This Earnings Report Came With an $18 Billion Catch

Editor's note: Private investors can buy into a vision. But retail investors demand results. And last week, the company behind Wall Street's biggest-ever IPO got its first taste of that reality. According to John Evelius of our corporate affiliate Chaikin Analytics, investors weren't worried about today's earnings... They were worried about how much the company is spending to build tomorrow.

Newly public companies dread this moment...

Eventually, every one has to open its books for the entire world to see for the first time.

You see, private companies grow on their own terms for years.

Private companies answer to a small circle of people. These investors bought in because they believed in the "mission." Nobody outside that circle gets a vote on how the story unfolds. They set their own valuations in funding rounds that are negotiated behind closed doors.

Going public erases that arrangement in a single trading session.

Suddenly, millions of strangers get to share their opinion on what the business is worth. And they update that opinion every day the market is open.

Often, these retail investors overlook the vision that got the company that far.

Facebook, now Meta Platforms (META), found that out in 2012 when it reported earnings as a public company for the first time...

By all accounts, the business was booming. But investors zeroed in on a single question: Could Facebook make real money through smartphones the way it had on desktops?

The market didn't think so. That led to an 8% sell-off and a new all-time low within hours of the earnings release. It took more than a year for the stock to reclaim its initial public offering ("IPO") price.

Last week, one of the most closely watched companies on the planet ran into the same wall...

Investors Wanted Growth... Not More Spending

I'm talking about SpaceX (SPCX).

The rocket and satellite company began trading publicly in June, ending years of speculation about when, or if, it ever would happen.

As expected, SpaceX's IPO prospectus was public before the stock started trading.

And buried in that document, SpaceX says that roughly 93% of the market it's chasing is tied to its AI segment. Yet, that business has few real customers or products.

Only a sliver of SpaceX's prospective market relates to the rockets and satellites the company is actually known for.

Last week's earnings call was the first chance for outside investors to weigh in on that AI bet...

In some ways, the company delivered. SpaceX's total revenue hit $7.8 billion for the quarter, up 92% year over year. This beat Wall Street estimates by roughly $1 billion. And its satellite segment Starlink saw subscribers double to 12 million.

That's solid growth. Yet the market didn't treat the stock with grace...

After a brief climb, shares reversed hard. SpaceX closed the next trading day down more than 13%.

It's not hard to see what's worrying investors...

SpaceX posted a $541 million net loss for the quarter. Even worse, capital expenditures ("capex") hit $18.4 billion.

And all that money is largely tied up in two expensive bets...

One is Starship, the rocket SpaceX still needs to make fully reusable if launch costs are ever going to fall as planned.

The program logged two major test flights this year, including a July "splashdown" SpaceX called its softest landing yet.

But the real "catch" in SpaceX's earnings report is the company's quick AI computing-capacity build-out.

You see, SpaceX ended this quarter with 1.4 gigawatts of computing power. But SpaceX's target is between 10 and 20 gigawatts in the future.

Increasing capacity 10-fold won't come cheap.

Though the satellite business seems solid, the AI segment's capex was more than twice SpaceX's total revenue. That gap made investors anxious the day after earnings.

SpaceX shares have already fallen 9% since the stock's public debut. With another lockup expiration looming in December, more insider shares will become tradable. This could add fresh selling pressure.

We don't know where SPCX will go from here. IPOs often take a while to find their footing. And shares can be very volatile while that happens...

So for now, tread carefully with SpaceX's stock.

Good investing,

John Evelius

Editor's note: Chaikin Analytics founder Marc Chaikin isn't telling investors to abandon AI. Instead, he says the market is about to change. Some of the largest stocks will stumble from here... while a rare new class of AI winners could potentially double your portfolio. That's why Marc developed a new system to help investors get positioned ahead of this shift. He'll reveal more on August 18.