Key Points
SpaceX stock seems to offer no margin of safety at recent levels.
I see Elon Musk as a drawback.
It could do well in the long run, but it's a risky proposition.
Space Exploration Technologies (NASDAQ: SPCX), commonly referred to as SpaceX, is a hot stock these days, and it's even up 25% over the past three months as of Oct. 22. You might want to buy some shares, but I don't think I ever will, for a variety of reasons. My main reason is that I don't sufficiently understand the company.
One of my heroes is Warren Buffett -- who's famous for staying within his "circle of competence" -- meaning he steers clear of stocks that he doesn't fully understand. I am not always good at following this advice, but with SpaceX, I do.
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SpaceX is a leader in space launches, satellite communications, and artificial intelligence (AI). Those are all fast-growing niches. But I must admit that I'm far from an expert on satellites and space operations. That makes it hard for me to really assess SpaceX's challenges and opportunities.
Meanwhile, there are ample other reasons why I'm steering clear. Let's start with the stock's valuation. Its price-to-sales ratio, for example, was recently 58. Compare that to the S&P 500's ratio of 3.5. That 58 figure is high. It essentially means that there's no margin of safety here. If SpaceX makes some missteps, the stock could drop sharply.
And:
- The company only turned profitable in the last quarter. That's not necessarily a bad thing, but I prefer long track records of revenue and profit growth.
- It's burning through cash at a rapid rate -- around $10 billion in its last quarter.
- It pays no dividend. These days, I'm focusing more on dividend payers, as I hope to retire within a decade and want to set up long-term income.
- Finally, there's SpaceX founder and CEO Elon Musk. I don't see him as a good leader, and he isn't laser-focused on SpaceX, as he has multiple other irons in the fire.
I think the case against the stock is strong. It could do very well, but a lot has to go right for the company, and that's far from guaranteed.
Selena Maranjian 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.