Why Do I Have Confidence in My Forensic Financial Analysis of SpaceX?

This is a bit lengthy, but I wanted to explain why I have confidence in my financial analysis of SpaceX.

I believe I have created a crude but justified proforma forensic financial analysis of SpaceX and their Starlink business. It is crude but is at a far more instructive level of detail than most other analysis that I have seen in Bloomberg, Forbes or the Wall Street Journal. I think it is at the right level for useful analysis, conclusions and insights. Most other analysis does not incorporate the impact of reusability at all.

A proforma financial statement is one based on upon certain assumptions and projections. Financial forensics is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. The forensics involves dissecting statements, the business and the company for accounting and financial truth.

Corporate Finance Bootcamp is Where I Developed a Skill of at-a-Glance Financial Intuition

Several paragraphs describe the corporate finance Bootcamp part of my work career.

I worked in Corporate Finance at $50+ billion revenue companies for over ten years. It was in healthcare, biotech, finance and semiconductor companies.

I was forced to develop the skill of scanning financial statements, financial reports and
executive strategic planning decks for errors at a glance. The CFO, CEO and the board would be looking at these documents. I was responsible for systems that gathered results from regional or departmental finance. If the wrong numbers went out then people like me would get fired. I could not allow numbers that did not make sense to be passed higher up. No matter what the source of the error was.

I had to look at 50-200 charts and slides of financials and proof them in one to several hours. Then the reports went out to meetings with the CFO, CEO and the board. VPs of Finance, EVPs were buzzing around wanting to get their story and numbers right.

I would support regional and department finance people and determine from a dozen possible inputs areas what was not entered or calculated correctly.

There would be many questions about some wrong numbers. Some typical answers were -“you copied default numbers in on input screen 5 and did not put actuals in” or “you did not trend it correctly”. I was under extreme pressure to give the right answer in minutes. The finance execs were working nights and weekends to hit deadlines.

I am done with describing the crucible that I went through to get some of the skills that I am applying.

SpaceX and Elon Musk

I have run my SpaceX calculations by a guy who closely analyzes Ukrainian and other aerospace firms. He was at GE in corporate finance and Healthcare Finance.

His feedback was that I was assuming the most favorable efficiency for SpaceX. Yes, I am assuming the most favorable efficiency, but I believe this is how SpaceX has sold the funding to their investors.

The cost of satellite development will be coming from admin and research and development overhead. Yes, this is a deduction but it makes sense based upon the evidence of what is public.

The 12 month budget up to Sept 2018 was released publicly for SpaceX funding and financing talks.
They had $2.5 billion in revenue with $270 million in profit but the profit included pre-payment deposits for future launches.

Without deposits, they were at breakeven after admin, R&D etc…

SpaceX did talk about raising $750 million in loans. This would have been a safer financial strategy. But Elon does not play it safe. He created Paypal etc… He knows finance at a high level. Elon knows what the safer moves are.

I have an article on what I believe about Elon’s personality. The song “The Man” is more useful than the 60 minutes interview in understanding Elon.

I think Elon thinks he can get to meaningful risk reduction, higher valuation or even all the way to 800 satellites with $500 million. I have some experience in startups and fundraising. I took a Stanford extension course from a practicing Venture Capitalist. I have spreadsheet models that the Venture capitalists believe is acceptable for a funding pitch.

I think Elon thinks with 3 reuses of the first stage instead of the Sept-2017 to Sept 2018 at most one reuse that he will have more profit in 2019 ($200M-300M per year). Plus he is counting on $160 million to 250 million per crewed launch four times per year starting mid-2019 and his higher value military launches.

I think I am correctly modeling the logic behind his risk-taking and the nature of the gambles he is making. Maybe I am still wrong.

I think I am correct in scoping the size of the risks. I think the risks are reasonable. Getting most of the way to full execution allows for a new fundraising round at a far better valuation.

Hot Structures Gamble

Elon also appears to be making an engineering and technical gamble on x-plane hot structures for his airframe and heat shield for the Super Heavy. This has not officially announced but Elon tweeted about heavy metal and separately about the airframe and heatshield.

I believe Elon is depending on an internal SpaceX Skunkworks team to make the hot structures technology successful. The team was described in a Mars Society presentation.

I do not Think My Analysis is Lining Up at Random

I think the numbers line up because I have derived the correct models. I do not think it is random. I am open to considering possible errors.

Besides the forensic proforma analysis, there was the journalistic detective work to find the relevant information about SpaceX’s finances and business.

By Brian Wang

21 thoughts on “Why Do I Have Confidence in My Forensic Financial Analysis of SpaceX?”

  1. Years ago some other company tried something similar although I think is was more a satellite phone but it wasn’t successful. I am not sure how successful Starlink will be. And whether or not there will be space for similar companies to exist.

  2. Under this logic, as long as equity valuations increase debt is an attractive alternative since u can always refinance (or paydown the debt) w/ new equity. However that assumes equity valuations rise– which is a brave assumption for SpaceX. WHile they make things look easy, what they do is insanely challenging technically. Further they operate under a strict regulatory regime. if a rocket explodes further launches could be on hold for a while. This impacts revenues, cash flow and the entire financial picture (including equity valuations for SpaceX).

    In terms of raising equity gives more people a say in SpaceX, maybe. But unless they have a controlling stake (or the ability to assemble a controlling/supermajority stake) that is not likely to mean much. I am sure Elon has structured his companies to avoid such an outcome. Given that, it is plausible that a person with a large twitter following in the Space-related arena has more of a say in influencing SpaceX than most minority equity holders in the company

  3. Also, debt has different legal obligations that equity.

    Raising equity gives other people a direct say in how you run your company. Elon doesn’t seem to work best under such conditions.

  4. The demand is nearly endless if the network is reliable and price competitive. The thing about networks is that the cost is a high up front cost but once it’s operational then the costs are minimal. The reason why the telecom industry tends to be a monopoly is ground based infrastructure is so expensive and slow to roll out. A new ground based network could not compete with an established one that has minimal operating costs and a customer base. However, space-based infrastructure would actually be able to compete at a fraction of the infrastructure costs of new ground based telecoms. Once it’s operational then SpaceX only needs to undercut the prices of the competitors. The telecom industry is trillions of dollars so even a sliver of it will be worth billions in revenue. The reason why space-based networks haven’t taken off in the past is that companies like Hughes Net had launch costs close to ten times what SpaceX can launch for internally ($200m vs $20m) and the satellite technology wasn’t quite there for high bandwidth and a high number of connections, not to mention laser-linked inter-satellite connections also greater would advance the technology, something that SpaceX is working on. SpaceX is also bringing the costs of satellites down and including low-cost ion thrusters (not possible 15 years ago).

  5. Debt could be viewed as safer in the long run (as in “cheaper”) if SpaceX takes off in valuation. Equity raised now would be much more expensive than debt raised now if SpaceX doubled in valuation in the future.

  6. Question: How many satellites will it take before SpaceX can begin marketing data transmission to North America? What is the fewest number that it will take?

  7. It’s all interesting but, last I checked, you really couldn’t invest in SpaceX. If they don’t have to split the wealth (and perhaps just as importantly, the control) why would they? Elon definitely does not want to wind up like Heinlein’s “The Man Who Sold the Moon.”

  8. The success of starlink depends on other technologies such as high-altitude pseudo-satellites not overtaking it. Already the airbus zephyr can stay aloft nearly a month; five years should be possible, especially if expected breakthroughs in solar cell efficiency and battery energy density come through in next five years.

  9. How is raising debt a ‘safer’ financial strategy for SpaceX than raising equity? (Equity is permanent capital — i.e. u do not have to repay it and an equity dividend can always be cut)

  10. https://www.quora.com/Which-trading-communication-technology-e-g-laser-microwave-fiber-delivers-the-lowest-latency-Is-there-publicly-available-data-on-their-respective-speeds-between-data-centers


    As a minimum lower bound, the satellite will be 50% faster than the fiber. More realistic is about twice that as a minimum, because the satellite signal has three straight legs, the fiber and even microwave follows a far less straight a path (longer actual length) and has many more switches between media and within switches.

    ” Not to mention the fact that it is stupid from a societal point of view to waste enormous sums to shave off microseconds of communication lag…. ” <– It is not your place to decide that is a waste. An advantage of milliseconds means millions of dollars per day, and it’s not your money.

    Or satellites.

  11. He’s been posting endless articles on this with numbers in the past few weeks, and more earlier. Just click on the “Space” square on top, and you’ll find plenty.

  12. Brian, in you previous calculations you have assumed that the Starlink network will generate revenue due to faster communications for the stock market, and you have used the value of a micro-wave connection to model it. You state that there are 190 combinations of financial, but most combination will not be profitable. For instance, if you assume 160 km satellite height, then absolute shortest “air-distance” with one optimally placed satellite would be 469 km compared to the “land distance” of 344 km when connecting the servers of Paris with the servers of London.

    If we divide 469 by 1.48 (refractive index of glass fiber), we obtain 317 equivalent fiber kilometer. So you would gain, at best, 89 microseconds. Since the satellites are not stationary, your gain would vary between 0 and 89 microseconds. If the satellite is not above the straight line Paris-London, then you would have a time penalty instead. Also note that this communication would have to compete with land based micro-wave, which would be (presumably) both cheaper and faster….

    No, most of the city combinations would not be profitable. There is a second reason for this. If your company has a connection between London and New York, you would use land lines for Paris to London, and then satellite the rest of the way. Your financial assessment is not viable.

    Not to mention the fact that it is stupid from a societal point of view to waste enormous sums to shave off microseconds of communication lag….

  13. We can also speculate that if Starlink is highly successful then that will encourage other, similar business plans, who would also use the SpaceX launch capacity.

  14. The analysis is about SpaceX’s financing of Starlink which creates a vast amount of internal demand for their low cost launch services.

  15. There’s a heck of a lot of demand for low-latency high-bandwidth internet. Hence the gigantic satellite network SpaceX is planning to launch.

  16. I tend to take a top down look at similar businesses, projects and services and then give SpaceX a lot of potential credit for lack of legacy costs, younger workforce, better and faster processes and technical risk taking. Iridium Next cost about $2.9B for less power hungry services with much lower capacity and 64 operational LEO sats. Now some of that cost went to SpaceX profits so maybe $2.5B is a better number. If the 800 sats are 1/2 as heavy and 1/4 cheaper and launch costs with Block 5 are 1/2 the cost then you are starting to see a $2B production and deployment number after the R&D and testing. An incredible value, which assumes my most favorable efficiency for SpaceX. It still would be a great value if it was $4B.

    When it comes to SpaceX’s F9 business we see a lower cost business running at a respectable but not impressive rate in 2018. We see a slowing commercial demand and an increasing and slightly higher margin gov’t business filling in the slack for now. Overall they seem to be making somewhere between a 0-10% profit. Given valuation and the promise of Starlink there is an IPO of 25% of the shares to be had to fund Starship/Super Heavy ($2-$5B) and initial Starlink ($2B) over the next 5 years.

    I think most favorable efficiency for SpaceX allows them to do things at 1/2 to 1/4 the cost of others … but there is a limit, and slips to schedules simply reflect that although SpaceX is the best out there, there are limits to even the best organization.

  17. While I love Space-X I don’t see a big demand for their business. And that to me is the problem. Maybe they can sell tickets to space using a lottery system. You buy a ticket for $1. If you win you get to go. We have a cheap way to get to space but right now we have nothing that needs it.

  18. While I love Space-X I don’t see a big demand for their business. And that to me is the problem. Maybe they can sell tickets to space using a lottery system. You buy a ticket for $1. If you win you get to go.

  19. I like it.

    I sometimes read short seller analysis of companies, where someone takes the published financials and demonstrates that they just can’t work, at least to the level of certainty where they are prepared to bet millions that it will all fall apart.

    I also have direct involvement in startup financials, at least to the point of judging whether to walk away or not.

    And from this perspective I think it’s a very under used method for seeing what is going on in the world, because a lot of very important stuff depends on just these kind of things.

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