There is a lot of interest in investing in SpaceX, but an IPO making the company available to everyday investors is likely still a long way off. CEO Elon Musk has said SpaceX internet service provider subsidiary Starlink is much closer to going public, but not until after the company can "predict cash flow reasonably well."
As Starlink is in the very early stages of rolling out service, don't count on a Starlink IPO in 2021. While that may be frustrating, the decision to wait could be a very good thing for the average investor.
Satcom is an expensive business
Running a satellite communications company (or satcom) is an expensive endeavor. For most companies, launching satellites into orbit to create a "constellation" to support voice and data services requires hiring a contractor to get the hardware into space. Even for SpaceX, which is vertically integrated with its own rocket launching capabilities, building out and operating Starlink satellites isn't cheap. Musk said as much on Twitter in February:
SpaceX needs to pass through a deep chasm of negative cash flow over the next year or so to make Starlink financially viable. Every new satellite constellation in history has gone bankrupt. We hope to be the first that does not.— Elon Musk (@elonmusk) February 9, 2021
Cash flow, specifically free cash flow, is a basic profitability metric that measures cash operating expenses and capital expenditures (larger purchases of property and equipment that are expensed over time for tax purposes). As Starlink has relatively few regular paying customers as of this writing (some 10,000 orders were placed after the first three months of availability), it's safe to say Starlink is burning through cash.
This is a problem every satcom has had to deal with, and running out of cash is a real risk -- as alluded to by the Tesla (TSLA -0.06%) CEO's mention of satcom companies' frequent brush with bankruptcy proceedings.
Even Iridium Communications (IRDM 3.74%) -- arguably the most successful satcom to date -- had to go through this "deep chasm of negative cash flow." It filed for bankruptcy protection in 1999 and managed to emerge as an operating business. But given the rapid technological advance of internet-based communications, it embarked on the launch of a new constellation called Iridium NEXT. The program was announced in 2007 and completed in 2019 -- incidentally, with the satellites riding aboard SpaceX rocket launches.
Though the company is now slowly expanding and is free-cash-flow positive, it was an incredibly bumpy ride for shareholders that has left the company with ample debt ($1.73 billion at the end of 2020, offset by cash and equivalents of just $237 million).
A protection for shareholders and a boost for SpaceX
I get it -- investing in the space economy is exciting. But there are risks here, and satcoms running out of cash is a problem Musk and his company would obviously like to avoid. Based on the limited data available, I'd venture to say SpaceX is absorbing the losses Starlink is racking up right now before opening it up to public investor scrutiny -- and limiting the risk of Starlink running out of cash and joining the ranks of previously bankrupt satellite operators. Some investors might be impatient, but this move actually keeps the average retail stock purchaser safe should things go wrong at Starlink during this critical chapter of its life.
But there's another benefit to SpaceX's patience. If Starlink can start to generate (or can accurately project when it will generate) positive cash flow, SpaceX could boost its proceeds from an IPO. You see, when a company spins off a subsidiary, it receives cash based on the number of shares it sells and the price per share.
We can again refer to the Iridium chart above. Notice when the stock price really started to fly a few years ago? It was when free cash flow started to improve and a clear path to breakeven was in sight. If Starlink can predict a similar short-term timeline of profit generation, it could boost the satcom's valuation and earn SpaceX more cash -- cash it will need for its ambitious space travel plans in the coming decades. Plus, if Starlink can ramp up its operations with minimal distraction from the public, it could reach its goal of making space-based internet available around the globe, even for currently low-income emerging markets.
As Musk expounded on the previously mentioned Twitter message:
Starlink is a staggeringly difficult technical & economic endeavor. However, if we don’t fail, the cost to end users will improve every year.— Elon Musk (@elonmusk) February 9, 2021
It may not be to everyone's liking, but SpaceX's patience with a Starlink IPO is a win-win-win for it, the customers it hopes to serve, and the average retail investor who wants a piece of Musk's space economy ambitions.