Here’s What I Think Is Going on With SpaceX Stock

Key Points

Space Exploration Technologies (NASDAQ: SPCX) blasted onto the scene, completing the world’s biggest initial public offering and three straight days of gains that brought market value to more than $2.5 trillion. Investors piled into SpaceX before and after the IPO; press reports said the operation was greatly oversubscribed, and the momentum in the first days of trading clearly showed the interest in this technology and space giant.

But after a 40% gain from the opening price on Friday — its first day of trading — through Tuesday, SpaceX ended Wednesday with a 5% decline. Of course, this is a very small move considering the stock’s initial increase. Still, you may be wondering about what’s next for this exciting company. Here’s what I think is going on with SpaceX stock…

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Why investors are buying SpaceX

First, let’s start off by talking about why investors have rushed to get in on SpaceX in the first place. The tech giant represents a rather unique opportunity, given the businesses it’s pursuing and the fact that they are actually complementary. SpaceX is a leader in rocket launches and satellite-based internet services, and it’s building a significant artificial intelligence (AI) business too. The company’s launch program could be a huge asset as it gives SpaceX the ability to accomplish certain goals at the lowest cost possible and with maximum control: for example, sending satellites to space to support its connectivity business.

Investors may also be eager to invest in the company because Elon Musk is the chief executive officer. Musk isn’t necessarily admired by every investor, but at the helm of Tesla and through his private company endeavors, he has proven his ability to innovate and commit to potentially game-changing projects. Many investors like these qualities and want to get in early on the next Musk success story. And they probably liked the fact that Musk made the IPO a major event for retail investors, earmarking more than 20% of IPO shares for this community of non-professional investors. Generally, only about 5% to 10% of IPO shares go to retail investors.

All of this has driven huge interest in the IPO and SpaceX stock in its early days of trading. So, it’s not an enormous surprise that SpaceX, from its set IPO price of $135, opened at $150 and then went on to climb in just a few days — it closed at about $191 on Wednesday.

Now here’s what I think is going on with the stock at the moment and what may be just ahead. Today, some investors may be locking in quick gains — even if they believe in the SpaceX story, they might be reducing their positions by a small degree for this reason alone.

The early rally may not be over

SpaceX’s early rally probably isn’t over, though, and the stock’s entrance into the Nasdaq-100, which likely will happen in the early days of July, could act as a positive catalyst. This is as managers of funds that track the index buy SpaceX shares.

But, moving forward, we might see additional declines, and here’s why: Eventually, some investors will pay close attention to SpaceX’s financial picture and the challenges it faces. It’s important to remember that the company must invest heavily in its AI business to accomplish its goals — and last year that resulted in $12 billion in capital expenditures in that unit, which propelled the company to a loss of $4.9 billion.

Another key point is the fact that some of SpaceX’s biggest goals — ones that could result in explosive growth — may be very difficult to reach as they rely on new or yet-to-be-developed technologies.

These elements could weigh on SpaceX stock in the months to come. So here’s what I think is happening with SpaceX stock: It’s climbing right out of the gate as investors focus on Musk’s strengths in innovation and the technology potential — but the stock may pull back once investors put a focus on earnings growth and the risks ahead.

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Adria Cimino has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.