SpaceX Monetizes the Future

And that's an exercise that is almost impossible to get right

From my limited experience of talking to people about it, there are three common views of the SpaceX IPO.

One camp is enthusiastic. Elon Musk revolutionized an entire industry by driving down the cost of launching satellites into orbit dramatically. He was able to build this extraordinary company independently, answering only to himself, and built it into one of the most valuable companies in the world. Now that he’s the clear market leader in this business, and has such a valuable currency in the form of this $2 trillion company, he has massive leverage to engineer future success. Betting against Musk is a bad bet, and there are limited opportunities to bet on him—but he specifically reserved a significant percentage of the shares SpaceX was issuing to retail investors, who normally can’t get access to high-profile IPOs. You’d be a fool to ignore the opportunity to take advantage of that access, at almost any price.

A second camp is skeptical. There’s no such thing as a bet being good at any price. Musk is a great business-builder, but he’s also a great hype-meister, and has built a cult-like following, in part by purchasing one of the world’s premier social media networks and turning it into a tool for self-aggrandizement. Their enthusiasm is what has driven the price of the company well beyond any rational valuation, but while the stock market may be a voting machine in the short term, in the long term it’s a weighing machine, which is to say: reality ultimately wins. SpaceX did not just have an enormous IPO; it was priced at an outlandish multiple of historic sales, a level unheard of for a company its size. There’s no way it can grow revenue, to say nothing of profits, enough to justify that valuation in a reasonable amount of time. And the same corporate structure that allows investors to bet on Musk unbound gives them little recourse if Musk decides to use his power to their detriment. Musk may or may not succeed in any given venture, but betting on him by buying SpaceX shares is a sucker’s move.

Finally, a third camp is simply outraged. The most simpleminded version is simply appalled that anyone could be a trillionaire. But more sophisticated versions point out that the things that make the skeptics skeptical and the enthusiasts enthusiastic alike should actually be seen as signs of deep corruption in our system. The public markets should be used primarily to raise capital so a company can expand, and should therefore impose proper accountability to shareholders. Companies like SpaceX (and also other tech companies from Google to OpenAI) shouldn’t be allowed to use multiple share classes to shield their founders from that accountability. Nor should they be allowed to issue tiny floats as a proportion of their companies’ value, using public markets more to create massive paper wealth that gives the company and its insiders massive leverage over competitors. Musk specifically shouldn’t have been allowed to cultivate an army of small investor supporters by buying a social media network. Nor should his brand new company shouldn’t be included in indices like the NASDAQ 100 right after the IPO, which forces index funds to buy his already overpriced shares, further driving up the share price and effectively transferring wealth from investors in index funds to SpaceX insiders. Finally, Musk couldn’t have built SpaceX in the first place without government contracts, and political influence remains crucial to the future of the company. Why shouldn’t “the people” have more of a say about—and more of a share in—private wealth creation that owed so much to public investments?

Buying SpaceX shares was never something I was likely to do. I understand the perspectives of the enthusiastic, the skeptical and the outraged, but I recognize that my inclination toward the skeptical camp is substantially personality-driven. I’m just congenitally skeptical. But I think one thing all three camps may not be acknowledging as fully as they should is the degree to which pricing a company like SpaceX is genuinely extremely difficult because to such a considerable degree what drives its value is a portfolio of real business options, which are inherently difficult to value. That doesn’t usually matter because real business options are usually only marginal factors in valuing a large company like SpaceX. But we’ve entered a world where there are real business options of plausibly extraordinary value, and that world is just genuinely very weird.

What do I mean a real business option? An option gives the holder the right but not the obligation to do something in the future. A real business option is some aspect of a business that gives the owner the ability to enter another business that might not be available—or might be much more expensive—without already being in the prior business. For example, if you build a business with a deep customer base of, say, plumbers, you now have the option of selling other products to that customer base, while it would cost a new business some amount of money to acquire that customer base. The more difficult it is to acquire that customer base, the more valuable the array of products that could be sold to them, and the simpler it is to plug in those additional products into the pipeline, the more valuable the real business option is. In extreme cases, the option could be worth so much that it makes sense to build the initial business as a loss-leader simply to acquire the customer base.

Contemporary tech businesses abound in real business options. Amazon, for example, by building an in-house solution to its own IT infrastructure and storage needs, also acquired the option to offer that service to business customers in the form of Amazon Web Services. Its subsequent dominance of cloud computing then gave it leverage to develop additional businesses. There are multiple other examples I could use just about Amazon, and there are other examples that would apply to Microsoft, Meta, Google, etc. These real business options are often extremely difficult if not impossible to value accurately, because the value depends on the range of possible outcomes and the probability distribution across those outcomes, but the recognition that there are so many potentially valuable options out there is one reason why some tech stocks trade at such high multiples to their revenue, and why they even incur enormous losses to enter businesses that themselves have highly uncertain prospects of ever being profitable, because even if those businesses may not be profitable they make it possible to enter businesses that will be hugely profitable, but which would be inaccessible without that entree.

I would argue that the value of SpaceX is dominated by these impossible-to-value business options, but they’re even harder to value than usual because of their sheer scope and scale. SpaceX has the dominant position in launch, which is the gateway service for everything related to space. How valuable is that? It depends in part on how defensible their current advantage is, but it also depends on just how “big” space turns out to be. Will exploiting lunar resources prove profitable? It certainly isn’t now; it makes vastly more sense to mine Greenland before trying to mine in space, and it doesn’t even make sense to mine Greenland now. But it’s possible to imagine technological, geopolitical and economic developments that would change that equation. Similarly for the idea of building data centers in space. Right now, that’s a crazy idea; it makes a lot more sense to build giant solar farms to power data centers in the Sahara Desert than to do it in earth orbit. But, again, technological, geopolitical and economic developments could change that equation.

Quite apart from the idea of putting data centers in space, SpaceX is also a strong contender in the A.I. race, albeit behind the three leaders (Anthropic, OpenAI and Google), and both A.I. itself and relative positioning in the race are incredibly hard to value. We don’t have any visibility yet into the next inflection point on the sigmoid curve, and very small differences in how far out it is could have vast implications for the economic potential of the technology, positive or negative. Meanwhile, we’ve barely exploited the potential of the technology at its current frontier; that potential alone could be sufficiently enormous that the real constraints will be in terms of sufficient compute and energy to fully exploit it even if the advance of the frontier slows dramatically. We also don’t have any idea how much of the economic potential of A.I. will turn out to accrue to the owners of the technology versus to the users; it’s possible to imagine a world where, not long after advances slow, multiple companies catch up to the frontier, and the service becomes commoditized.

There are so many divergent paths forward, none of which are easily handicapped. All you can be sure is that SpaceX has real business options whose value will be implicated by a great many of them. And the combination of extraordinary potential and extraordinary uncertainty means that they are extremely valuable even if you think the most likely outcome is that they all expire worthless. But “extremely valuable” isn’t a number. For that reason, a huge driver of valuation is little more than vibes and risk tolerance—but that fact alone isn’t enough to refute the valuation of this particular bet, particularly when you don’t have a specified time horizon.

This is not an unprecedented situation. It’s reminiscent in many ways of the internet bubble in late 1999 and early 2000. If you’d bought $10,000 worth of Amazon stock at its 1999 peak, for example, those shares would have been worth only about $600 by the market trough after the attacks of September 11, 2001. But today that investment would be worth over $500,000. The annualized return earned by someone who bought Amazon at its 1999 peak and held on is only modestly higher than that earned by someone who bought the S&P 500 at the same time.

Does that mean that, in retrospect, that 1999 peak price was “right?” No—among other things because there were lots of other overpriced companies at the peak of the internet bubble that went to zero. But that in turn just highlights another fact about options: their time value drops to zero as their value converges to their intrinsic value. The implication of that fact, though, in a situation where investors rationally perceive a significant percentage of the value of a number of companies is based on their portfolio of real business options is that the rational valuation of these companies will in retrospect necessarily be collectively too high, because while some of those real business options may well pay off enormously, collectively they are being dragged down by the decay of their time value. An even more striking way of putting it is that investors, by trying to value those options properly, are actually creating their value, and therefore are also ensuring that collectively they will achieve sub-par performance.

In any event, the difference now is, again, one of scale and scope—but in this case scale and scope cut in opposite directions. Amazon’s peak market value in 1999 was around $30 billion, and that was over two years after their IPO. SpaceX’s market value is already $2 trillion, only one day after its IPO. Is SpaceX going to be a $100 trillion company in 2050 or so? What would the economy even look like in a world in which it is? On the other hand, while the internet bubble was a broad phenomenon, there are only a handful of enormous companies that are getting the SpaceX treatment and being valued substantially as options on a huge slice of a radically different future. Does that make it more likely that they all succeed? I don’t know—but that’s where muttering about corruption starts to really be relevant. Bubbles are nothing new, and they sometimes deliver the promised transformation only for the benefit to accrue to different companies and on a different schedule than investors expected. When the bubbliest companies start to look too big to fail, though, politics could well put its thumb on the scale of a particular outcome. And of course that possibility is also being priced into the market valuation of these few, extraordinary companies.