The "bull case" for SpaceX: re-running the Tesla dilution playbook?

There has been considerable discussion about the valuation of several upcoming IPOs, including the most imminent, Space Exploration Technologies (SpaceX). At a $1.75 trillion valuation, it would command an unprecedented 100-times price-to-sales ratio despite being unprofitable and a relatively modest 15% y/y growth rate for a company that is being priced for hypergrowth. How does one justify such a rich valuation?

Well, one simply cannot from the fundamentals or any reasonable expectations of future earnings or cash flows. But a comparison to the Tesla playbook may provide insight into the "bull case".

Typically, companies return value to shareholders by paying a dividend or buying back stock. Tesla famously has never done either. In that sense, it isn't a car company. But it isn't an energy, autonomous, or robotics company either. Its most lucrative venture has been selling stock--literally. Since its inception, it has issued $24.22 billion in shares, mostly frontloaded at the most times in its corporate lifecycle. In contrast, despite being a mature company, it has only made a cumulative $38.48 billion in net income, which would count as a decent quarter for the likes of Nvidia, Google, Apple, and Microsoft. Nonetheless, its shareholders--at least those who bought in before it entered the S&P 500--have been greatly rewarded.

How did this happen? Back in late 2018, Tesla was growing revenues at a dizzing clip--over 100% y/y--and after nearly a decade of unprofitability, logged its first two quarters of GAAP profitability. But when this trend rapidly decelerated and even reversed briefly in early 2019, the short sellers came piling in. This was a precarious time for Tesla. It had yet to meet the criteria necessary for S&P 500 inclusion, which included a full year (trailing 12 months) of GAAP profitability, and its stock was trading at justifiably high nosebleed valuations (Fig. 1) with a net debt position (Fig. 2), exacerbated further by junk bond credit status.

Fortunately for Tesla, its entry into China and the rollout of the Model Y helped reaccelerate its revenues in mid-2019 and 2020 and catapulted it into sustained GAAP profitability, along with entry into the S&P 500. Suddenly, short sellers were scrambling to cover their positions, and in the ensuing squeeze, Tesla stock approached a P/E ratio of nearly 1000. The company used this opportunity to aggressively dilute their shareholders, issuing a total of $12.89B in shares in CY2020--a truly massive amount considering that the company's cumulative net income to this point was -$5.95 billion.

This meant that Tesla's credit was no longer junk bond, but BBB investment grade, allowing them to go from paying interest expenses to actually generating interest income and speculating on other investments like digital assets (you know what I mean, trying to avoid the automod filter). Because my data source does not itemize specifically for quarterly interest income, I am using non-operating income as a proxy (Fig. 3). This came as a forutnate time because 2022 came as a downturn in both bond prices and digital asset prices.

Even to this day, as Tesla has matured, these share issuances represents a bigger infusion than any operating income (Fig. 4) or net income (Fig. 5) it has ever generated in any quarter, save for one single non-cash accounting benefit of $5.9 billion. It has fueled their stock based compensation (Fig. 6), as well their relatively modest overall capital expenditures and R&D (Figs. 7-8) given their grand ambitions.

This has been sufficient to keep Tesla's stock afloat even though it is no longer the hypergrowth company of 2019-20, even though revenues remain flat and declining, and even though eroding margin have resulted in drastically shrinking profits since 2022. But I don't know if Tesla shareholders--who self-select for a crowd who care about narrative over fundamentals, who care about pumping share price over earnings growth--actually mind. Those who bought in at IPO in 2010 have dramatically outperformed the market. Those who bought in after it joined the S&P 500 have trailed VOO by 35.50% cumulatively and experienced greater volatility than even UPRO (3x levered VOO), but generally seem happy with it.

What does that mean for SpaceX?

• Its stock may not come back to earth (literally) for many years even if it never generates a meaningful profit
• It is almost certain existing shareholders get diluted if its valuation remains
• Issuing stock may be as important to the company as its purported business
• The long-term plan is to unload more stock to retail and index fund investors
• Be very careful when going excessively short on a stock