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5 Things We Learned From The Wall Street Journal's Exclusive Report on SpaceX

By Rich Smith - Feb 12, 2017 at 9:13AM

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Internal documents show that SpaceX never really intended to earn much profit from rocket launches.

By now you've almost certainly heard the big news about SpaceX: Last month, The Wall Street Journal uncovered a treasure trove of internal documents from the company. These documents clearly demonstrate that SpaceX is neither profitable nor cash flow positive any longer.

It's what you may not have heard, though, that will really shock you: SpaceX never planned to earn much profit from launching rockets in the first place. Instead, SpaceX is placing its faith in a megaproject, partially backed by Alphabet (GOOG -0.28%) (GOOGL -0.27%), to create a satellite broadband internet constellation, which will encircle the globe, and (as the Journal puts it) "eventually dwarf [SpaceX's] rocket division."

Now, here are five more things you need to know about SpaceX's secret plan for satellite dominance.

Communications satellite in orbit.

Look! Up in the sky! It's not a bird or a plane -- it's how SpaceX hopes to turn profitable. Image source: Getty Images.

1. Tiny satellites, huge profits

While most famous today for its rocket launches (and soon to become famous for launching reused rockets, perhaps as soon as this month), SpaceX sees rockets as only a small part of its plans for future profits.

According to internal documents dated from 2015, SpaceX hopes to begin putting a constellation of 4,425 broadband internet satellites into orbit in 2018, and begin collecting revenue from it as an internet service provider as early as 2019.

2. Moving the needle

That year, revenue from satellites will be minuscule -- a few hundred million dollars at most, and probably contributing nothing to profits. Just one year later, however, in 2020, SpaceX expects to get roughly equal amounts of revenue from rocket launches and from satellite internet, about $3 billion each. Profits are expected to leap to $2 billion -- 33% of revenue.

3. Blasting off

And this is just the beginning. SpaceX expects its revenue from satellite internet to grow by leaps and bounds from 2020 on, eclipsing revenue from rocket launches in 2021. SpaceX expects that by 2022, satellite revenue will account for roughly 75% of all revenue the company collects, then grow to more than 80% in 2023, and to 85% or more in 2024 and 2025 -- by which time SpaceX expects to be regularly landing astronauts on Mars.

4. Planned obsolescence for rocket launches?

You might expect that once SpaceX has begun its Mars colonization project, the company would lose interest in the workaday business of merely lofting satellites into Earth orbit -- and you'd be right.

SpaceX's rocket launch plans got knocked off track by its twin SpaceXplosions in 2015 and 2016. But before those plans went askew, the company had mapped out a surprising future for its rocket launch program. Starting off from a base of zero launches in 2011, SpaceX planned to steadily increase the pace of launches through 2019. SpaceX had 27 launches slated for this year, for example. That number would grow to 44 launches in 2018, and then 52 in 2019. But in 2020, satellite launch activity would suddenly reverse course, and fall to just 41 launches.

At the same time, SpaceX projects modest increases in launch revenue even after 2020. The logical conclusion is that by 2020, what few rockets SpaceX is still launching will be bigger, and more expensive, and will carry bigger, more expensive satellites, too -- just not as many of them.

5. A margin explosion

So what does all of this mean for SpaceX stock, and for the investors who hope to invest in a possible eventual SpaceX IPO?

As we explained last week, SpaceX's internal documents show that even in the best of years, it has been only marginally profitable, and is not profitable at all at present. Introducing reusable rocket launches, as the company plans to do this month, holds the potential to put SpaceX back in the black. But significant profits -- the kind that can finance the colonization of Mars -- will depend on the company's successful deployment and operation of a constellation of broadband internet satellites.

Based on the numbers laid out above, SpaceX appears to be targeting operating profit margins of 33% once its satellites begin operating in 2020. Operating profits could total $4 billion by 2021 (a profit margin of more than 40% on projected revenue of about $9.5 billion). Margins will top 50% by 2022 -- then soar into the mid-50s range in 2023, and finally top out at better than 60% by 2025. At that point, SpaceX expects to be collecting $36 billion in annual revenue -- almost all of it from satellites -- and earning roughly $22 billion in operating profit. To put that final goal in context, $22 billion in profit is 11 times more than the $1 billion in revenue that SpaceX collected in 2014, its best revenue year ever.

Logical conclusion: If SpaceX can bring its broadband satellite internet project to fruition, SpaceX stock could turn out to be a very profitable investment. But if you're planning to invest in SpaceX, you need to do it for the satellite business (which doesn't exist yet), and not for the rocket launch business that does exist.

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