- SpaceX’s business spans three distinct segments, with Starlink generating the majority of revenue and profits.
- Pillow Investment Partner believes SpaceX is a high-quality business, but not an attractive investment at its current valuation.
- Governance, capital allocation and the economics of the company’s AI business remain key risks for long-term investors.
Great business, difficult valuation?
SpaceX’s (NDAQ:SPCX) blockbuster IPO gave public market investors their first opportunity to own one of the world’s most closely watched private companies. But while few dispute the company’s technological leadership, a more important question remains: does that make it a compelling investment?
In this episode of The Expert Exchange, Coreena Roberston is joined by Alpha Ba, Chief Investment Officer of Pillow Investment, to examine the investment case behind SpaceX following one of the largest IPOs in history.
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.
Rather than focusing on the excitement surrounding rockets and space exploration, the discussion breaks down SpaceX into its three core businesses: satellite broadband through Starlink, space launch services and artificial intelligence. Ba argues that Starlink is emerging as the company’s strongest asset, benefiting from characteristics similar to infrastructure or “toll road” businesses, with recurring revenue, strong operating margins and growing scale.
However, he believes those strengths are more than reflected in the current share price. At its IPO valuation, Ba argues investors are paying a premium not only for Starlink, but also for loss-making businesses whose long-term economics remain uncertain.
The discussion also explores governance concerns, including Elon Musk’s concentrated voting control, and whether the company’s significant investment in artificial intelligence could dilute returns from its more profitable operations.
For investors considering exposure to one of the market’s newest mega-cap stocks, the interview offers a reminder that a great company is not always a great investment at every price.
Watch the video above or on YouTube, and share your thoughts with the community. Full transcript below.
Is SpaceX a great company—or an overpriced stock?
Transcript
Coreena: Investors have spent years trying to get exposure to the private space economy. Now that SpaceX is public following one of the largest IPOs in history, the question isn’t whether it’s an extraordinary company—it’s whether it’s an extraordinary investment.
Hello and welcome to Expert Exchange. Joining me today is Alpha Ba, Chief Investment Officer at Pillow Investment Partner, a global investment firm focused on identifying long-term opportunities across markets. Alpha, great to have you with us.
Alpha Ba: Thank you for having me.
Coreena: SpaceX came to the market at roughly a $2.2 trillion valuation, making it one of the largest IPOs ever. The stock surged after listing before pulling back sharply.
Before we get started, Alpha, what is SpaceX?
Alpha Ba: SpaceX has three businesses. It has a wireless broadband business called Starlink, which is the biggest part of the business. It represents about 60 per cent of revenue and approximately US$4.5 billion of operating profit. Most of the company’s profits come from the connectivity business.
The second business is space launch, which launches rockets into space. That represents about 20 per cent of revenue, around US$4 billion, and currently generates approximately US$700 million in losses.
The final piece of the company is its AI business. That generates roughly US$3 billion in revenue but is currently producing substantial losses of approximately US$6.5 billion.
Coreena: From Pillow Investment Partner’s perspective, what was your initial reaction to the IPO and the market’s enthusiasm around it?
Alpha Ba: We’re always very careful about IPOs because, generally, they don’t perform well from a long-term compounding perspective at the entry valuation.
The valuation here was not attractive to us.
The stock listed at around 125 times price-to-sales. It debuted at US$135, rallied to US$225, and has since pulled back to around US$156. We believe the stock remains overvalued, and we’re not interested at this valuation.
Coreena: For many investors, the excitement isn’t just about rockets. It’s about the businesses being built around them. Let’s talk about the investment thesis. When you evaluate SpaceX, where do you see the greatest opportunity?
Alpha Ba: As investors, we always look for disproving evidence—evidence that challenges the prevailing thesis, the narrative and the bullish case.
If we look at Starlink, which is currently the most attractive part of the business, the key question is whether it is a toll-road business or simply a growth story.
If it were a toll-road business, you would expect each new customer to generate very high incremental margins because the infrastructure investment has already been made. The costs are largely sunk, and additional customers become highly profitable.
Alternatively, is it simply a growth business where new customers come in at progressively lower margins because average revenue per user continues to decline?
We think the evidence suggests Starlink is much closer to a toll-road business.
Average revenue per user has declined from roughly US$99 three years ago to around US$66 today, while subscribers have grown dramatically to approximately 10 million users.
The company is attracting more subscribers through lower pricing, yet it continues to generate operating margins of approximately 35 to 39 per cent. That creates a very attractive flywheel business.
The evidence points toward a toll-road model rather than a traditional growth model, and that’s very attractive from an investment perspective.
The challenge is that this attractiveness is offset by other parts of the business, particularly the AI division, which continues to generate significant losses.
Coreena: Is Starlink essentially becoming a hidden infrastructure monopoly, or is the bigger story still ahead?
Alpha Ba: It has some characteristics of a potential monopoly. I can’t say that’s the case today, but it certainly has the potential to become, if not a monopoly, then at least a dominant global player in rural broadband.
Coreena: Some investors are concerned about the company’s lack of profitability. What are your thoughts on that?
Alpha Ba: We think the lack of profitability narrative around SpaceX is overstated.
The losses in the launch business represent reinvestment rather than weakness. The company needs a large number of launches to continue driving down the cost per launch.
SpaceX benefits from internal demand through Starlink. Approximately 70 per cent of launches are for internal customers, allowing the company to continuously improve scale and lower launch costs.
Over time, we believe margins should improve. We think there’s an attractive flywheel developing within the launch business.
Coreena: With transformational companies, the upside story is usually accompanied by significant risks. From your perspective, what are the biggest risks investors may be underestimating today?
Alpha Ba: We see three major risks. First, while the Starlink and launch businesses are attractive, investors cannot own those businesses without also owning the AI business, which continues to generate significant losses, has uncertain pricing power and weaker competitive advantages.
You’re effectively buying three different businesses that deserve three different valuation multiples, and we think the overall valuation is simply too high.
The second risk is capital allocation.
A great deal of capital is being invested into the AI business, which currently has unattractive economics.
After raising US$75 billion, SpaceX also issued significant debt, with much of those funds being invested into AI—a highly capital-intensive business with limited profitability today.
The company also recently completed a US$60 billion acquisition, and we’re always cautious about large acquisitions.
The third risk is governance.
Elon Musk owns approximately 42 per cent of the company but controls around 85 per cent of the voting power.
In practice, there is very little independent oversight capable of challenging management decisions if necessary. Governance risk is something investors simply cannot diversify away.
Coreena: Given all of that, would Pillow Investment Partner invest in SpaceX today?
Alpha Ba: At this point, no. We will not be investing in SpaceX today.
Coreena: What would need to happen—whether through valuation, governance improvements or greater proof of execution—to make SpaceX attractive as an investment opportunity?
Alpha Ba: We believe SpaceX has many characteristics of a high-quality compounding business. However, valuation would need to become much more reasonable.
We’d like to see profitability become more widespread across the business, particularly continued evidence that Starlink truly operates like a toll-road business.
We’d also like to see the launch business become sustainably profitable.
As for AI, we’d like to see evidence that it can become meaningfully profitable, although we think that’s unlikely.
Finally, we’d like to see improvements in corporate governance.
Coreena: Thanks, Alpha. It’s a fascinating investment debate because SpaceX appears to be both a mature, cash-generating infrastructure business and a highly speculative technology company at the same time—a combination that could create enormous value or significant complexity for investors.
Alpha Ba, Chief Investment Officer at Pillow Investment Partner, thank you for joining me today on Expert Exchange.
Alpha Ba: Thank you very much for having me.