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Billionaire Elon Musk’s new space business is extremely profitable
Two months ago, Bloomberg put SpaceX in the crosshairs: Contrary to CEO Elon Musk’s boasts, the news outlet argued, claims that the company’s Starlink satellite internet subsidiary is already profitable seem “suspicious.” Citing “people familiar” with SpaceX’s finances, Bloomberg argued that SpaceX is losing “hundreds” of dollars on each Starlink ground terminal it sells.
Bloomberg may be right about this part of Starlink’s business, but that doesn’t matter.
Razors and blades… and profits
Every land terminal that Starlink sells is analogous to a razor – a piece of equipment that needs to be put into the hands of a customer to then sell blades (or satellite internet service, in the Starlink context) for years after making that first unprofitable sale. .
It turns out that Starlink’s internet service is actually very profitable.
In its forecast for 2024, Payload Research estimated that Starlink will record revenues of US$6.8 billion this year, the majority of which will come from internet subscriptions. Internal SpaceX documents show that the company expects to earn operating profit margins of 60% on this revenue – which sounds like a lot, because it is. Still, terrestrial ISPs such as Comcast (NASDAQ: CMCSA) and Verizon (NYSE: VZ) routinely achieve operating profit margins of 20% to 40% offering similar services, according to data from S&P Global Market Intelligence. SpaceX, which faces less competition in the field of space-based Internet services, can probably do better than that.
But even if that doesn’t happen, even an operating profit margin of just 20% to 40% wouldn’t be bad at all.
From not bad to “nothing short of mind-blowing”
Profits, of course, come in all shapes and sizes, from gross to operating to net, as we walk through the income statement and grapple with the complexities of generally accepted accounting principles. As an investor, I personally prefer to value my companies by the cash they generate after paying off all their capital investments, which we call free cash flow.
From that perspective, one space investor is now officially describing SpaceX’s profits as “nothing short of mind-blowing.”
Quoted in Ars Technica last month, research firm Quilty Analytics largely agreed with Payload Research on how much revenue Starlink will generate this year — about $6.6 billion, up from basically zero four years ago. After deducting capital expenditures, Quilty estimated that SpaceX Starlink will generate about $600 million in positive free cash flow this year.
The story continues
Again, above zero four years ago. Mind-blowing, indeed.
What this means for investors
If you’re a Starlink user, you might not be too happy to know that your money is what Starlink is using to generate all these profits for SpaceX. But if you’re a space investor like me and are looking forward to the day that SpaceX announces an initial public offering of Starlink – as Elon Musk has promised to do – then you might be curious to know what these numbers mean for Starlink as an investment. .
$600 million in free cash flow on $6.6 billion (or $6.8 billion) in annual revenue equates to about a 9% free cash flow margin in the Starlink business. To put that in context, Verizon generated $20.1 billion in positive free cash flow last year. With revenue of $134 billion, this resulted in a free cash flow margin of 15%. Comcast is less profitable, but even its $16.7 billion in FCF and $153.3 billion in revenue yielded a free cash flow margin of 11%.
At first glance, these numbers may seem surprising. After all, Elon Musk is supposed to be a “magician” for corporate profits – but these numbers strongly suggest that his Starlink subsidiary is, in fact, significantly less profitable than established competitors like Comcast and Verizon. Still, remember that just four years ago there wasn’t even a Starlink to compete with these terrestrial ISPs.
With revenue of $6.6 billion (or $6.8 billion), Starlink may still be a long way from the 60% profit margins on $30 billion in annual revenue that Musk is aiming for. However, the larger Starlink becomes, and the more its scale efficiency increases, the more profitable this SpaceX subsidiary will become.
I’m still as optimistic as ever about Starlink’s upcoming IPO.
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Billionaire Elon Musk’s new space business is extremely profitable was originally published by The Motley Fool