Ian Cowie: the investment trusts safely orbiting SpaceX

A mind-boggling $1,490 billion (£1,110 billion) - or nearly $1.5 trillion, if you prefer - has been wiped off the stock market value of Space Exploration Technologies Corp Class A (NASDAQ:SPCX), Elon Musk’s extra-terrestrial business, since its share price peaked last month. 

It’s early days yet but this small DIY investor is glad he shunned the biggest-ever initial public offering (IPO) and gained diversified exposure via investment trusts instead.

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To put this stratospheric stock market setback in perspective, the peak-to-trough plunge destroyed more paper wealth than the total value of Tesla Inc (NASDAQ:TSLA), Musk’s electric vehicle-maker, whose market cap is currently $1,210 billion. 

SpaceX shares launched with an IPO price of $135 on 12 June before the shares peaked at $225 four days later, briefly valuing this rockets-to-satellites business at $2,970 billion.

Since then, the share price shrivelled to $113 on Thursday, valuing SpaceX at $1,480 billion. That correction is no surprise to those of us who worried about the shares at flotation being priced at 94 times SpaceX revenues.

So, even if sales were the same thing as profits - which they aren’t because this loss-making business has substantial costs - the IPO price was very high. 

By contrast, the S&P 500 trades at an average price of about 28 times earnings, or profits per share, compared with an historic average multiple of nearer 18.

Despite all that, Goldman Sachs - one of many investment banks promoting the IPO - forecast that SpaceX shares might hit $205, which they briefly did. Meanwhile, also at the time of the flotation, investment researchers at Morningstar estimated the “fair value” of SpaceX at $63 per share.

Talk about two views make a market. No wonder City cynics warn against excessive excitement about “moonshot” hit or miss investments, saying: up like a rocket, down like a stick.

But, as mentioned above, it’s early days - less than two months since IPO - and it’s not all bad news for Musk or his many admirers. Two of the shrewdest investment trust fund managers, focused on future-facing businesses, are backing SpaceX to soar again.

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Scottish Mortgage Ord (LSE:SMT), the £16.7 billion giant of the Association of Investment Companies (AIC) Global sector had 25.7% of its net asset value (NAV) invested in SpaceX at the end of June. 

But most of that is unrealised gains because SMT originally invested $200 million (£151 million) in 2018, when SpaceX was valued at “only”$30 billion.

So, SMT fund manager Tom Slater was well ahead of the crowd and gained an entry point that was far below the flotation price. 

Slater also sounded a note of caution at the time of the IPO, saying SpaceX shares could “double or halve in the next few days” and added: “Be aware that the fund is not as diversified as it has historically been” with a “very high degree of concentration”.

However, it is only fair to point out that other exciting assets in Scottish Mortgage’s top 10 include Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM), its Dutch rival ASML Holding NV (EURONEXT:ASML), the American graphic processing unit (GPU)-maker NVIDIA Corp (NASDAQ:NVDA), and the online marketplaces Amazon.com Inc (NASDAQ:AMZN) and Latin America’s MercadoLibre Inc (NASDAQ:MELI).

Similar diversified exposure to space is available via Polar Capital Technology Ord (LSE:PCT) with total assets of £7.6 billion. 

Its manager, Ben Rogoff, said: “We took part in the SpaceX listing, the world’s largest-ever IPO. We see it as a unique, vertically integrated business – meaning it controls most stages of its own supply chain – at the centre of several attractive, underpenetrated markets.”

Rogoff said criticism that SpaceX had been overpriced reminded him of similar worries about Alphabet Inc Class A (NASDAQ:GOOGL) when it floated in 2004 and went on to become one of PCT’s most successful holdings. 

PCT is the top performer in the AIC’s Technology & Technology Innovation sector over the last year and five-year periods with total returns of 56.5% and 149.8% respectively, following 734% over the last decade.

Against all that, Rogoff reminded investors that share prices in this sector have fallen sharply in the past. 

He said: “As we have cautioned, we should expect episodes of volatility that are endemic to new technology cycles, as we saw between 1995 and 1998 when a strong technology market was punctuated by seven sell-offs of 15% or greater.”

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Looking forward, I continue to believe that some parts of SpaceX are among the most exciting businesses on this planet. 

These include its Starlink subsidiary, whose 10,000 low earth orbit satellites have the potential to replace conventional internet service providers. 

Less happily, Musk also added assets such as X - formerly Twitter - which increasingly resembles a pub with no beer where there is a fight every night. It must be somebody’s idea of entertainment but it certainly isn’t mine.

So, I am neither surprised nor pleased about SpaceX falling to earth since its stratospheric IPO. In the short term, the share price may trade nearer Morningstar’s cautious valuation than Goldman Sachs’ more ambitious estimate. 

Over the medium to long term, I intend to continue participating via the diversified portfolios of Polar Capital Technology and Scottish Mortgage.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Polar Capital Technology and Scottish Mortgage as part of a globally diversified portfolio of investment trusts and other shares.