{"text":[[{"start":6.3,"text":"Last June I wrote a column with the headline “An entry-level guide to valuing stocks”. I also provided a link to a simple valuation tool that even my children’s new hamster (go early on pets and go small) could use."}],[{"start":21,"text":"But discounted cash flow models require the cash moving in and out of a business to be net positive in order to calculate what a company is worth. Unless you want a negative number for some reason. Like in divorce court."}],[{"start":35.1,"text":"Hence, a few years after I began as a portfolio manager in the mid-1990s, equity analysts trying to flog dotcom stocks began to use price-to-sales ratios. When these looked silly too, they invented price-to-clicks or price-to-eyeballs."}],[{"start":49.75,"text":"And you know how that ended. No wonder investors still prefer cash flow- based valuation mythologies over anything else. That said, there are legitimate reasons to employ other metrics, including price-to-sales ratios."}],[{"start":62.95,"text":"The latter are handy as a sense check when profits are temporarily depressed, distorted or cyclical — provided the revenues are real and measurable. If a price-to-earnings ratio appears odd, comparing price-to-sales ratios within an industry can be reassuring."}],[{"start":79.80000000000001,"text":"Moreover, plenty of firms operate at a loss and thus using earnings multiples doesn’t work — period. This can go on for years due to heavy investment in a business. Amazon was founded in 1994 and didn’t make a net profit until 2003."}],[{"start":96.05000000000001,"text":"What levels of price-to-sales ratios make sense? In theory it depends on how fast a company is growing, its margins — ratios can be higher if net profit margins are — its reinvestment needs and its cost of capital."}],[{"start":110.25000000000001,"text":"These differ from sector to sector. But when I used to run money, we had a few rules of thumb. A price-to-sales ratio of one or under was cheap. Two to five times was fine, depending. Above that was racy unless margins were high and very secure, such as in software or luxury goods. Double digits were considered speculative."}],[{"start":131.60000000000002,"text":"Things got crazier in the late nineties — but not everywhere. While internet stocks such as Priceline saw their price-to-sales ratios zoom towards 50 times, the median ratio for large US companies remained at just over one."}],[{"start":146.60000000000002,"text":"And today? The S&P 500 is on 3.5 times sales — raised by the prevalence of high-margin technology stocks versus when I were a lad. Nvidia, for example, has an enterprise-to-sales ratio (I’m now including debt for fairness) of about 20 times, with Apple and Microsoft at about half that."}],[{"start":166.40000000000003,"text":"Meanwhile, something like Walmart is on 1.5 times. As are the FTSE 100 and the Topix in Japan. All of which is to say that most of the time, for most companies in the world, if you had to mime price-to-sales ratios in a game of charades, the fingers of one hand would mostly suffice. Two hands max."}],[{"start":184.40000000000003,"text":"Enter SpaceX on 95 times. No, I haven’t forgotten the decimal point. That’s ninety-five. I seriously couldn’t believe it when I first divided the target valuation of $1.8tn (which was achieved on Thursday) by the last 12 months of revenues. I laughed so hard the wine I was drinking shot from my nose."}],[{"start":204.90000000000003,"text":"Then I laughed some more when I thought of all those analysts who had to justify that multiple in their “Buy” recommendations to clients. It was easy for Goldman Sachs, however. It simply forecast revenues to rise 25-fold by 2030."}],[{"start":219.35000000000002,"text":"It makes me wonder why it didn’t push for 50-fold. Or why not sales up a hundred times in four years? SpaceX could have raised double or quadruple the money! After all, the initial public offering was at least three times oversubscribed — and on Friday trading opened with the stock up 11 per cent. "}],[{"start":238.35000000000002,"text":"How might a sensible person — which excludes conflicted global bankers and meme investors who jump on anything from marijuana and the metaverse to bitcoin and AI — value SpaceX, then? Frankly, I haven’t a clue."}],[{"start":251.40000000000003,"text":"By which I mean, I have no idea how anyone can arrive at the current valuation. And it’s not that the outlook for SpaceX’s core launch and satellite communications business, as well as artificial intelligence, is largely theoretical at this point. It’s just that even insanely bullish assumptions get me nowhere near the share price."}],[{"start":271.1,"text":"Perhaps I’m not dreaming big enough. Space is larger than earthling investors such as me are used to analysing. Then again, I’ve just read the Morningstar research report from a couple of weeks ago that arrived at a valuation of $780bn — less than half of SpaceX’s market cap. And it was wildly optimistic."}],[{"start":291.45000000000005,"text":"Morningstar wrote of “prodigious cost advantages” in launch, reaching $18bn in sales within a decade at 20 per cent margins. For even the more sensible Starlink business, “tens, not necessarily hundreds” of billions of dollars in annual revenue growth over the coming decade are pencilled in. At operating margins “potentially exceeding 75 per cent”!"}],[{"start":315.40000000000003,"text":"I agree that X (formerly known as Twitter) and Grok are sideshows — neither of them adding to or subtracting much from a valuation of SpaceX. But what of orbital data centres? It’s the business that has everyone wetting their pants. Morningstar’s analysts model three outcomes."}],[{"start":332.50000000000006,"text":"In their “Moonshot” scenario, ones and zeros somehow survive the battering from solar radiation, there are meaningful cost advantages over data centres on earth, and SpaceX wins a fifth of the forecast market for AI infrastructure computing capacity. In a worst-case scenario, it’s a dud, with the base case at 4 per cent of capacity."}],[{"start":354.40000000000003,"text":"The latter is given a 50 per cent chance of happening. Failure has a 43 per cent weighting and the “Moonshot” scenario the rump. But even that 7 per cent chance adds $93bn to the overall valuation — equivalent to the tenth biggest company in the FTSE 100 index."}],[{"start":373.1,"text":"So you see what I mean? Even worst-case outcomes for SpaceX produce eye-boggling numbers. This won’t stop many of you buying it, of course. But what do I know? Years ago, I thought Tesla was worth zip. "}],[{"start":388.6,"text":"The author is a former portfolio manager. Email: [email protected]"}],[{"start":null,"text":"
| Assets (£) | Weighting | Total returns YTD | |
|---|---|---|---|
| Vanguard FTSE 100 ETF (GBP) | 202,253 | 29.3% | - |
| iShares MSCI EM Asia ETF (USD) | 156,121 | 22.6% | - |
| Vanguard FTSE Japan ETF (USD) | 70,103 | 10.1% | - |
| Vanguard S&P 500 ETF (USD) | 72,654 | 10.5% | - |
| BlackRock Latin American Ords | 61,004 | 8.8% | - |
| 4.5% Treasury Gilt 2034 | 128,893 | 18.5% | - |
| Total | 691,028 | - | 8.2% |
| S&P 500 (GBP) | - | - | 9.6% |
| Morningstar GBP Allocation 60-80% Equity | - | - | 4.9% |
| Any trades by Stuart Kirk will not take place within 30 days of being discussed in this column |