm, you know, learning about this global research analyst settlement. Something I learned last night is that 7 months ago that law was terminated by the SEC.
I was not aware of that, but that is interesting. Yeah.
This is the headline, the press release. SEC agrees to terminate global research analyst settlement. And right after that happened, Arthur Levitt, who's the former SEC chair, he wrote an article in the Wall Street Journal titled, quote, 'The SEC may make Wall Street analysts corrupt again.' And he warned about the dangers of getting rid of this stuff. The argument that they have proposed as to why it's okay to get rid of this is because they say that we have new regulations that already do the job of what that old regulation did. But if you actually look into those regulations, what you learn is that it kind of does the job, but way weaker, way more flexible. The communications restrictions are, you know, kind of loosey-goosey. The requirements on third-party research, independent verification, those are virtually gone. And the former SEC chair said, quote, 'Don't be fooled by the promise that other regulations provide this separation. Financial regulators are floating the removal of quiet periods restricting when analysts can publish research on their own banks' transactions. This is the natural pattern of regulatory surrender.' So, this I'm sort of learning about this in one go. I feel like this might be an explanation to what's happening. I'm not accusing anyone of anything, but it seems striking.
No, it's pretty wild. Like, it's funny because even without this rule being changed, there's sort of just a general issue that if you work at one of the top investment banks that's really hoping to bring in billions of dollars in IPO fees, that it would be a career-limiting move to put out a sell report or to say anything bad about these businesses. So there's sort of a corrupting influence in there anyhow. And you know, when you look at the list of analysts, like I'm not familiar with that many of them, but you know, you kind of look at the CVs online, like it looks to me like some of the banks went recruiting at the circus rather than at Harvard Business School in order to hire some of these people in.
Well, just looking at the underwriters of the SpaceX IPO is basically everyone. I mean, Goldman Sachs, Morgan Stanley, JP Morgan, Deutsche Bank, Raymond James, like everyone who is putting a buy on this thing, they all had a financial incentive within the bank. So, it seems hard to assume it's anything other than that. And just going back to like the dot-com bubble, when you look at mid-2000, you look at all the recommendations on the stock research, 74% of stocks had a buy recommendation, only 2% had sell, which it kind of makes me think that if there's ever some IPO boom, which there is happening now, it automatically, or if ever there is, you know, more deal making on the table, it incentivizes the entirety of Wall Street to suddenly say these stocks are great. And if they all say these stocks are great at the same time, then we start getting into bubble territory now.
