I don't think I'm being unfair when I say that this seems unserious. Here is exactly what was reported. Quote, "Investors whom SpaceX has previously approached about financing its multi-billion dollar chip purchase said they only received a short two-page deal memo with pictures of outer space and an arrow pointing out that the company was going to build data centers, quote, somewhere in the universe." This is just an extraordinary anecdote that that is actually the pitch on a $40 billion transaction. I mean, what was your reaction?
So, to be clear, although I'm discussing all this stuff with a straight face, like if you think that SpaceX is really worth $2.3 trillion, which is where it is today, it's because you think Elon Musk is some kind of anomalous genius. And if you don't think that, you should not be in the shares because there isn't like it would be breaking all of the rules of finance as we know them.
Welcome to Prof G Markets. I'm Ed Elson. It is October 8th. Let's check in on yesterday's market vitals. The major indices fell from record highs as bonds sold off again. The yield on 10-year Treasuries hit a new 24-year high. It later cooled off following a 10-year note auction that drew solid demand. Meanwhile, minutes from the latest Fed meeting showed another rate hike is likely this year, though it may not come until December. And finally, Brent crude remained elevated around $101 per barrel.
Okay, what else is happening?
Four months ago, SpaceX raised $86 billion from its IPO. Now, it's looking to borrow even more. On Tuesday, the Financial Times reported that SpaceX is seeking $40 billion to buy Nvidia chips. $30 billion will come from investment grade bonds, and the other $10 billion will come from bank loans. Reportedly, the investors pitched on this deal got a two-page memo which showed pictures of outer space with an arrow pointing to data centers, quote, somewhere in the universe. This is not the first time that SpaceX has borrowed big. Less than two weeks after its IPO, SpaceX sold $25 billion worth of bonds to investors, which now trade at 85 cents on the dollar. Still, the stock has been on a tear this month. SpaceX shares are up about 12% over the past week. Yesterday, the stock closed down 2%.
Okay, here to break it down, we're speaking with John Foley, head of the Lex column at the Financial Times. John, thank you for joining us on Prof G Markets. So, SpaceX wants to borrow $40 billion. Kind of crazy considering they raised $86 billion just four months ago. Then right after that, they issued another $25 billion worth of debt. And now they're saying that's not enough. Now we need more. Now we need $40 billion. Let's just start with your initial reactions.
Right. Well, SpaceX already has quite a bit of cash on its balance sheet because it did this IPO. It raised debt shortly afterwards. It has something like $90 billion. But what Elon Musk wants to do is build, he says, 10 gigawatt worth of data centers by the end of next year because we measure these things in gigawatts. And a gigawatt costs, very rough numbers, about $50 billion to build. So that would be $500 billion. So unsurprisingly, he needs more money with which to do that. So it's not totally surprising that he's now coming to the market and saying, 'Can I have some more money?' He absolutely needs that and much more if he's going to meet his goals of data centers on Earth, in space, or anywhere else in the universe.
So $500 billion, I heard that correctly, right? That's how much he would need to raise in order to achieve those goals.
Yeah, that's like taking a very rough $50 billion for a gigawatt worth of data center and his plan to build 10 gigawatt by the end of next year.
So I guess the question, and this seems to be reflected right now in the bond markets, especially in the credit default swaps markets, which is like where is the money going to come from? And this is something that we had been talking about when they first went public, which is that in order to keep up with their extraordinary costs, they're going to have to raise huge amounts of money. We're already starting to see signs of it. They raise the IPO money, then they go and issue the debt. Now they want to issue more debt. And I guess the question is like, how are they going to keep doing this? I mean, if they're not generating the profits, do they just raise half a trillion dollars worth of debt? So that is the very important question, is how are they going to pay for all this? How are they going to service this debt?
Of course, they do want to make profit. SpaceX is already making a profit from its connectivity business, from Starlink. And the idea is supposed to be that because data centers are in such hot demand that you can get your investment back very quickly. So the CFO of SpaceX said quite recently that they can get payback on a data center investment in less than a year. So if that remains true, then as you're building data centers, you're also renting them out at high enough rates that you can make your money back. Of course, the question is, can you actually build them in time? What happens to the price of data centers in the kind of rental market in the meantime? But Musk's bet is that he can do this faster than anyone else. So while everyone is scrambling to find space in data centers, he'll be able to bring his online and he'll have no problem, this is what investors are being asked to believe, in renting those data centers out at very high rates to people like Anthropic, to Google, to anyone else who needs them.
The idea is building data centers quickly, but also the idea is putting data centers in space.
And to me, those two things seem to be completely at odds with each other. You can tell, I mean, you can see my face, I think that this is a little bit ridiculous, but I'm just going to read you a quote from the Financial Times report. I don't think I'm being unfair when I say that this seems unserious. Here is exactly what was reported. Quote, 'Investors whom SpaceX has previously approached about financing its multi-billion dollar chip purchase said they only received a short two-page deal memo with pictures of outer space and an arrow pointing out that the company was going to build data centers, quote, somewhere in the universe.' 'How are we supposed to take that to the IC?' one of the people said, referring to the in-house investment committee that approves transactions. This is just an extraordinary anecdote that that is actually the pitch on a $40 billion transaction. I mean, what was your reaction to that story?
So, to be clear, although I'm discussing all this stuff with a straight face, like if you think that SpaceX is really worth $2.3 trillion, which is where it is today, it's because you think Elon Musk is some kind of anomalous genius. And if you don't think that, you should not be in the shares because it would be breaking all of the rules of finance as we know them. So to hand out investors a two-pager with some pictures of space on it is kind of wild. It's not like that is going to be the final documentation for this debt issue. I think what we're looking at here is some early communications with would-be investors that seemed very back of the cocktail napkin. That reflects the fact that Musk kind of shoots first and asks questions later, or answers them later. And people give him money because he is Elon Musk. When they actually get to do this issue, which they're talking about it closing next year, there will be something a bit more concrete than that. But it will still be based on this idea that his moonshot, literally moonshot, putting stuff into space, putting data centers into space, is viable, which a lot of people think, a lot of scientists think it is not.
But it does seem to speak to this issue that seems to be kind of pervasive on Wall Street, specifically when it comes to SpaceX, where everyone seems to be shooting completely from the hip. I mean, it's not just this two-page deal memo where they're like, 'We'll just do it. We'll put data centers in space. Don't worry about it. We'll figure it out later.' But we see this in a lot of the price targets from the investment banks as well. Morgan Stanley putting a price target at $300 a share. I mean, Raymond James coming out and saying that the company is actually worth $10 trillion.
And my little conspiracy theory about this, which I'd like to get your reaction to, is that if they know that this company is going out to issue hundreds of billions of dollars of more transactions, whether that be more equity issuance or more debt issuance, they also know that those are fees that they can profit off of. And they want to be the banks to go out and help with those transactions and issue that debt, issue that equity. So it seems to me that maybe there's a little bit of a conflict of interest here where there's so much money in the pipeline here that they don't care about the numbers and yeah, they'll just accept a two-pager with pictures of rocket ships and pictures of space.
For sure. And like the whole premise of sell-side bank analysts' work is that you are being asked to believe that there is a Chinese wall. That means that they're not writing from a place of the fees that their investment bank is going to make. Like we, you know, they say that very earnestly. If you don't believe them, then you should take all the analysis that you see from them with a pinch of salt. And as you said, these target prices are really high. When you look at how the target prices were derived, in many cases, you have research notes that are dozens of pages long, but at the end of it, they extrapolate what they think revenue will be next year and slap a multiple on it, which does not to me seem very rigorous or realistic. It seems to me like a lot of them started with the answer and worked their way backwards. But there you have it. Dozens of pages of information and discounted cash flows and whatever you like. So do your own homework, I guess, is the moral of that story. If you believe Musk is a genius, you're not reading that note anyway. You're just buying the shares or whatever he tells you to pay.
I'm not sure anyone is reading these notes, either the bears or the bulls.
I just want to point to what's happening to the SpaceX credit default swaps, which rose to 194 basis points on Wednesday. They were trading at 110 basis points in June. So essentially what's happened here is the cost of insuring SpaceX's debt against default is suddenly getting very expensive and the debt itself is also getting sold off as well. So it seems like the bond markets are starting to tell a kind of a different story, which is they are very worried about the debt. What do you make of what we're seeing in those markets?
I think they're a bit worried about the debt. So the credit default swaps are, as you said, those spreads are rising, and that's because people look for something they can use to hedge against this all going wrong. The bond prices have also fallen more at the long end. So the 50-year bonds are trading at something like 85 cents on the dollar. The 5-year bonds are trading much closer to, I think it's like 95 last time I looked. And that's not a sign that people are, you know, desperately worried, but it is a sign that they're aware that this company is taking on much more debt. Now, the idea is that its cash flows are also going to grow very quickly. You know, I think its revenue is expected to quadruple. Again, we're back to the analysts here, but expected to quadruple by the end of 2028. If that happens, then like these debt numbers start to look less scary.
But certainly, and the other thing I should point out is SpaceX at the moment, for whatever reason, has an investment grade rating. Were it to lose that investment grade rating from the credit agencies, then creditors would start to worry because the debt would become much, the yields would go up a long way and it would become much more risky. So we should definitely be looking at the creditworthiness of SpaceX. At the moment, the market's not sending out a distress signal, but it is saying this company's getting riskier by the minute.
What do you make of that investment grade rating? You said for whatever reason it has it. Do you think there are reasons it shouldn't?
Again, much ink has been spilled by credit rating analysts to justify those investment grade ratings. They're based on a lot of, you know, on the idea that he'll do a lot of what he says he's going to do. Also, that Starlink is actually a pretty good business. But obviously those ratings are up for grabs. Like, they get reviewed. If investors don't believe the ratings, then that's a problem for the ratings agencies. So it's not in their interest to stretch credulity too far. They do have a lot of people in these financial markets have a lot of faith in him.
It is true that the Starlink business and the connectivity business is a really good business and also profitable and has completely dominated that market. But it does seem as though this company isn't about Starlink and it isn't even about spaceships anymore. It's about data centers. And they spent more than $18 billion on capex last quarter and it's all going into these data centers. So I mean, do you struggle as I do to see arguments as valid that are centered around this company being, you know, at least the price being justified by the fact that the Starlink business is strong?
I mean, it's not even really about data centers. If you looked at their IPO filing, they had a $23-ish trillion total addressable market of which $22 trillion was enterprise apps and really they don't have any enterprise apps at the moment, really Cursor, I guess, the coding tool. Data centers are what's happening now and data centers are actually where the revenue is. So realistically if we want them to generate cash, renting out data centers to AI labs is not a bad way of doing it. It's just that that revenue is very early stage. So he needs to show that he can build the stuff, he can rent it out. Starlink is not the core. It's not the future of SpaceX, and he's not pretending it is. I mean, the future of SpaceX is colonies on Mars. Like, that's a whole different conversation, right? But it's not unwise of him if he thinks he can build data centers quickly to do that now and try and rent it out to people who are more desperate than he is.
Yeah. Let's just take a look at the stock. It's up around 10% in the past month. I mean, I had a three-part prediction for SpaceX. Part one was it would explode on the IPO. Got that right. Part two is it would then get cut in half. Got that right. And part three was that it would start after that point to, or it would continue to slide as the lockups expired. Got that wrong. It's risen to $167 a share from its low of 108 in August. It has exploded back up to, as you say, $2.3 trillion market cap. What do you make of the rise in this stock, which from what I can understand doesn't seem to be happening on the back of much news? It seems to be mostly sentiment.
There's been a tiny bit of news, right? There have been some launches that were quite successful. So the Starship project, like he had his first orbital flight for Starship, which is important because that's going to be key to getting lots of stuff into space and getting his spaceships back again. I'm not totally surprised that the lockups didn't have much of an effect. I know there were a lot of people who were watching this very closely, but that was pretty well telegraphed. I mean, we knew that was coming. There's no secret about the fact that there's going to be liquidity overhang. I expected, well, I probably expected it to go up and then to come down below the IPO price.
What I would say is that there are a lot of people who want this to stay aloft. As we've discussed a lot of them in this call, a lot of vested interests on Wall Street want to see this stock continue to go up and Elon Musk is a great generator of fees for Wall Street. So the analysts have lots of incentives to pump him up. He also has a really big fan base. Look at Tesla. Like, I have been arguing for so long that Tesla's valuation is not based on any real fundamentals and yet if I'd bet against Tesla, with some periods that are exceptions, I would have lost money. So Musk just has this ability. The problem is also that others now are going to start to think that they have the same magic charms as he does and they will be wrong.
