Reading the Tea Leaves (Ep.6) – SpaceX: Growing Like a Rocket but Its Valuation is Stratospheric

Chris Zand: Hello and welcome to this edition of Reading the Tea Leaves. I'm Chris Zand, Managing Director of Private Client at Osterweis Capital Management. This series focuses on recent developments in financial markets and one of the biggest storylines right now is the IPO of SpaceX, which occurred on Friday, June 12th. It was the largest IPO ever with $75 billion in proceeds and now a $2.5 trillion valuation as of today, meaning it's going to have a significant impact on the market just by virtue of its size. The reason for so much enthusiasm about this company has to do with the fact that it's a set of several very unique businesses with significant growth potential, including Space division, the Starlink division, and the AI division, all of which are led by Elon Musk. I'll discuss each business with members of the Core Equity team, including Greg Hermanski, Nael Fakhry and Jasmine Shen, and we'll conclude by explaining why we're deciding not to invest in SpaceX at this time.

So to get things started, Greg, can you please discuss the Space division?

Greg Hermanski: Absolutely, Chris. At the core of this SpaceX story is its $4 billion Space Launch business, which is the key enabler of almost everything else they do. Historically, launch providers operated at a cadence of five to ten launches per year. Last year, SpaceX completed 170 launches with roughly 70 to 80% of those supporting their own internal demand. That level of capacity creates a powerful flywheel, lowering costs while increasing the density and scale of its broader space ecosystem. In the launch business, cost advantage is critical. By reusing the lower stage of its rockets, SpaceX has driven the cost per kilogram down over 90% from historical levels while driving gross margins up to over 65%. Looking ahead, Starship is the next step function for SpaceX. Starship is a new launch vehicle that is designed to be much larger but fully reusable. That should further reduce costs and significantly expand to capacity, enabling SpaceX to deepen its competitive moat while increasing the value of its adjacent businesses.

The bottom line is that SpaceX's low cost, high scale launch capability is already a structural advantage. With a successful launch of Starship, SpaceX could meaningfully extend that lead.

Chris Zand: Thanks, Greg. Fascinating. Nael, let's turn to you next and discuss the Starlink business.

Nael Fakhry: Sure. Starlink is a pretty simple business to understand. It's also by far the most profitable business within SpaceX. The division uses its unique low earth orbit satellite network to provide internet globally as well as mobile service in about 30 countries. The company right now has about 10 million subscribers and that number's growing pretty rapidly. Ultimately, we think Starlink is really going to play more of a role of generating cash to help invest in and grow the other two divisions. So right now, if you look at the financials, you can see that Starlink is going to generate over $13 billion of revenue this year and that accounts for almost 70% of SpaceX's revenue, so it's the overwhelming majority of the revenue of SpaceX. And the EBITDA margins for Starlink are almost 65%. So this is a very highly profitable business. Even if you account for the CapEx required for the business, Starlink generated about $3 billion of free cash flow last year.

So again, simple business to understand, it's one that'll generate cash and be used to invest elsewhere to grow both AI and space.

Chris Zand: Thanks, Nael. Very helpful. Jasmine, let's turn to you next and discuss the AI business.

Jasmine Shen: Sure. The AI business is actually the newest piece. It came together this February when SpaceX acquired a social media platform X and xAI. In '25, the business generated $3.2 billion in revenue in advertising and AI against an operating loss of $6.4 billion. Surprisingly, this is actually the most capital-intensive business with roughly $13 billion CapEx in '25, more than half of the company's entire CapEx budget. Most recently, SpaceX began to monetize its investments by leasing out this spare compute capacity to Google and Anthropic, which will generate about $26 billion in annualized revenue through mid-2029. We viewed this as essentially a GPO rental business, which faces intense competition from other new clouds and hyperscalers and is expected to continue to require significant capital investments going forward. Over the very long term, SpaceX also wants to build an in-house foundary called the Terafab and put data centers in space.

While potential opportunities are vast, these are still highly uncertain ventures with significant technological hurdles that we are unable to underwrite with any degree of confidence today.

Chris Zand: Thanks, Jasmine. That's great perspective. Well, clearly we have a set of unique businesses with diversities and potential. I'd be curious to understand what led to our decision not to invest in SpaceX at this time.

Nael Fakhry: I can take that, Chris. I'd say that for sure it has a very unique set of businesses. They're real competitive advantages we laid out, but SpaceX is burning through enormous amounts of cash and there's no clear path in our mind to getting to positive free cash flow generation right now in addition to the big technological hurdles that lay ahead. Governance is also an open question. Elon Musk is in total control of the business. Obviously, some investors love this, others, and we put ourselves in this category, are more concerned about having one person in total control of the business. And from a valuation standpoint, at over 50x next 12 months' consensus revenue, a lot has to go right for SpaceX to justify its current $2.5 trillion valuation. Just for context, the NASDAQ, which is a tech-heavy index, trades at about 5x. So given the lack of near-term cash flow generation, the governance questions, and the valuation of SpaceX, it just doesn't fit our quality growth framework despite owning and operating a really unique collection of businesses with a huge set of growth opportunities ahead.

Chris Zand: Thanks, Nael. That's great perspective and helpful to hear it within the framework of quality growth. I'll look forward to continuing to monitor this business alongside all of you and look forward to our next session of Reading the Tea Leaves. If any of you at home have questions about SpaceX or would like to discuss your portfolio overall, please reach out to us directly. Thank you for joining us today.