We haven't even gotten to the lockup expirations yet. My assumption is there are a lot of people who are very rich on paper right now. As soon as those lockups expire, I assume they're going to want to sell and maybe go out and buy a boat or buy a house, whatever they want to do. That hasn't even happened yet. And yet the stock is still declining. Surely that means it can only keep going down. What do you think will happen?
I think that seems likely. So I go back then to the fundamentals. What is the ROI on all these investments that have been made, and also an LLM that is not in the top ranks, shall we say? So, lots to question.
Welcome to Profy Markets. I'm Edson. It is July 16th. Let's check in on yesterday's market vitals. The major indices rose after another inflation reading from the producer price index came in cooler than expected. Treasury yields fell. Brent crude had another volatile day as the US continued to strike Iran. And finally, Apple stock hit an all-time high after announcing it will integrate Alibaba's Quen model into Apple Intelligence in China. Okay, what else is happening?
The largest IPO in history is officially underwater. Yesterday, SpaceX fell below its $135 IPO price for the first time, touching an all-time low of $132.75. The stock has now dropped 40% from its peak, wiping away more than a trillion dollars in value. That downfall comes just one month after a debut that raised a record $86 billion and briefly made Elon Musk the world's first trillionaire. The new low also comes just one week after SpaceX joined the NASDAQ 100. That means that the index fund and the millions of Americans whose retirement accounts track it bought in right before a 10% decline. It also means, more importantly, my SpaceX prediction is on its way to becoming reality. On June 10th, I said this: here is my prediction for what will happen tomorrow. As soon as it hits the market, SpaceX stock will immediately explode 25%. However, my other prediction is that within 6 months, probably sooner, SpaceX stock will be cut in half. Why? Because the valuation makes no sense whatsoever. Almost two for two. We'll see. Joining us to discuss SpaceX's decline, we're speaking with Nicolas Owens, equity analyst at Morningstar, one of the few analysts who has been bearish on this stock. Nicolas, thank you for joining us on the show. Just as a reminder for our audience, you published your SpaceX research before the IPO. You valued the company at $62 per share. So, even lower than where we are now, of course. Just walk us through your valuation again as a reminder.
Sure. Thanks so much for having me, Ed. The $62 is a result of three scenarios: you know, a bull case, a medium case, and a bear case, and some probabilities that we assign to those. Only in the bull case do you get into the 130, 150, $160 range. The problem is that depends on so many things going right that we think there's only a 7% chance of that happening. So that's where you get to a weighted average fair value of $62. You know, the medium case on its own is about $71 a share. So I think we're in the same camp, if you will, thinking about valuation-wise.
Yeah, just looking at what's happened so far. So, the stock, I mean, obviously it popped immediately, as I thought it would. It continued to rise and now it's coming down. I mean, it's been pretty quick the way this has happened, especially considering the fact that it joined the NASDAQ 100 so recently. What do you make of how quickly it has started to drop back down?
I think it's a really good point. I think there's two kind of buckets that I would want to point out there. First of all, maybe working backwards. It's quick. I think partly because the float is still so small, only four-ish percent of the company. But then on top of that, I think it's, and I go back and forth between thinking about the fundamentals, like what do you have to believe about AI data centers in space, etc., or what the margins on that might be in 10 years, and then you go to just the market, the supply and demand for the shares themselves, right? So both of those should drive the price. So I think here you have in the next couple weeks, I think they're supposed to announce earnings, August something, August 8th or 9th, and two days after that, a whole another 7% of the company can be sold by insiders. So that's supply. And then I wanted to comment on the NASDAQ 100 inclusion, which is, you know, notable because it was a result of some changes in their methodology and so forth, but I think actually not even that huge a deal in terms of demand. So, I Googled what's the market cap of all the funds that track the NASDAQ 100, and something like $800 billion, and if it's $800 billion and they're weighting it at 1%, that's $8 billion of demand that would have been a result of that inclusion, which does not offset, if you look at the market cap, and even with the float, the potential supply of someone who bought it at 135 and was selling at 156 or whatever in the last couple weeks.
Right. One of the crucial things you mentioned there is the fact that we haven't even gotten to the lockup expirations yet. I mean, that was what I was kind of waiting for, is as soon as people can sell, my assumption is there are a lot of people who are very rich on paper right now. As soon as those lockups expire, I assume they're going to want to sell and maybe go out and buy a boat or buy a house, whatever they want to do. That hasn't even happened yet. And yet, the stock is still declining. Surely that means it can only keep going down. What do you think will happen?
I think that seems likely. So I go back then to the fundamentals. What are maybe some changes in what people believe about what drives the value of this stock? There are certainly the Starlink business, which is actually kind of the gem right now. But you have motivated competitors making some advances in their launch and their technology. Ironically, I think that the economics of this business may resemble the terrestrial telecoms business, where Morningstar would call it an efficient-scale source of moat, which is problematic because the more players there are, the worse the economics get. So, SpaceX is kind of king of the hill there. And having an eager competitor launching a bunch of satellites looks like a capacity glut could happen. And so pricing doesn't look as good. So there's maybe some overhang even on the Starlink case in terms of AI. There's so many assumptions you have to make to get to these upside scenarios. And the payoff there, you know, is in, let's call it, the decades. There's a couple news items I would point to. Meta starting to rent out capacity. OpenAI probably delaying their IPO. Those are things that would make people question the thesis of what is the ROI on all these investments that have been made. And SpaceX today looks a lot like an infrastructure play and also an LLM that is not in the top ranks, shall we say. So, lots to question.
And when you look at some of the research that we've seen from some of the other Wall Street analysts, to be clear, 27 of the 31 analysts who cover this stock have recommended it as a buy. And the average price target is shockingly $242 per share. One analyst gave it a price target of $800 per share, which would value it at $10 trillion in market cap, which would make it by far the most valuable company in the world, like double Nvidia, double Apple. I mean, it's just nuts. What are your reactions to some of the other price targets that we've seen, given the fact that you rate it at 62?
Yeah, I think I would rather, I would sort of like to go back to first principles and I would say things like the market works on disagreement. You know, it really, and it's really good that investors have, let's say, different sources of information about what do you have to believe to buy this or that version of what the stock might be worth. I think a lot, there's also a methodological difference. I have a discounted cash flow model. We have forecasts out to 2045. We're discounting those today. So, we're saying these shares are fundamentally worth $62 today. Again, probability weighted. A lot of those analyses that you're referring to, they're doing things like, oh, let's get to 2027, 2028 when they might be making money a little bit and then we're going to put a 100x multiple or something on that number. And they're doing some of the parts, you know, with Starlink and AI and so forth, but that is a different methodology that gets you, and again, I think when you're doing a multiple, you're baking in assumptions that are not necessarily being stripped out. You're making growth rate assumptions and discount rate assumptions that we always are very explicit about at Morningstar. So, I think that's as much of a compare and contrast as I'd be comfortable doing.
Fair enough. It's a polite way of putting it. Just looking ahead for the rest of the year. I mean, we've got the supply of the new shares coming down the pipeline. We've got, I mean, as you mentioned, right after the Q2 earnings report, lots more supply because of the lockup expirations, but then it's going to continue for the rest of the year. Lots more investors will be able to sell given all the information at our disposal. Do you have any thoughts on how the stock will perform over the course of the year?
Honestly, I think it could go either way and I'll tell you why. So with everything we've said right there, there's certainly a lot of items in the negative column in terms of supply of shares and small changes in people's sentiment can make a bigger move again given the smaller float. You could say a positive argument is the float will actually increase with each of these lockups expiring and depending on what investors' appetite is, you know, the price could find a new direction. And I'll say too, I expect the quarterly report to be glorious. You know, we have pretty good growth rates even for 2026 and I think if they did it kind of according to what I think of as the classical IPO playbook, they've got two quarters of numbers pretty much in the bag that they will be happy to share, right? And I'm looking mostly at those rental agreements with Anthropic and Google and the other one that are pretty nice chunks of revenue at low marginal cost. They're still spending a lot, etc. But anyway, I think you'll see some nice comps, you know, and then it might be people might be more comfortable thinking, oh, you know, AI might be whatever, cash flow neutral in 2033 or whatever the story ends up being. So I'm not excluding the possibility that there will be some good news there and it wouldn't take much in terms of, let's say, the collective appetite if the story turns positive again. So I wouldn't sit here and say it's totally going to crater. That said, there has to be more demand than supply for the stock to go up. It's again, first principles.
All right, Nicolas Owens, equity analyst at Morningstar. Very respectfully bearish, which we always appreciate. Thanks again for joining us, Nicolas.
