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Welcome back to the Rundown interview edition. Today I am talking to Nicholas Owens, an equity analyst over at MorningStar. Nicholas covers SpaceX, which just had a record breaking IPO last week and the stock continues to surge. At the time of this recording, SpaceX stock is trading above $200 a share. But Nicholas believes the actual value of the stock should be closer to $63. So in this conversation we get into why Nicholas is so bearish. How he actually got to that space in general is overrated. And also take a look at SpaceX's AI strategy moving forward. This was a really good conversation. I think you guys are going to really enjoy it. So let's get into it. All right, guys, Today we are talking to Nicholas Owens, an equity analyst from Morningstar. Nicholas, welcome to the Rundown.
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Thanks for having me say I'm super
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excited for today's conversation. We're talking SpaceX. You know, your report before the IPO about SpaceX caught my attention. It caught a lot of people's attention because in your report you said that the, you were assigning a value of 63 a share to SpaceX. Now, since the IPO on Friday, SpaceX stocks is just, I mean, the stock went up 19 on day one, 20 on, on Monday. I think it's up another 10 today on Tuesday, the, the day we're recording this. Did you expect this to happen after the ipo, despite your bearish outlook, would you believe?
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B
Yes, I think the real tension here is between what Morningstar would call a intrinsic value or fundamentally based valuation of the stock, which I can talk about, and let's say the market for the stock, like supply and demand, the, what you see in the, in the stock chart. I had every reason to believe that there's a lot of, you know, enthusiasm for the stock, for Elon Musk companies in general. And, you know, the way the IPO price was, was set with a relatively small flow. I fully expect it to sort of stay high here for a while and we can even talk really about what the differences are between what I view and let's say, what the market seems to be pricing in. But yeah, the market was prying for this stock to go up. That doesn't surprise me. But the real tension is what are investors buying or what are they paying for at these prices and what's reflected in the expectations, if that makes sense.
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Well, what I'm surprised though is I'm with you. I kind of felt the same way that the stock would rally post ipo, because a lot of factors here, the Small float is one of them. But the fact that like, it's been kind of like a smooth ride up. Right. It wasn't like a figma style where you had a jump, I don't know, 50, 60, 70% in the first day. It was like 20%, 19% on the first day, 20% on the second day, just slowly, slowly going up. And the fact that it wasn't herky jerky is kind of surprising to me. No, no big drop on the second day or third day. And it's just, it's kind of like a rocket ship up.
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Oh yeah, a rocket ship. You got it.
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A
Yeah.
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I mean, I honestly, I guess we've sort of reached the limits of what I would consider my expertise in terms of, you know, looking at, you know, volatility, weighted float and volumes and stuff. That's kind of not my, my area. It may get choppier, it may stay smooth. You know, I think the underwriters are active in, in the sort of days and weeks after the IPO and kind of managing the, you know, what they call an orderly market because they're still moving some of those shares around. So I, I guess I don't, I, I think the, the, the, the, the story for me more long term will be where, where will value shake out in the next year? You'll have potential dilution as the lock is, lockups expire. You'll also have index funds buying it because it's a big piece of the market now. And so we'll see.
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Well, let's talk about the, the Math behind your $63 number. That was making the waves. You said this was a mathematics more than skepticism. Now we don't need to get into the full DCF model here, but can you kind of break it down? How did you, how did you come up with the $63 number?
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Sure. And I think it's really, I really want to emphasize that it's, I'm not like disagreeing with the market about the potential for this company to do amazing things and you know, even, let's say, unprecedented things. Looking at the rocket business and Starlink, you know, the way they developed the Falcon rocket and its reusability is incredible. And they literally change the math on what you'd even consider to be feasible to launch into space or, you know, the dollars per kilogram to launch is, is radically come down because of SpaceX where the issue is. So the way we do it is I valued, let's say the unknown here really is the AI piece of the business that they Acquired, you know, you had a rocket company and satellite company that acquired the AI business from, from Elon Musk in February. And they're, they're heavily investing in that, you know, which is part of kind of the wider AI theme. People investing tens of billions of dollars in infrastructure and servers and stuff. And basically we look at that as unknown outcome. Right. So will they succeed? The biggest project on the, on the books is putting data centers in space. There's a whole debate about whether that's even possible from an engineering point of view. People talk about the radiation or cooling. I've actually become convinced that on an engineering basis it's doable. I think they have SpaceX has a video showing kind of like a mock up or a prototype and they can leverage some of the same tech that let's say that they've developed for Starlink. What is unknown to me and where we modeled a handful of different outcomes is how commercially viable or competitive will a data center in space be compared to a terrestrial data center? The way I interpret it is the company has a cost advantage in its ability to put stuff into space. And they kind of rinsed and repeated that many, many, many times, many more times than any competitor. And so there's a possibility that they could have a data center in space that has an operating cost, slight edge compared to terrestrial because the solar energy is free and the cooling is free. So let's sort of leave that as the depth of the science that we would get into. If you, so if you believe that and you believe that it's compelling, let's say from a financial point of view, that's one scenario that we modeled. And I think that's the scenario that the market is assuming is totally true. And that's where you get to the, the, you know, $170 on the first day and 200 something today as a share price. We've, we valued that scenario at $154 a share. The problem is it's not 100% likely to be that way. Right. So the two things that need to happen are starship, the giant new model rocket, the top part of that has to be reusable in order for them to launch all these satellites. They have put in a permit request for up to a million data center satellites, which I think is a bit high, you don't need that many for it to work. But thousands of satellites, they need to launch these like hundreds of launches a year, like more than one a day. And that requires the starship to be able to relaunch quickly, not like after six months having all the tiles replaced or what have you. And so that's not proven. They just did a test run of Starship. They didn't reuse the top part portion. And so we'll see in the next year or two how the engineering plays out. I give them the benefit of the doubt that they can do it most likely, but it's not baked in as a certainty to my scenarios. And then the second piece is whether data centers and space will be cost effective. Again, I'm assuming they're doable engineering wise, but that's how we get to the $63 is we're probability weighting this outcome against other scenarios where the data centers may not be cost compelling or where Starship is less reusable less frequently star. So I hope that helps kind of put it in context.
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Yeah. So from my understanding, it's like you're thinking best case scenario, right? Everything works like the starships work, which they're still having some engineering issues there. But let's assuming they get that figured out because they have historically gotten this stuff figured out, let's assume data centers in space works. Let's assume, you know, all this works, they overcome the engineering challenges. And you're assigning that $154 share value and the way you back up back down to 63 is by assigning each one of those segments a percentage of actually happening, right?
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Correct.
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And that's how you come up with a 63.
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Yeah. And the real problem, you could say, you know, that lowers these percentages is that the two things have to happen. Starship has to be reusable and data centers in space need to be compelling. So the kind of combined probability, the way we looked at it, was only 7% for that best case scenario. And if we learn something tomorrow, which I don't think we will quite so soon, but if we learn more about either of those, I can change the percentages and that would move my valuation. But in reality, kind of just being honest, it's still even at 154, that's still meaningfully below the market price. So I think you have people also pricing in kind of other, you know, moon shot, Mars shot, you know, long range projects as, as added value to the, to the, to the company that, you know, again might work out but aren't a solid 100% probability in my book.
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When you guys were going through this exercise, I'm sure it was, you know, you guys were, you know, digging into the stuff when was there a conversation like maybe we need to add a coolness multiple.
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Right?
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Space is cool. People want to get into the cool industries. And then also an Elon multiple. I mean, obviously, like Tesla is a great example. People have been calling Tesla overvalued for a decade. It's still trading at pretty insane multiples compared to the rest of the market. Was there that conversation, like, maybe we got to add in a little coolness multiple here?
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B
I mean, did we talk about that? Yes, but, but, but, so, but no, there isn't like a line item in my model that says cool, therefore, you know, or whatever. And, and that we don't really, we don't really use multiples to value stocks. And, and that is one of the disconnects. Right. So, so the, the, our valuation is meant to, to measure what the present value of the free cash flow to the firm is, full stop. And I do my best to model in this case a range of scenarios and weigh them into what I would call the most likely outcome or the set of most likely outcomes. And in the long term, we believe that stocks tend to arrive at those fair values. You know, obviously we will have new information over time as well. I'm not really in the business of trying to guess what the market will pay in the next minute or hour or day. That's going to be where these multiples and, you know, the Elon premium and all those factors will come in. I will say this, though. I tried to reflect some of that in these percentages and then I would say I would give any other company lower probability of success for these projects. Right. I mean, again, I'm trying to.
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So it is built in essentially in your analysis because of the historical President
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Elon, to be honest, like, not to pick on any one competitor or another, but another rocket company that said the same stuff. I would say maybe 0% probability of that upside scenario. See what I'm saying?
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Yeah, yeah. And speaking of just space in general, see, my personal opinion is just, I feel like space is just overrated as a whole. Right. I think, I think it's just, it's still so unknown and there's all this like, like talks of. Obviously data centers in space has gotten a lot of hype recently, but there's also like talks about mining on the moon and this and that. And to me it's just everyone's throwing out all these crazy tams for space. And again, I think it also plays up to like the sci Fi factor of it and it kind of plays to people's imagination and especially retail investors. So I think that is all overrated, and that's also baked into like the premium that SpaceX is trading at right now.
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Yeah, I hadn't thought about the, this, the, you know, no pun intended, space being an overrated space. I looked at this company, particularly with its AI venture, but then also the longer term goals, you know, putting a city on Mars or mine on the moon, those are, let's say, debatable value propositions. But again, I think this is the company best position to go after that. And the way I really modeled it is essentially as an infrastructure play, like, almost like building the railroads, you know, 130 years ago, putting that infrastructure and the supply chain in place to be able to do that. And it very much hinges on starship being able to go, you know, there and back again many times, etc. It's a, it's a, it's a very kind of ambitious and you know, fantastical project, but here it's happening. You know, 15 years ago, did we think there'd be reusable rockets with boosters landing, you know, two minutes after launch? No, but there they are.
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Yeah. And don't get me wrong, I'm just with you, like, I, I feel like the technology is incredible, the progress, I mean, what they're able to do, catching the rockets with the chopsticks, I mean, it's absolutely insane what they're able to pull off. But I'm, to me, I'm just like, even if they're able to dominate a hundred percent of that market, like what is the actual, like business upside to for just, you know, dominating rockets? Like is it actually the crazy tan that people are projecting? I'm a little skeptical about that. But what, but what I wanted to ask you about, speaking about rockets, is like the StarLink part of SpaceX's business, you know. Your report, again, I recommend everyone read your report. It's fantastic. You estimated that the TAM for Starlink is closer to 129 billion versus what SpaceX is estimating, which is like 1.6 trillion. That's a pretty big difference. So can you break down where that gap comes from?
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Absolutely. And yeah, so tam, the total addressable market is the way I interpret those numbers. And it's interesting actually that the smaller of the three that they put in their registration statement was for the rocket piece, right?
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Yeah.
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So the 1.6 trillion addressable market that they list for the Starlink business, that's the 1.6 trillion, is pretty much what every human spent on telecoms on Earth. This Year. So to say that, that, so what you, what I interpret from that, like, like you said, it's as if they're saying we could go get or dominate, you know, 100% of this market. And so I actually interpret like addressable is sort of like in air quotes, like, like in theory they're in that market for sure. They are playing in the mobile, telecom, broadband and wireless market. That's kind of the service that Starlink provides. But we did an independent assessment of what we think a more realistic or addressable, not in air quotes, market opportunity for them is. And here again we're trying to give them some benefit of the doubt given kind of these multiples that are being thrown around. And we're saying they have a great niche, right? There's stuff you can do with Starlink connectivity that you can't do with ground based broadband or wireless and there's pretty big market for that. And then we interpret also this most likely scenario is that they can sign partnerships with wireless carriers and use the wireless carrier spectrum in most cases, which is an important solution to a constraining problem that they have, which is radio spectrum is the limiting factor to get the information up and down from the satellite. So that's where we get to the 129 billion global opportunity which, and we even give them, I want to say it's in our 10 year forecast they get to some 45% of that market which is pretty aggressive. But that's in part because they kind of define some of that market, these niche uses that they, they are the most credible provider and they're way ahead in terms of the number of satellites that they have up there to be able to deliver that connectivity. So, and then similarly on this, on the AI side, their TAMs is ridiculous. The 20, 25 trillion dollars, what that is, is like a quarter of world GDP. So they're saying AI is addressing basically people's work, right? Like what's the value of a quarter of people's work? We're going to address that. Maybe, maybe AI will address that, but it doesn't mean it's going to turn into $25 trillion of revenue to this company. Right. So it's like an intellectual statement. Here's, here's the value of the thing that the AI is potentially like, you know, augmenting or displacing one way or the other. But again does not in any way equate in my view to that being the top line or bottom line figure that you'd expect to put in this company's. Income statement.
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I like how you broke down the Starlink stuff and I want to talk more about AI, because to me, that obviously is the biggest unknown. I think we kind of have a good feeling for where SpaceX is when it comes to their rocket business, where they are when it comes to their Starlink business. They're way ahead of everybody else. The AI stuff is like the biggest unknown. They're starting to pivot a bit, making some interesting moves. What is your take on their kind of pivot to being a NEO cloud company? You know, signing these data center deals with Google and Anthropic, and then also beyond that, their, their decision to acquire Cursor, which broke earlier today.
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So background for that or my view. So yeah, they're active, let's say, across the sphere of things that are going on in AI. They have their own LLM Grok, they have the server farm, they are planning to put the GPUs in space, et cetera. I primarily view their business plan as, let's say, extending what they did between rockets and Starlink potentially into space. And so that kind of the main current of how we look at this business is as an infrastructure, like AI infrastructure for humanity or for the future. And renting out the capacity that they've done to Anthropic to Google is very much a validation of that. So they're saying, we built this amazing data center, we can use it to train Grok, we can also rent it out. And so in a way, I'm indifferent in my forecast between whether they get more subscription revenue for Grok or more rental revenue from Anthropic. They're one of the handful of AI companies that own that infrastructure. Anthropic does not. Right. They don't own a data center and so they have to go out and rent it. And that, that, you know, that's, that's just a, let's say, I think a validation that SpaceX through its AI division is one of a small number of the AI companies that owns its infrastructure. And this, this vertical integration, owning all your stuff, you know, owning the whole stack is very much a part of the SpaceX strategy. And they, they kind of proved it out in the original rockets and satellites business model in that they use their own rockets, which are lower cost than anyone else's, to launch the Starlink satellites. And they do so sort of frequently. I mean, the vast majority of the payloads that they brought up are their own satellites and they sort of, they charge themselves like the, you know, the friends and family discount for. Right. You know, they get it at cost, so to speak. So they have an even bigger cost advantage in that market, which we, we give them a narrow moat rating because the, the characteristics of those two businesses are so strong and they're so far ahead. And that may in one scenario kind of extend out into AI. If, if the GPUs in space with free solar heating and arguably free cooling is incrementally cheaper than the data center on, on the ground. That could be, that could be the way that this business plan sort of proves out and extends the same strategy of vertical integration. If that makes sense.
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Yeah, that makes sense. And you can kind of see that, you know, you can kind of see that the pathway to get there, which I think is what a lot of people are excited about. Like it's not just like a fairy tale anymore. Now it's like, okay, I can kind of see this making sense based on everything that SpaceX has done.
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I agree.
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And then, so now following up to that, the Cursor acquisition that was, that was confirmed this morning, SpaceX is going to move forward with their 60 billion dollar acquisition of Cursor, which is a AI coding agent and they're gonna, it's an all stock deal too, which I think is very important. How do you, how do you see that? Do you think that's going to be a game changer for them to finally make some inroads into the enterprise, enterprise side of the side of the AI market?
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I, I wouldn't say game changer. I mean, I, you know, so two, two things, yes, they are using equity to do the deal. So would I.
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Right. Yeah.
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That's the, let's say, most efficient currency for them to use right now. Especially if you believe as I do that it's overvalued. That said, so that, I mean, 60 billion is almost as much money as they raised in the ipo. So it just gives you a sense of the size of the deal.
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It's big.
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And yeah, so the, I did model a, the idea. So there's kind of a, you know, an outlay and some dilution. What's the upside? I see that as probably making GROK more valuable and raising their ability to have more of that enterprise type subscription revenue over time. And that's something that, and I think I view it primarily as like bringing that team on board real quick. Right. So some people would call this an acqui hire. So it's, it's getting those people who know how to do that, you know, ramped up real fast. And yeah, this company likes to move fast and so here we are whatever a couple days after the IPO and they're going for it. So not ultimately a shock because they had already inked the agreement a while ago and but I, I doubt that it'll be a huge game changer but it could add value to, to the, the Grok platform.
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Yeah, I think, I think people are starting to see like the vision come through now where it's like okay, this is not just like a space company anymore. The AI started selling side is somewhat serious beyond just it being like a Neo cloud player. It could potentially kind of, you know, especially if they can kind of, you know, we'll see what it does to, to grock this acquisition of Cursor. I got two last questions for you. So you know markets are going nuts right now. Stock is trading above 200. Is when is gravity going to impact this stock again, no pun intended but is it going to come back down to Earth? Are you think, are you thinking weeks? Is it months? Are you waiting for a specific moment? Is it a, is it a star? Is it a starship? Sorry, Starship test launch? That doesn't go well. Is there, what's. What is it going to take for this stock to kind of come back down to reality?
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I have to say I do not know.
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Right, Okay. I wasn't sure if you were keeping an eye on like a star starship thing or maybe like something like that.
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Well, I'll tell you exactly what I'm looking out for. It really is those two huge, you know, question marks that that would change the probability weighting of my valuation. One is showing, demonstrating let's say the reusability or the rapid reusability of starship, which I think is possible but not in the bag yet. And also some data that would show how cost competitive a data center in space would be compared to terrestrial. Those are really the two factors that will drive my valuation. And here's the thing, I think that people have already priced those in. So if they, if they say hey Tada, we have a reusable starship, should the stock go up? I don't think so because I think they already believe that. So you know, and then on the kind of other side of the scale, over the next year most of the rest of the shares could become available for sale by, by the current owners, the insiders who bought it as a private company. That dilution or I mean it'll increase the float, it'll increase liquidity, some of the index funds will also increase their allocation because they're float adjusting their, their holdings. But you know, as long as investor appetite remains high, that shouldn't matter too much. But other IPOs I've covered, you see this potential selling of insiders is kind of ends up being an overhang on the stock. You know, look at standard Arrow is one that I cover. Carlyle is exiting their position every, you know, couple months and that, that's, that weighs down the stock. So that's a scenario I think people should be aware of. And then you know, Purser, they just issued 60 billion in equity. There could be other deals like that. Maybe they're going to go out and buy Tesla, probably issue equity to do that, you know, so those are, those are dilution type events that investors I think should, should keep in mind. Yeah, you don't have a say about it because the chairman has 85% of the votes.
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That I was actually going to bring that up was I forgot to mention that like there's going to be forced buying because of the index fund inclusion, the fast track index fund inclusion. So you have that as buying pressure. But then obviously like there's going to be this. Once the six month lockup expires, you're going to have potentially a ton of insiders ready to sell the stock. So how is that going to balance out in the market? You brought up something that I wanted to end on the Tesla SpaceX merger. A lot of noise about it. If you were to assign a probability to that, that it actually happens in the next 12 to 24 months, what would you put that out right now?
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It seems highly likely to me.
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Yeah.
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You know, for, for I, and I think there's some kind of sound, let's say operational reasons why they want to share resources and be able to like move people around and work on the chip fab and all these things without being kind of like accused of diverting resources or whatever. So if you put it all under one roof, what, what today, what they have to write up as a related party transaction, which sounds kind of, you know, squirrely. It would just be like, hey, we're doing this project and it's really cool.
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Yeah.
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And, but the question mark and me and the analysts who covers Tesla for Morningstar, Seth, we wrote a piece kind of analyzing these scenarios. The open question would just be like at what type of deal terms for Tesla shareholders? Tesla shareholders have a little more of a say because Elon Musk only controls about up to 20 ish percent of the votes there. So they'd have to Kind of like make it right for Tesla shareholders, which
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there's gotta be some overlap there too, right? With like the Tesla.
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It's some of the same people.
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Sure, yeah, yeah, that's gonna be very interesting. Nicholas, I really appreciate you talking, talking SpaceX with us today. I highly recommend people read your report. You had a couple great pieces on it. I read through all of it, really good stuff. You break down the math. Not super difficult to follow. So if anyone's out there that wants to learn more, we'll put a link in the, in the, in the show notes for people to check that out. And again, we appreciate you coming on and you got to come back on in six months so we can see where we are here. And, and, and who knows, maybe the stock will be trading closer to $60.
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We'll look forward to the checkup. Thanks so much for having me, Zade.
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A
Appreciate it Nicholas. Have a good one. Well, all right guys, hope you enjoyed that conversation with Nicholas Owens. Do I appreciate Nicholas breaking down the math behind why he's bearish. You know, it's going to be really interesting to see what happens to SP SpaceX stock once some of the IPO hype starts dying down. Especially what's going to happen after the six month lockup period that allows insiders to start selling. The other thing to watch out for is the SpaceX Tesla merger. I mean, I also think that it's likely going to happen sometime in the next year or so. Let me know what you guys think. Are we being too bearish on SpaceX? Do you think that SpaceX will merge with Tesla? Drop your thoughts on Spotify and YouTube and while you're at it, consider leaving us a five star rating as well. All that engagement really does help us out and it helps other people find the show. By the way, if you're new here, just an FYI, we post an episode every single day throughout the week breaking down what's happening in the market. So if you're not subscribed yet to the channel, definitely get subscribed. Especially with everything going on in the markets right now. Thank you guys again for listening, watching and commenting. Shout out to Mike for all the work behind the scenes and we'll see you guys back here tomorrow.