Billionaire Elon Musk’s New Space Business Is Surprisingly Profitable
Before investing in Starlink IPO, you need to know how much money the company is making.
Two months ago, Bloomberg took aim at SpaceX. Contrary to CEO Elon Musk’s boasts, the telco claimed the company’s Starlink satellite internet subsidiary was already turning a profit, a claim that seemed “suspicious.” Citing “people familiar with” SpaceX’s finances, Bloomberg claimed that SpaceX is losing “hundreds of dollars” on every Starlink ground terminal it sells.
Bloomberg may be right about one part of Starlink’s business, but that doesn’t matter.
Razors and blades… and profits
All ground terminals sold by Starlink are similar to razors. A razor is a piece of equipment that you have to get into the hands of customers to sell blades (or satellite internet service in the Starlink context) for years after your first unprofitable sale. .
As it turns out, Starlink’s internet service is actually very profitable.
In its 2024 forecast, Payload Research estimates that Starlink will have $6.8 billion in revenue this year, most of which will come from Internet subscriptions. According to internal SpaceX documents, the company hopes to use this revenue to generate a 60% operating margin. This sounds like a lot because it is true. Nonetheless, land-based ISPs such as comcast (CMCSA -0.28%) and verizon (VZ -0.94%) Data from S&P Global Market Intelligence shows that providing similar services routinely yields operating profit margins of 20 to 40 percent. SpaceX, which has less competition in the space-based internet services space, could probably do better than that.
However, even if this is not the case, even if the operating profit margin is only 20-40%, it is not at all shabby.
From too humble to “pretty amazing.”
Of course, profits come in all shapes and sizes, from gross to operating to net income, as you dig into the income statement and deal with complex generally accepted accounting principles. As an investor, I personally prefer to value companies. cash They generate profits after all capital investments have been paid. We call this free cash flow.
From that perspective, one space investor has now gone on record describing SpaceX’s profits as “pretty amazing.”
Quilty Analytics, a research firm cited in Ars Technica last month, broadly agreed with Payload Research on how much revenue Starlink will generate this year. That’s about $6.6 billion, up from basically zero four years ago. After deducting capital expenditures, Quilty estimates that SpaceX Starlink will generate about $600 million in positive free cash flow this year.
It has risen once again from 0 four years ago. This is truly amazing.
What it means for investors
If you’re a Starlink user, you might not be thrilled to learn that your money is being used to help Starlink generate all these profits for SpaceX. But if you’re a space investor like me and you’re looking forward to the day when SpaceX announces Starlink’s initial public offering as promised by Elon Musk, you might be wondering what these numbers mean for Starlink. invest.
$600 million in free cash flow on annual revenue of $6.6 billion (or $6.8 billion) equates to a free cash flow margin of about 9% for the Starlink business. To put this in context, Verizon generated $20.1 billion in free cash flow over the past year. With sales of $134 billion, free cash flow margin was 15%. Comcast’s profitability is low, but even with $153.3 billion in revenue and $16.7 billion in FCF, its free cash flow margin was a respectable 11%.
At first glance, these numbers may seem surprising. Ultimately, Elon Musk will have to work his “magic” for corporate profits. But these numbers strongly suggest that his Starlink subsidiary is actually generating a decent level of profit. less More profitable than traditional competitors such as Comcast and Verizon. Still, keep in mind that just four years ago, there wasn’t even a Starlink around. to Compete with these terrestrial ISPs.
With $6.6 billion in revenue (or $6.8 billion), Starlink is still a long way from the 60% profit margin on $30 billion in annual revenue that Musk is targeting. But as Starlink grows larger and becomes more efficient at scale, the SpaceX subsidiary will become more profitable.
I remain optimistic about the upcoming Starlink IPO.
Rich Smith has no positions in any of the stocks mentioned. The Motley Fool recommends Comcast and Verizon Communications. The Motley Fool has a disclosure policy.
