SpaceX headquarters, Bolsa Chica, Texas. Photo: Alexander Hatley, Wikimedia Commons. CC BY 2.0Last week was a big one for the AI bubble. SpaceX had the largest IPO ever and Elon Musk became the world’s first trillionaire. In fact, it was such a big deal I thought I would summon Mr. Arithmetic out of retirement to get his insights.
First, if anyone is wondering what rockets have to do with the AI bubble, you have to look at the company’s registration statement. It projects that more than 90 percent of its future market ($26.5 trillion of $28.5 trillion) is in AI. So, SpaceX is first and foremost an AI company.
Now, let’s do the numbers. The Friday close on the listed shares for SpaceX’s IPO gave the company an implied market capitalization of $2.2 trillion. Does this valuation make sense?
Ordinarily, we would first look to its price-to-earnings ratio (PE) to see how high it is. But we can’t really do that with SpaceX, since it lost $5 billion last year. So, the company has a way to go here. Clearly the company’s IPO is a bet on Elon Musk.
I know there are some who insist the guy is a visionary and a genius, but his track record has not been great, nor has his relationship with the truth. Paul Krugman gave a few prominent examples of Musk’s boasts that have not panned out in his Friday Substack. His Boring Company, which was supposed to create superfast trains between cities, has literally gone nowhere. The same goes with his Neuralink company that is supposed to give us brain implants that allow us to circumvent our normal physical processes.
He has promised us that Tesla would give us full-self-driving cars next year for at least a decade. And he was supposed to have a full system of self-driving taxis last year. Apparently, Tesla now offers limited service in Austin, Texas. By contrast, Waymo has extensive service in San Francisco, Phoenix, and a number of other major cities.
And for those keeping score on such things, Tesla’s profits were $4 billion last year, roughly 0.25 percent of its market capitalization. And the overwhelming majority of the profits came from selling carbon credits, a system that Musk’s good friend Donald Trump wants to end. In short, Musk’s track record in his business dealings has been less than stellar.
But his ventures into politics look even worse. Apart from his presidential pick (he once said he loves Donald Trump as much as it’s possible to love another man without being gay), his grasp of numbers seems to be seriously lacking. When he was allowed to invent and run a “Department of Government Efficiency” Musk saidhe would eliminate at least $2 trillion in waste and fraud, according to Grok, his AI system. At one point, he suggested giving us all $5,000 annual DOGE dividends, which would come to over $1.3 trillion a year.
The most cursory examination of the federal budget would have told him that savings of this magnitude are absurd. The whole budget for 2025 was a bit over $7 trillion, with the overwhelming majority going to interest on the debt, Social Security, Medicare and Medicaid, and the military.
Reducing interest payments would mean radically altering monetary policy, which he didn’t have the authority to do, and would be a radical shift, to say the least. Social Security and Medicare have been endlessly scrutinized and found to have very little fraud. Medicaid surely has some, but it is hard to detect and getting to double-digit billions would be a huge stretch — and still less than 1 percent of Musk’s target. Defense surely has fraud and waste, but Musk’s boss didn’t want him to go there.
Spending outside of these areas was well under $2 trillion. This included education, scientific research, infrastructure, the FBI and criminal justice, agriculture, and foreign aid. Musk was able to score big in cutting the last category by cutting around $20 billion (1 percent of his promised savings), leading hundreds of thousands of people in Africa to get sick and likely die from AIDS and now Ebola.
Musk also routinely initiated and/or repeated whack job crazy claims like 20 million dead people getting Social Security. (The true number is low thousands, among a population of 70 million beneficiaries.) He also claimed, against all evidence, that Democrats are arranging to have millions of undocumented immigrants vote.
Maybe Musk never believed such craziness, and these were just lies to advance his political agenda. But if someone would so easily tell whack job crazy lies to advance their political agenda, is it reasonable to think that they wouldn’t tell lies to make themselves richer?
Does SpaceX’s Future Justify SpaceX’s Current Market Cap?
The question of the day: Does SpaceX’s $2.2 trillion market capitalization makes sense? We know the thing doesn’t make money now, but maybe at some point in the future Elon will be raking in the bucks to justify this price.
Let’s say we take a 10-year horizon. In 2036, SpaceX will be 34 years old, a more established company than Google is today, so we might expect it to have profits somewhat in line with its share price, like most mature companies. But its share price should be far higher in 2036 than it is today. After all, people aren’t buying shares of SpaceX to just break even.
Historically, stocks have given somewhere close to a 10 percent nominal return. (I have argued that expecting that return going forward probably doesn’t make sense, but most people invested in this market probably do expect a return something like that.) But that is for a normal stock with real profits. People putting money in SpaceX are betting on a company that is losing large amounts of money and run by a person with an affection for ketamine and neo-Nazi propaganda. Surely, they expect a better return than the measly 10 percent you can get from investing in an airline or consumer products company.
Let’s assume your typical SpaceX investor is expecting a 20 percent annual return. (Use a different number if you prefer.) After ten years with a 20 percent annual return, SpaceX’s market capitalization will be 6.2 times its current level, or $13.6 trillion.
As a mature company, let’s say that in 2036 it will have a price-to-earnings ratio of 20, still well above the long-term average for the stock market. That would imply it would have annual after-tax earnings of $680 billion. Is that plausible?
The Congressional Budget Office (CBO) currently projects that, in the economy as a whole, after-tax corporate profits will be $4.1 trillion in 2036. That would mean that SpaceX will have almost 17 percent of all after-tax corporate profits. That is several times larger than the share that any company has ever had.
It also comes at a time when Musk’s rivals, Open AI and Anthropic, are also having IPOs expected to price them at well over $1 trillion. Don’t forget that Nvidia already has a market cap of almost $5 trillion and the rest of the magnificent 7, including Tesla, all have market caps of well over $1 trillion.
If you think that something here doesn’t add up, you would be right. But there is the possibility that the CBO is wrong — and not just by something like 3-5 percent, which would already be a big deal, but 20 percent, 30 percent or more, which would be huge and unprecedented.
We can’t rule that sort of extreme error out of the realm of the possible, but we can say some things about the world where it is true. Jason Furman, who was a top economic advisor in both the Clinton and Obama administrations, had a New York Times column on Friday warning about the disaster facing Social Security as projections show a funding shortfall beginning in 2032.
While Furman is right that we will need additional funding for Social Security, the concern he expresses at the end for the well-being of our children is utterly absurd if economic growth is going to be hugely faster than the CBO projects, because of the wonders of AI. If the price of SpaceX and other AI companies come anywhere close to making sense, then concerns about the material well-being of future generations are complete nonsense.
Can completely contradictory views of the world exist on opposite sides of the New York Times home page and no one even notices? Having been around Washington policy debates for more than three decades, I can assure people that they can.
The people involved in policy debates tend not to be deep thinkers. They can miss massive contradictions right in front of their face. In fact, the same person can even argue massively contradictory positions themselves and fail to recognize the problem.
What do you know, here’s Elon Musk warning earlier this year that there is a “1000% chance” the government will go bankrupt. Anyone up for some shares in SpaceX?
This first appeared on Dean Baker’s AI Bubble blog.
The post SpaceX: Elon Musk’s Greatest Scam? Mr. Arithmetic Weighs In appeared first on CounterPunch.org.
This content originally appeared on CounterPunch.org and was authored by Dean Baker.