The Age of the Trillion-Dollar, Zero-Profit Company

In the following excerpt, Derek talks to Michael Batnick and Ben Carlson about SpaceX, Elon Musk, and the company’s valuation.

Derek Thompson: So, as I said in the open, I’m really interested in a couple trends in tech and markets right now, and they really all revolve around this one phenomenon, which is that SpaceX, Anthropic, and OpenAI, all IPOing in one year means that we’re going to get $3 trillion IPOs with a combined profit well below zero. And I think this is just a sign that we’re in a brave new world that requires some explaining. So, let’s start with SpaceX, the company IPOs at just over $2 trillion valuation, already down about 25 percent from the peak, this is a firm with no profits, enormous costs, great satellite business attached to a money burning AI business, Michael, what are investors buying when they buy SpaceX?

Michael Batnick: I’m going to answer a different question. And excited to be back here, Derek. 

Thompson: Great. Let’s do it.

Batnick: All right. Forget about what are they buying, I think everybody understands the Starlink system is phenomenal, it’s a game changer, forget about the $32 trillion TAM, or whatever they spoke about with the AI opportunity. I think for the point of view of the investor base, what’s really important is the $2 trillion market cap. Holy cow, I missed my opportunity to invest in SpaceX at a $300 billion market cap, right? Wherever Facebook came public, we missed all of that growth because companies are staying private for way longer, and now I’m being, as an index investor, you are jamming $2 trillion of a company with a lightning rod of a leader, that I potentially do not care for, and I am now his exit liquidity.

So, the story is simple, complex, and nuanced. You, the index fund investor, are not swallowing $2 trillion worth of Elon Musk, the NASDAQ 100 is fast tracking inclusion into the index. But what they are doing … And when I say fast track, usually there is a seasoning period, where a company will have to show something like four quarters of something crazy called a profit before they can get included into the index. The NASDAQ is saying, listen, we are the innovation exchange of the world, how can we not fast track and include SpaceX? The question becomes how much? And there’s this thing called the free float adjusted market cap, where they’ll not just put $2 trillion in, they’ll say, okay, how much stock actually exists for the public to buy? In the case of SpaceX, Elon Musk owns 40 something percent of the company, that will never be included in the market cap.

So, it’s not to downplay and say that the $75 billion worth of proceeds that are being raised is not a lot, because it is a lot, but you are not … So, SpaceX can be the fifth-largest company in the world by market cap, and it could be, if and when it’s included in the S&P 500, whenever that may be, it could be the 180th biggest stock. And I think the part that people got upset about this is, they came to market, they issued 3 percent, so they raised 3 percent of the company was what they issued, normally when companies IPO, it’s 30 percent. 

And so, the thing that is I think grinding people’s gears, past the $2 trillion number, it’s, hey, wait a minute, they know that there is such a gigantic amount of demand for this stock, and they are artificially limiting the supply because they want the demand to so far outstrip supply because in the lockup schedule … Which, how many shares can insiders sell over time?

There are hurdles such that if the share price is say 20 percent above, or 30 percent above for X consecutive days, then they can sell more stock to the public, they can get unlocked faster. And I know I just said a lot that’s probably confusing to a lot of people, but it’s a big story, but the headline numbers miss a lot of the nuance underneath it.

Thompson: No, one way that I recapitulate that is to say that look, most times when companies go public, they go public by issuing 30 percent of the available stock. In the case of SpaceX, they didn’t let out 30 percent of the stock, they let out 3 percent of the stock. And so, there was a pressure created by that scarcity to drive up the value of those shares, and when the value of those shares is driven up to a certain number, I don’t know what it is today, 175, 180, well, that calculates, that cumes to a $2 trillion valuation. But by only releasing a small amount of a stock that they know has enormous demand, because Elon Musk is one of the most famous people in the world, that was one way that they knew they could get this $2 trillion valuation. Now, over the long run, I think people, traders, hedge funds, institutional investors should probably think, what is this piece of paper worth? What is this share in SpaceX worth? Do we think it is worth a share of a $2 trillion company? Or when we look at the fundamentals here, are we looking at something that makes more sense as a $1 trillion, $800 billion company? So, Ben, I want your SpaceX thoughts as well. And we already talked about the famous page 11, or referenced the famous page 11 of the S1 document, which is the one that got everybody’s attention, that claimed that SpaceX had a, “Quantifiable total addressable market of $28 trillion,” that consisted of $370 billion in space-related stuff, what most people think of with SpaceX being a rocket company, $1.6 trillion in Starlink satellite communications, and $26.5 trillion in AI.

So, I do think it’s important to slow down here and say most people when they think about SpaceX, think of SpaceX as a rocket company, but when you look at what SpaceX defines SpaceX TAM as, they’re saying 95, 99 percent of the value is the future of AI business. Ben, is this best understood as just an Elon meme stock, or are you bullish on some aspects of the company’s earnings perspective here?

Ben Carlson: I think I’m more bullish on tech leaders’ ability to sell the future to people. And I think this goes back to Jeff Bezos in a lot of ways. He was the first one who said, “Listen, don’t worry about right now, worry about the future. We’re going to grow into this valuation.” And it took a while for investors to get used to that. You remember in the dotcom bubble, Amazon fell 94 percent at the end of the dotcom bubble, and people weren’t quite there yet, but for years and years, people kept going, “Why is Amazon’s valuation so high? What is it going to grow into?” And finally, the cash flow started coming and it grew into it. I think Elon Musk has taken that to another level with Tesla. Everyone who’s a fundamental analyst for Tesla for years has said, “This thing is a joke.”

He keeps issuing equity, and when companies issue equity, the current investors get diluted. So, the value of the company should go down to you. Your earnings per share is being spread among a wider set of people. And he’s been able to sell the fact that, no, no, no, this equity will help me grow the company. And that’s what he’s trying to do with SpaceX as well, is say, listen, don’t worry about right now, we’re worrying about the future. And so, if you’re a fundamental analyst and you looked at the numbers, you’d go, this is absolutely insane. Just look at the numbers, they made what, $19 billion and they’re going to be a $2 trillion company? It makes zero sense. Until you start going, well, what about data centers in space, and what about trips to Mars? And that’s where he sold enough people… Because if you look at it, you talk about the IPO, 30 percent of the demand from the IPO came from retail investors who obviously love what this guy does.

And usually it’s, I don’t know, five to 10 percent for IPOs. So, he has talked enough people, and he’s such a good showman and salesman … Obviously he’s landing rockets too, it’s not like there’s nothing going on. But I’m more bullish on his ability to continue to get investors to buy into his vision of the future.

This excerpt has been edited and condensed.

Host: Derek Thompson
Guests: Ben Carlson and Michael Batnick
Producer: Devon Baroldi
Additional Production Support: Ben Glicksman