Chris: Jeff, I'm excited about the conversation today because we don't often have as much buzz in our industry with headlines and newspaper articles and just people talking about something going on. It is June 8th today, and on Friday, something pretty exciting that a lot of people are talking about is the SpaceX IPO.
Jeff: Everyone is talking about it.
Chris: I was taking my kids for a walk the other night, you know, right after dinner, and a neighbor came and said oh, the SpaceX IPO, you know, it's $135 a share, is that a good price? And then I had friends text me over the weekend because they were trained to think that a $10 stock is cheap, a $100 stock is okay, and a $1,000 stock is expensive. But that's not how you actually value a company. And the news isn't really touching on this as much as they should. It's a phenomenal story, lots of excitement, Elon Musk is a big figure. But how do you value something like SpaceX?
Jeff: I'm glad you differentiated between just a simple stock price because stock price is meaningless. It's the true valuation, the underlying fundamentals. And I think even just starting with a simple analogy like a home — let's say you spot a home in your neighborhood, beautiful home, listed at $2 million. You're like, that's reasonable. Let's say you wake up the next day and it's priced at $1 million, cut in half. That doesn't make any sense. Or the flip side, let's say it doubles and instead of $2 million it's priced at $4 million. You'd never touch that home. This is what's happening with the valuations we're talking about with SpaceX. And no one is talking about this. Everyone's just talking about the narrative or the story. It's an incredible story, an incredible growth opportunity. But just a few months ago SpaceX was being priced at call it $500 billion to $1 trillion. A few short months later it's $2 trillion. That's the analogy of the home going from $2 million to $4 million — something that maybe was attractive at the right price and now you would never touch it. No one is talking about SpaceX from a valuation point of view.
Chris: Yeah. And that's where the numbers just get really extreme. Most people are really excited — great story, they want to make money. They maybe look back at something like Facebook or Google and think, man, if I got in on that and owned it through that extremely bumpy ride I would have made a lot of money. But I know you and Meghan have touched on the market in general, the craziness with valuations, and also AI and how it's such a disruptor. All of those narratives are feeding into this hype and this story. But let's talk about SpaceX. $1.75 trillion market cap. Their earnings aren't near that. So how do you value a company like this?
Jeff: Going back to the fundamentals of value — typically you value based on earnings, a price to earnings ratio. But with many growth stocks they don't have earnings. They have revenue but they're spending everything on R&D, so they have negative earnings. You can't price it on a price to earnings ratio. So typically what you do is price it on a price to sales ratio. At that roughly $2 trillion valuation, what is the price to sales ratio of SpaceX? It's right around 100 times. For the audience, that is extreme. And just to give some context, the S&P 500 broad based index right now is trading at about 3.5 times price to sales. And by the way, that is the all time high.
Chris: Higher than 2008, higher than the dot-com bubble?
Jeff: Correct. The S&P 500 typically trades in the 1.5 to 2 times range. In the dot-com bubble it was actually in the mid twos. Again that's a broad based index. And now it's trading in the mid to high threes. SpaceX is at 100 times. Pretty extreme.
Chris: Are there any other examples — when you think back to 1999 and the dot-com bubble, when there was as much euphoria and companies were trading at extreme valuations, what are some examples from back then?
Jeff: Everyone probably remembers Cisco, which ended up being the largest company in the world through the dot-com boom. It traded at a 38 times price to sales ratio, which in hindsight was absolutely extreme. And this was not a random company with no earnings — it was the market leader. It ended up collapsing 90%. It took literally 26 or 27 years to finally get back to its previous level. Just happened in recent months. And that was at 38 times. SpaceX is at 100 times.
Chris: So the stock price fell by 90% post the dot-com bubble. But the company itself, Cisco, made a lot more money over the years. You look at how much they used to make versus what they make today.
Jeff: Its earnings and revenue are much larger than even the late 90s. This is a growing company — and yet it's still just valuations. At that 38 times price to sales multiple it collapsed 90%. SpaceX is triple that at 100 times. One other quick example — there's a famous quote from Scott McNealy, the CEO of Sun Microsystems, one of the high fliers of the dot-com boom. When he was doing a retrospective on the bust in 2002 or 2003, he talked about how his company was valued at 10 times price to sales and in hindsight how absolutely ludicrous that was. He essentially called the market of his company moronic. His actual quote was "what were you thinking?" — directed at the collective market. Sun Microsystems utterly collapsed in price as well. And again that was at 10 times price to sales. So at 100 times price to sales with SpaceX — listen, the stock can go anywhere. This is more of a speculative play than an investment. It could go up, it could go down. But buyer beware. The downside potential is real.
Chris: I remember that quote from Scott McNealy. He also said, let's assume I don't have to pay any taxes, any employees, anything for R&D — you make your money back in ten years. With zero expenses. But the reality is you have to pay for R&D, taxes, people. So Sun Microsystems at 10 times price to sales. Cisco at 38 times. There are some tremendous companies getting a lot of attention today. Nvidia — 16 or 18 times price to sales, tons of earnings, lots of growth.
Jeff: The best company in the world right now. Largest company from a market cap standpoint. Tremendous growth. And in the high teens for price to sales.
Chris: And you were talking to the team the other day about how if SpaceX fell by 80% in value it would still be more expensive from a price to sales standpoint than Nvidia.
Jeff: Than Nvidia — truly the most remarkable company in the stock market today. Another maybe good example is Tesla. That's more tied to the Elon Musk effect — he's obviously CEO of both SpaceX and Tesla. Tesla's highest price to sales ratio was around 30. Currently I think it's trading in the mid teens. So that's already a very expensive stock. Tesla is not cheap by any stretch. It has the Elon Musk premium. And it's trading at about a fifth of the value from a price to sales standpoint compared to SpaceX.
Chris: These valuations are extreme. It even makes me think about Facebook. If you bought Facebook when it first started trading publicly, and you look at it today, you would have made a lot of money. But it would have been a very bumpy ride — legal battles, lawsuits, all sorts of things. And Facebook, six months after it started trading, was down about 50%.
Jeff: Cut in half. And from a long term point of view it ended up being a tremendous investment. But a lot of people are asking us — let's say they want to dip their toe in the water, what's going to happen in the short term? We really don't know. But even in good scenarios it's very likely to be very volatile. And Facebook within a few months was down 50%.
Chris: What does SpaceX actually do? I know they own something like 17,000 Bitcoin or so. What are their business lines?
Jeff: They have a few different business lines. One is obviously the production of rockets and launching into space — that's actually a money loser, though from a long term point of view it's a tremendous upside and growth opportunity. But that's actually a smaller part of their business. The main revenue source is the launching of satellites and the relationship with Starlink to provide internet service wirelessly around the globe — that is the most potentially profitable business segment. And then they have other ancillary businesses tied to AI and other ventures. Listen, this is an incredible business without a doubt. If you're looking at your crystal ball and asking will this business grow ten years from now or shrink — grow is definitely the answer. There's no doubt about that. But is that already priced into the stock? Our answer would be more yes than no. That does not mean it's not an incredible company. The question is whether it's a great stock.
Chris: You and I talk about this a lot — a great company does not mean a great stock. A great stock does not mean a great company. The market is going to lean into the momentum, the excitement, the news, the headlines and where the money flows. It's just fascinating how much AI is in the news and the potential for money to be made. SpaceX going from $500 billion to $1 trillion six or seven months ago to potentially $2 trillion now — that's a lot of growth. The money has sort of been made by the employees and people that were able to get access to SpaceX shares many years ago. It's more about being careful and having an understanding of what you're buying if you go buy it on Friday when it starts trading.
Jeff: One other example that came to mind — a trend from a few years ago that was very powerful and captured the imagination of the public was electric vehicles, which continues to be a tremendous growth opportunity. Rivian was a big IPO about five or six years ago, a tremendous success at launch. But since that time, down 90%. And Rivian, if you just look at the growth of the company, it has grown tremendously. At the time of the IPO it was a startup with roughly $50 million of sales. It now has $5 billion of sales. It has become a substantial car company. You see Rivians on the road all the time. They have grown about 100 times. Despite that the stock is down 90%. And this is a company that is so far a success — it has grown tremendously. So again, a company is not a stock and vice versa.
Chris: I hate to come across sounding like stay away, don't touch it. We don't have a crystal ball. We don't know how this is going to work out. But the main thing is to understand the value you are purchasing a potential investment at. It doesn't matter if the stock is trading at $10 a share, $100 a share, or $1,000 a share — that's not how you actually value a company or the market in general. Just be aware of the valuation. And 100 times price to sales is the real number you have to look at for a company that doesn't really have any earnings. Jeff, enjoyed the conversation.
