SpaceX made history in June when it pulled off the biggest U.S. initial public offering ever.
Billionaire investor David Einhorn believes investors may remember the milestone for a very different reason in the road.
Greenlight Capital founder has expressed concerns that the valuation of SpaceX at around $1.77 trillion for its IPO did not correctly reflect the risks associated with Elon Musk’s massively capital-intensive ambitions, according to Einhorn’s recent investor letter.
His interest is not whether Starship succeeds, or Starlink continues to attract customers, or Musk ends up realizing his objectives in artificial intelligence.
Einhorn worries about how SpaceX is going to pay for it all.
Shortly after its IPO, the firm got investment-grade credit ratings from Moody’s, Fitch, and S&P Global Ratings. SpaceX has a Baa1 rating with a stable outlook from Moody’s, a BBB+ rating from Fitch, and a BBB rating from S&P.
Morgan Stanley’s predictions show how much outside financing SpaceX would require.
Analyst Adam Jonas does not anticipate SpaceX to have positive free cash flow until 2035 and expects average external capital needs between 2027 and 2034 of over $84 billion a year.
That gap has caught Einhorn’s eye.
And he believes the repercussions might go beyond just SpaceX itself.
David Einhorn questions SpaceX’s investment-grade status
The crux of Einhorn’s argument is SpaceX’s credit rating.
The firm earned investment-grade ratings from all three major rating agencies immediately after going public.
Moody’s awarded SpaceX a long-term issuer rating of Baa1 with a stable outlook. The rating agency cited among the considerations SpaceX’s position in orbital launches, Starlink’s cash-flow generation, and the company’s vertically integrated activities, according to Investing.com.
Fitch granted SpaceX a BBB+ rating, while S&P Global Ratings gave it a BBB rating. Both also had a stable outlook.
These scores are important because SpaceX has big ambitions for the future that involve a lot of money.
Investment-grade firms usually have access to a larger pool of debt investors and usually pay less for borrowing than speculative-grade enterprises.
Einhorn is seeing something odd about the scenario SpaceX is in.
In his Greenlight letter, he argued that SpaceX could become one of the largest nonfinancial investment-grade borrowers, despite forecasts that it won’t have positive free cash flow for years.
“We can’t find any other examples of investment-grade ratings being awarded to a company with a multiyear forecast of negative free cash flow,” Einhorn wrote.
And that doesn’t imply the rating agencies think SpaceX is free of financial hazards. S&P Global Ratings, for instance, pointed to uncertainties over SpaceX’s AI operations given their huge financial needs and competitiveness.
But Einhorn’s point is that investors may not be paying enough attention to what happens if SpaceX’s access to very cheap finance changes.
Morgan Stanley sees SpaceX burning through staggering amounts of cash
Morgan Stanley’s SpaceX forecasts help explain Einhorn’s anxiety.
Analyst Adam Jonas has been positive about SpaceX’s longer-term prospects, but his financial estimates require a lot of patience and resources.
Morgan Stanley expects SpaceX to achieve positive free cash flow no earlier than 2035.
More remarkably, Jonas anticipated average external capital requirements of almost $84 billion per year from 2027 to 2034. That funding demands nearing $700 billion over eight years, assuming those figures are correct.
Capital expenditures might be more severe at the start of the following decade. Morgan Stanley’s estimate forecasts SpaceX’s capital investment would peak at $300 billion in 2031, the Motley Fool said.
More SpaceX:
- Morgan Stanley doubles down on SpaceX stock for investors
- SpaceX analyst plots path to bold $100 billion claim
- JPMorgan resets SpaceX price target after earnings
Morgan Stanley has outlined the repercussions if debt markets can’t accommodate the company’s funding needs.
In a note to investors, Jonas said SpaceX may need to raise more stock, cut down on investment, or halt deployment plans.
There’s a trade-off to each choice.
Issuing shares would dilute the ownership of current shareholders. Cutting capital spending might cripple some of the programs that sustain SpaceX’s massive value. And a higher reliance on debt would make borrowing rates increasingly relevant.
That makes the credit rating of SpaceX more than a little obscure bond-market information.
Ultimately, its ability to finance ambitious programs without having to continuously offer huge fresh sums of shares may rely on sustained access to the debt markets.
SpaceX’s record-breaking IPO provided it a significant leg up.
According to Investing.com, in June, the business sold around 555.6 million shares at $135 each, raising $75 billion. The IPO valued SpaceX at over $1.77 trillion.
But the biggest IPO in U.S. history seems a lot smaller when compared to Morgan Stanley’s longer-term funding needs.
SpaceX’s record IPO raised $75 billion
SpaceX brought an unexpectedly huge financial cushion to the public markets.
The corporation priced 555.56 million shares at $135 each in June, generating $75 billion and giving it an IPO worth of almost $1.77 trillion, Investing.com reported. The sale set records not just for SpaceX’s value but also for the quantity of funding raised.
The business also did things differently when it came to the procedure, pricing its offering at $135 ahead of the regular investor roadshow and bookbuilding process.
But investors bought in to the stock.
SpaceX shares started at $150 on their first day of trading and closed at $160.95, a 19% gain over their $135 IPO price, according to CBS news.
That excitement speaks to the range of what investors think SpaceX may one day be.
Its current business includes Starlink and launch services, but its long-term goals stretch beyond Starship, AI infrastructure, and other ventures needing enormous sums of expenditure.
This optionality is also at the heart of Einhorn’s critique.
SpaceX has a number of potentially valuable opportunities, Einhorn acknowledged. Rather, he asks if investors are sufficiently factoring in such possibilities, given the execution and funding risks involved.
Einhorn said he doubts that the discounted value of those opportunities, reported Motley Fool, using what he considers an appropriate risk-adjusted discount rate, would come anywhere near SpaceX’s current market capitalization.
That is a debate about value, at the end of the day.
SpaceX doesn’t need all the ambitious projects to fail for funding costs to matter.
All that is needed is for the market’s estimates about the cost, time, or ultimate profitability of such initiatives to shift.
David Einhorn’s SpaceX warning goes beyond 1 stock
Ultimately, Einhorn expands his case beyond the SpaceX financial sheet. He says the company’s value and the market’s readiness to bankroll its objectives might be a bellwether for wider investor demand for risky assets.
This was the harshest statement in his discussion.
“Our sense is that this IPO is something we might look back on as a marker that a major speculative top is near,” Einhorn wrote.
That prognosis is far different from proven reality.
Einhorn isn’t chronicling that SpaceX’s IPO was really a speculative peak but making a market call.
There is, however, a powerful counterargument to his premise.
Moody’s, Fitch, and S&P all gave SpaceX investment-grade ratings, and those ratings reflect the agencies’ view of its current operations, competitive position, and capacity to satisfy its financial obligations.
Morgan Stanley’s own view adds another perspective to the argument.
Its financial plans need massive financing demands and years of negative free cash flow. Still, Jonas has stuck with his positive view of SpaceX’s longer-term potential. That highlights how two investors might agree that SpaceX would need unusual sums of finance, yet come to very different judgments about whether the possible payout is worth that risk.
For stockholders, the issue may thus be less dramatic than whether the SpaceX IPO signaled the peak of a speculative market.
That’s the eventual cost to SpaceX of delivering the future implied by its value and where that money will come from.
Musk’s business has plenty of resources after raising $75 billion in its IPO.
But if Morgan Stanley’s projections prove accurate, SpaceX could require several times the amount raised in its IPO in additional capital over the coming years.
Debt provides one path. Additional equity provides another. Slower spending provides a third.
All three are worth monitoring, as Einhorn’s emphasis on funding kicks in as SpaceX tries to transform some of the world’s most costly technical goals into successful enterprises.
Related: Elon Musk sends strong message to SpaceX and Tesla investors
