Equity investors love SpaceX. The bond market, however, is a bit more skeptical.
The initial public offering (IPO) of Space Exploration Technologies (SPCX 6.83%) last month was a nearly unprecedented stock market phenomenon. The IPO was four times oversubscribed due to strong institutional and retail demand. The stock opened its first day on the market trading at $150, and in the days that followed, it surged to an intraday high of more than $225. Since then, it has settled back down, and even briefly sank below that $150 level. As of late Monday afternoon, it was trading at around $157 per share, giving the company a market capitalization of more than $2 trillion.
Space Exploration Technologies
Today’s Change
(-6.83%) $-10.95
Current Price
$149.47
Key Data Points
Market Cap
Day’s Range
$148.86 – $159.30
52wk Range
$147.11 – $225.64
Volume
659.9K
Avg Vol
173.2M
That keeps Elon Musk’s aerospace and artificial intelligence (AI) firm among the 10 most valuable companies in the world.
So, while SpaceX is still deeply unprofitable and probably will be for some time, investors expect strong profits down the road. But the bond market sees things a bit differently.
SpaceX’s bonds are not investment grade
The company’s bonds are trading at an average 1.62-percentage-point premium over Treasuries, a credit spread that puts it in the BB category.
For those unfamiliar with bond ratings, BB corporate bonds trade at an average spread of 1.55 percentage points. The wider the spread, the worse the rating. And BB bonds are technically non-investment grade. The fall into the range also known as “high yield” or “junk.”
This is because BB-rated bonds are viewed as carrying a substantial credit risk for their holders. While investment-grade bonds have a historical default rate in the range of 0% to 1.02%, the default rate for BB-rated bonds has been about 4.22%, or four times higher than that of the riskiest investment-grade bonds.
And SpaceX carries a substantial debt load, about $29 billion in long-term bonds.
Image source: Getty Images.
What does that mean for SPCX investors? Well, I think it means that they may be a bit too enthusiastic about the company.
To be sure, SpaceX has a profitable business in Starlink, its satellite internet service. That service generated about 60% of the larger company’s $18.7 billion in revenue last year.
But SpaceX’s AI division, which also includes social media platform X (formerly Twitter), posted an operating loss of $6.4 billion last year. And SpaceX as a whole posted a $4.9 billion loss for the year.
Of course, when you buy a stock, you are buying rights to a share of its future profits, if there are any. In the case of SpaceX, investors believe those profits could be massive, partly because of Musk’s grand visions for it.
The company’s initial registration form, filed with the Securities and Exchange Commission before the IPO, claims among its missions “to make life multiplanetary,” “to understand the true nature of the universe,” and “to extend the light of consciousness to the stars.” It also said, “to harness the Sun to power a truth-seeking artificial intelligence that advances scientific discovery and, ultimately, to build a base on the Moon and cities on other planets.”
I’m not saying Musk won’t make progress toward some of those lofty goals, but the bond market is hedging its bets.
Leave a comment