Space Exploration Technologies (SPCX -3.18%) has had a highly successful first few weeks on equity markets after its debut in the biggest IPO in history. However, the company has experienced a pullback. Not to worry, says Wall Street, as the dip may be a buying opportunity. SpaceX's average price target of $188.17 (According to Yahoo! Finance) represents an upside of 19% from its current levels. Should investors rush to buy SpaceX's shares right now?
Image source: The Motley Fool.
Mind your risk tolerance
The excitement surrounding SpaceX comes from several sources. First, the company's CEO, Elon Musk, is a trailblazer. He's not afraid to make aggressive bets and pursue potentially transformative strategies, and that has paid off for him in the past. Tesla (TSLA -1.79%) has delivered outstanding returns since its 2010 IPO with Musk at the helm. He has also helped revolutionize space travel, notably through SpaceX's pioneering work on reusable rockets, which significantly reduced launch costs. Second, SpaceX is by far the leader in some of the markets it operates in. The company dominates orbital launches.
Also, SpaceX's Starlink, which offers high-speed internet through a network of Low Earth Orbit satellites, is currently its most important business. SpaceX is the top player in this niche, with far more satellites in orbit than its competitors. The company's work with reusable rockets enabled it to scale this business faster than its peers. Third, SpaceX is looking to tap into lucrative opportunities. The company estimates that its total addressable market across space, internet connectivity, and artificial intelligence (AI) is $28.5 trillion.
Provided the company can grab even a fraction of this over the next decade, its revenue and earnings will soar, as will its share price. Lastly, SpaceX arguably has a competitive advantage from economies of scale thanks to its vertically integrated strategy.
NASDAQ: SPCX
Key Data Points
With all that said, there remain significant risks with investing in SpaceX. Though Musk is a trailblazer, he is also a polarizing figure, and one who is now the CEO of two major public corporations. It's not unheard of for a single man to successfully head two publicly traded companies, but it's not easy either. Further, despite SpaceX's pioneering of reusable rockets, other companies are actively trying to catch up.
Note the similarity with Tesla. It helped make electric vehicles (EVs) mainstream, and it still has the best-selling EV on the market. However, it now has far more competition and has seen a slowdown in EV sales in recent years. It even briefly lost its status as the largest EV company by deliveries, although it regained it.
The lesson: a first-mover advantage and a large lead over competitors matter. But even with those advantages, SpaceX could eventually see other space companies catch up and steal significant market share. The same is true with its Starlink business. In the meantime, SpaceX's financial results don't justify its valuation. Its revenue last year was $18.7 billion, while it lost almost $5 billion.
All these factors (and more) make SpaceX a fairly risky stock that will be highly volatile. It may not match The Street's price target over the next year as the excitement surrounding its IPO dies down. In the meantime, investors should wait for a much steeper pullback before initiating a position in this stock.
