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Is This Elon Musk's Next IPO?

By Rich Smith – Mar 1, 2020 at 6:13AM

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SpaceX might not IPO, but its most profitable subsidiary might.

The news struck like a thunderbolt: SpaceX might IPO Starlink.

For years, investors have sought a viable way to invest in Elon Musk's space start-up, SpaceX. Alphabet's 2015 investment in SpaceX, giving the internet giant a partial stake in the space company, suggested one way. (Currently the only way.) But what investors really wanted was a way to own SpaceX directly.

Problem is, Elon Musk is not all that interested in IPO'ing SpaceX. He doesn't want to cede control of the company and risk short-term-focused investors derailing his plans to colonize Mars, for one thing. And with SpaceX's satellite launch business reporting positive EBITDA (and even occasional positive GAAP profits), he doesn't really need the money an IPO would generate. Result: A near-term IPO of SpaceX probably isn't in the cards.

But an IPO of Starlink might be.

SpaceX Falcon 9 launching with SpaceX hangar in the foreground

Image source: SpaceX.

Starlink for sale

This was the upshot of a recent column by CNBC space maven Michael Sheetz, who reported that "SpaceX is considering spinning off its Starlink satellite business and may have an IPO for the unit in the next several years."  

Apparently, it was SpaceX COO Gwynne Shotwell who spilled the beans. Speaking to a group of investors in Miami earlier this month, Shotwell conceded that although SpaceX itself might not go public anytime soon, "Starlink is the right kind of business that we can go ahead and take public."

Even more than that, she said, SpaceX is "likely to spin out" Starlink and take the subsidiary public.

How to IPO a space business

So how might that work? Let's begin with a few assumptions.

Elon Musk is on record as estimating that it might cost $10 billion to build his imagined network of 12,000 Starlink internet broadband satellites to orbit Earth. (If he builds the bigger theoretical version of Starlink, comprising 42,000 satellites, it might cost a bit more, but for now let's just stick with the assumption of 10 bills.)

Now, a recent stock sale at SpaceX placed the company's implied, private valuation at $36 billion. Assuming SpaceX can hold on to that valuation through an IPO, all it will need to do is spin off Starlink for a market capitalization of just one-third of SpaceX's total market valuation, and this should generate all the cash SpaceX needs to complete Starlink -- and begin selling internet access to essentially every human on Earth.  

How likely are investors to value Starlink at one-third the valuation of SpaceX as a whole?

Well, consider. With 36 planned rocket launches this year, SpaceX is by far the biggest privately owned rocket-launching company on planet Earth. It's so popular, says CNBC, that market analysts believe SpaceX has access to "an unlimited amount of funding" anytime it wants to sell shares of itself, or float its own debt.  

Problem is, one of the ways SpaceX became so big, and so popular, was by offering rocket launches at prices cheaper than almost anybody else can manage. (Maybe India can. Perhaps China. But we now know for a fact that SpaceX's big competitors Roscosmos, Ariane, and America's own United Launch Alliance cannot.) As a result of charging so little for its launches -- and as already mentioned above -- SpaceX's launch business isn't generating a whole lot of profit.

But Starlink will generate profit. Simply gobs of it.

In fact, internal SpaceX documents from 2015, obtained by The Wall Street Journal, confirm that SpaceX expects to generate $4 billion from selling Starlink internet access as early as next year -- and perhaps as much as $22 billion a year by 2025. If SpaceX's estimates are anywhere near correct, then spinning off Starlink at a valuation of even $12 billion (one-third of current SpaceX market cap) would offer investors the bargain of a lifetime -- the chance to buy an Elon Musk company at a P/E of about 0.5 times estimated 2025 earnings.

For comparison, and for context, at its current market capitalization of $143.6 billion, Elon Musk's only publicly traded company today -- Tesla (TSLA 0.64%) -- sells for more than 13 times estimated 2025 earnings (according to data from S&P Global Market Intelligence).

Judging from the example provided by Tesla, chances are good that investors would line up to buy a Starlink IPO at valuations several times the 0.5 times needed to fund Starlink. More than that -- they'd clamor for a piece of the action.

My prediction, therefore: SpaceX will in fact spin off and IPO Starlink -- just as soon as Musk has evidence confirming that his profits estimates are correct. And when that happens, this IPO will be a smashing success.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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