As the old market adage advises, it’s usually best to buy low, sell high. When looking at a potential investment, investors typically prefer to pay less rather than more.
But real-world investment decisions can be more complicated than that. In many cases, a business’s stocks falls as it prospects diminish. This is especially true for unprofitable companies that need to sell shares and raise cash to survive. As their share price declines, their ability to stay afloat often falls in tandem, even as the valuation appears more attractive to investors.
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What about Space Exploration Technologies (NASDAQ: SPCX)? If a market crash arrives, will this space stock be more or less attractive as its valuation shrinks? The answer might surprise you.
SpaceX’s future is directly tied to its market valuation
Market crashes tend to hit certain stocks harder than others. That list often includes unprofitable businesses, high-valuation stocks with big expectations priced into their shares, and speculative tech companies with positive cash flows only expected far in the future.
Unfortunately, SpaceX fits all of those categories. In a stock market crash, I wouldn’t be surprised to see the shares take a hard tumble as the market penalizes risk and capital grows scarce.
If you’ve been waiting to buy into SpaceX, a market crash might initially seem like a great buying opportunity. And while that may prove true, there’s one risk investors should carefully consider.
One reason unprofitable, high-multiple, long-duration stocks are hit hard during market crashes is that achieving projected growth becomes significantly more difficult. When asset values fall, raising additional necessary capital becomes more expensive and, in some cases, impossible. Without profits, these companies struggle to self-fund growth. That lowers near-term growth expectations, pushing out distant projected positive cash flows even further than expected. It’s a perfect storm for stocks like this.
SpaceX posted a net loss of $4.9 billion last year. And while losses narrowed significantly last quarter, the company will need to ramp up spending aggressively during the coming years. Last quarter, capital expenditures surpassed $18 billion, nearly $16 billion of which was dedicated exclusively to artificial intelligence (AI) infrastructure. According to SpaceX, AI represents more than 90% of its long-term growth opportunity. Given this, the company has already outlined $350 billion in spending through 2030.
