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Key Points
SpaceX's valuation is based heavily on expectations of significant growth in the future.
Those high expectations, however, mean the stock comes with considerable risk.
Its valuation is incredibly high given its deep losses and underwhelming financials.
Shares of Space Exploration Technologies Corp (NASDAQ: SPCX) have been in a tailspin of late. The rocket company, which is also eyeing massive opportunities in artificial intelligence (AI), initially soared when its shares began trading last month, but the rally has since cooled significantly. Last week, the stock fell to below its IPO price of $135, closing at just under $124 on Friday.
Will the stock, which is more commonly known as just SpaceX, continue to fall, or is it likely to bounce back? Here's where I think it's headed.
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Why SpaceX's stock could finish the year below $100
SpaceX, for all its hype, is a grossly overvalued stock that's based primarily on rosy expectations of future growth rather than strong fundamentals. That's a big risk, particularly in a market that looks as frothy as this one. Although the stock's initial gains were promising and at one point it looked like its valuation could rise above $3 trillion, a pullback was highly likely. In fact, it's come sooner than I expected.
However, even today, with the stock's value falling, its market cap remains extremely high at $1.6 trillion. This is, after all, a business that generated $19 billion in sales last year and incurred a net loss of more than $4.9 billion. Those are not the kinds of numbers you'd expect from a business at this type of valuation. Momentum and excitement can drive a stock's value higher, but it's unlikely to last long.
As lockups on SpaceX's stock begin expiring later this year, insiders may have a strong incentive to sell their shares, given the company's inflated valuation. Thus, there may be more downward pressure on the stock in the near future. This is why I don't think it's a huge stretch to expect the stock to trade far lower this year, and why it may finish the year below $100.
Buying SpaceX stock today is a big gamble
If SpaceX can put data centers in space and help send humans to Mars, its valuation could skyrocket. The problem with its growth story is that it's based on exceptionally high hopes, and the person leading the business, Elon Musk, is known for making rosy forecasts and setting expectations high, only to often fall short in one way or another.
High expectations combined with poor financials could doom SpaceX stock to fall further in both the short and long term, which is why I'd stay far away from it.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
