David Einhorn Warns SpaceX IPO Marks a Speculative Top Amid Valuation Concerns

In his latest letter to Greenlight Capital shareholders, David Einhorn took aim at Space Exploration Technologies (NASDAQ: SPCX), which went public last quarter.

The IPO was historic in scale, and Einhorn acknowledges that SpaceX continues to make headlines. But, he argues, that attention is not necessarily flattering — and it carries risks that extend beyond the stock itself.

SpaceX has the capacity to shatter records

Einhorn was blunt about SpaceX’s valuation, calling the $1.75 trillion assigned by IPO underwriters excessive. He pointed to the extraordinary confidence investors have placed in the company’s long-term prospects, despite formidable obstacles standing between SpaceX and sustained profitability.

Even more troubling, in Einhorn’s view, is how credit-rating agencies are treating SpaceX.

According to Moody’s, SPCX has the capacity to become one of the largest non-financial investment-grade borrowers, even though it isn’t expected to be cash flow positive for years. We can’t find any other examples of investment-grade ratings being awarded to a company with a multiyear forecast of negative free cash flow and no history of generating free cash flow.

SpaceX’s ability to raise capital through bonds at relatively low yields is central to its business model. Yet even Wall Street’s most bullish analysts don’t anticipate positive free cash flow anytime soon. Morgan Stanley analyst Adam Jonas maintains a $300 price target — implying the stock could more than double — while still projecting negative free cash flow averaging $84 billion per year until 2035.

The takeaway is significant: SpaceX investors face substantial risk. The cost of capital may not be fully reflected in current outlooks. A downgrade in SpaceX’s credit rating, or a continued rise in interest rates, could severely strain its finances. Alternatively, funding capital expenditures through equity would further dilute existing shareholders.

Just add it to the list of risks for SpaceX stock

Einhorn contends that credit risk is only one of many dangers investors are overlooking. He catalogued a range of potential business ventures for SpaceX but cautioned: “We doubt that the discounted value of those possibilities, using an appropriate risk-adjusted discount rate, would lead to a number that approaches SPCX’s market capitalization.”

NYU professor Aswath Damodaran places SpaceX’s current valuation well above the 90th percentile of his model — a model that is already quite optimistic about growth and profitability across SpaceX’s segments.

Over the long term, SpaceX’s stock price will depend on its ability to generate positive cash returns and earnings. The investment horizon is likely far longer than for a typical company, which only amplifies uncertainty around its true value. In such circumstances, investors should demand a wider margin of safety. As things stand, the stock appears to offer little, if any.

That kind of behavior alarms Einhorn. He closed his SpaceX discussion with a stark warning: “Our sense is that this IPO is something we might look back on as a marker that a major speculative top is near.”

While pockets of the market may be speculative, the broader fundamentals remain solid. It is not time to panic about the market as a whole, but SpaceX deserves careful scrutiny.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody’s. The Motley Fool has a disclosure policy.

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