Space Exploration Technologies Inc., or SpaceX as it is generally known, has helped jumpstart the 21st century space economy. The company's latest project is Starlink, a proposed constellation of 11,000 small internet satellites, which CEO Elon Musk says will net billions of subscriber dollars per year. Yet, even if Musk is right about the future profit potential of Starlink, the cost of building, launching, networking and managing such a system is massive. To pay for that, SpaceX is planning to take Starlink public.
An expensive endeavor
Musk made Starlink the key pillar of his pitch to investors during SpaceX’s most recent funding round, espousing his belief that it will be the profit engine that will drive the company’s more ambitious, but less lucrative, pursuits. Investors’ expectations for big returns from Starlink have helped buoy SpaceX’s valuation to its current eye-watering $33 billion.
Launching thousands of satellites is not cheap, however. While SpaceX has demurred when asked for a set budget for the project, most industry and expert analyses suggest it will cost $10 billion at least. While private markets are awash with investor and allocator capital, that is still a steep price-tag for a private company. Thus, it is not terribly surprising that SpaceX has opted to tap public capital markets, despite Musk’s well documented personal antipathy to them.
Musk has proven extremely adept at fundraising and drumming up public interest in his companies. He should have no trouble finding eager buyers for Starlink, which looks set to be spun off from SpaceX proper. Yet, while funding for Starlink may not be in doubt, its potential to be profitable certainly is.
A problem of profitability
In 2016, SpaceX estimated that, by 2025, Starlink would have 40 million subscribers generating $30 billion in annual revenues. While already a few years behind schedule, the company has not deviated from its claim that Starlink will be wildly profitable.
SpaceX has enthusiastically plugged the benefits of Starlink, especially for rural communities and areas not currently served by adequate terrestrial internet. While these markets certainly do exist, they have shrunk in number and size due to the expansion of conventional services. Such areas tend to be poorer, making them less attractive customers. Moreover, evidence has been mounting of low-earth-orbit satellites’ susceptibility to technical and environmental issues that can reduce reliability. Even Starlink internet’s biggest supposed advantage, reduced latency, is far from guaranteed.
Taken together, the various limiting factors on the attractiveness and utility of satellite internet mean that Starlink’s actual addressable market is quite small. That is hardly the end of the world. Indeed, as companies like Iridium Communications Inc. (IRDM, Financial) have demonstrated, niche players can survive, and even thrive, in the satellite internet sector. However, they do not achieve anything like the profit levels promised by Starlink.
Verdict
As SpaceX eyes an initial public offering for Starlink, it has a lot going for it. It enjoys widespread name recognition and has entered pop culture and discussions of space exploration the world over. There will likely be no shortage of investors willing to throw money at the project. As a result, I would expect this offering to be oversubscribed in short order, with a valuation built on the same lofty expectations and assumptions that garnered SpaceX its current private valuation of more than $33 billion.
A public offering will force SpaceX to disclose more financial information than it has in the past, which could result in new information emerging. However, I do not anticipate anything that could derail this particular offering. Enthusiasm for SpaceX is high, as it is for the entire burgeoning space economy. One need only look at the stock performance of another space flight company that recently went public, Virgin Galactic Holdings Inc. (SPCE, Financial). Virgin Galactic’s market capitalization has surged to $5.6 billion, far outstripping any sensible valuation based purely on the addressable market for space tourism.
In the long run, however, I believe Starlink is likely to disappoint. SpaceX has sold investors on out-of-this-world profitability. When reality sets in, it will likely bring Starlink’s valuation down to earth.
Disclosure: No positions.
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