Public companies can invest their capital in other businesses. One of the most famous examples of this is Berkshire Hathaway (BRK.A +0.28%) (BRK.B +0.14%), which the legendary Warren Buffett formerly ran. He built that massive conglomerate by buying dozens of entire businesses and taking smaller stakes in others, then used the cash flows to keep on growing.
A less famous example of this strategy is Alphabet (GOOG 0.80%) (GOOGL 0.83%), which has made several large investments in other businesses. Most of Alphabet's investment portfolio doesn't warrant much attention relative to its primary operations. Still, it made one investment a few years back that could officially net it tens of billions of dollars soon.
I think it's a great reason to buy Alphabet stock now, as the company it bought a stake in could be going public this year.
Image source: Getty Images.
Alphabet's SpaceX investment is worth a lot
Back in 2015, Alphabet invested around $900 million to buy about a 7% stake in SpaceX. At that point, it was unclear whether SpaceX would actually pan out as an investment over the next decade. However, after hundreds of successful rocket launches, and after its development of a system that allows it to land and reuse its rocket booster stages, SpaceX has captured the market's attention. Additionally, the Starlink satellite internet and broadband business has been an excellent recurring revenue source for SpaceX. It looks like the sky is the limit for SpaceX (pun intended).
To unlock some of its value to fund the next frontier of its business, SpaceX is considering going public in 2026. During its most recent private investing round, buyers paid prices for their stakes that valued the entire company at $800 billion. But such funding rounds usually don't value companies at their full potential because insiders and private equity buyers routinely get access to discounted shares. And based on what the public knows now, it appears that for the IPO, SpaceX management is targeting a valuation of $1.5 trillion.
NASDAQ: GOOGL
Key Data Points
An IPO of that size is nearly unheard of, and could test the limits of how a public market responds to such a large entrant. Furthermore, if it's profitable, SpaceX could be included in the S&P 500 (^GSPC 0.06%). But whatever the outcome, Alphabet is also poised to be a massive beneficiary.
If the market actually values SpaceX at $1.5 trillion, the 7% stake Alphabet bought for $900 million will have a value of around $105 billion. Alphabet could, if it chose to, sell that stock on the open market and use the proceeds to support its generative AI buildout, as the cost of constructing and fitting out data centers is quite high.
There are some big "ifs" in that paragraph, because nobody knows for sure what will happen in 2026. However, if SpaceX goes public and Alphabet sells its shares, I think that could be a genius move on its part.
Using the proceeds from a sale to bolster AI capex would be a wise move
While Alphabet has held its stake in SpaceX for a decade and seen great results, the calculus for whether it's worth keeping it in the future is simple. Which will drive a greater return on investment: artificial intelligence infrastructure or SpaceX? That's up to Alphabet's leadership team to determine. Both arguments have valid points. However, in the short term, I think AI is a more compelling investment option.
A SpaceX IPO in 2026 would bring excitement that few investors have experienced, and it may ripple through the market. However, I think Alphabet will benefit from the public debut of SpaceX regardless of what it decides to do with its shares. This hidden booster is just one reason why I think Alphabet is a great investment right now. It's also leading the way in generative AI, cloud computing, self-driving cars with Waymo, and many other businesses. SpaceX is just one more Alphabet investment that has worked out great for the company and its shareholders.
