On April 20, SpaceX—the American spacecraft manufacturer, launcher and satellite communications corporation—launched the most powerful rocket in human history: A vessel that’s commonly referred to as “Starship.”
The rocket is a prototype of the rocket system that will one day theoretically take humans to Mars.
Starship successfully lifted off from Earth, but exploded just under four minutes later, failing to complete most of its pre-mission goals. And while there are many angles to this story, one of them is undoubtedly the impact on SpaceX’s financial position and valuation.
SpaceX is somewhat unique because it’s a for-profit enterprise, not a branch of the government. In that regard, SpaceX is ostensibly targeting a positive return for shareholders as one of its primary end goals.
That means significant setbacks can translate into millions (or even billions) in new capital, and potentially tarnish the company’s reputation and valuation.
For investors and customers of SpaceX, a public event involving the company’s operations—such as the recent test launch—provides real-time feedback on the company’s ongoing progress.
From that perspective, the recent test launch of Starship represented both a success and a setback.
Why the Starship test launch was a success
The launch was in many ways successful, because something that was only a dream less than a decade ago is now a reality. The launch didn’t meet many of the goals outlined ahead of the mission, but it wasn’t an unmitigated disaster either.
The true disaster would have been if the rocket had exploded prior to liftoff, which would have destroyed a significant portion of the “stage zero” infrastructure. Stage zero includes things like the launch pad, the launch mount, the launch tower, the propellent tanks and other ground systems that assist in the launch process.
Moreover, the Starship launch vehicle itself—constituted by stacking the Starship (prototype Ship 24) on top of the booster (prototype Booster 7)—wasn’t expected to be reused after this mission. Meaning the loss of the space vehicle itself was already budgeted into the test flight.
Starship’s ability to lift off and travel 24 miles into orbit was celebrated by many, including Daniel Dumbacher, the executive director of the American Institute of Aeronautics and Astronautics, and a former high-level official of NASA. In the wake of the launch, Dumbacher told the New York Times, “It looked really good coming off the pad, and it looked really good for awhile.”
Dumbacher elaborated on the overall result of the launch and said, “It may look like that to some people, but it’s not a failure … it’s a learning experience.”
The learning aspect of the launch is a sentiment that many industry experts cited in the wake of Starship’s first orbital test flight. That’s a key element in any SpaceX project, because, unlike NASA, SpaceX leverages an iterative and incremental approach when developing new technology.
In that regard, failures are critical for SpaceX. The company uses the lessons from those failures to make forward progress. This approach is often summed up in the unofficial mantra of the company, “fail fast, learn faster.”
NASA’s development philosophy, on the other hand, is based on safety, reliability and scientific rigor. In many ways, NASA attempts to pre-engineer the perfect result, whereas SpaceX—especially in the early stages of development—is continually refining and improving its technology based on feedback from experiments, tests and launches.
Why the Starship test launch represents a setback
The SpaceX philosophy revolves around trial and error, and in that regard, the recent Starship orbital test flight wasn’t a failure. The reality, however, is that the recent launch resulted in some significant setbacks for the company.
The launch facility for Starship is located in Boca Chica, Texas at a complex commonly referred to as “Starbase.” And one of the most glaring setbacks relates to the company’s stage zero infrastructure at the launch site.
During and after the launch, one of the most talked about aspects of the event was the physical presence and impact of Booster 7. The Super Heavy booster is 230 feet tall and comprised of 33 Raptor engines, which pump out 17 million pounds of thrust.
At ignition, the firestorm spewing from Booster 7 was so powerful that pieces of the launch infrastructure were blown hundreds of feet away with lethal force. And while that extraordinary thrust was undoubtedly required to push all 5,000 tons of Starship off the ground, the collateral damage caused by Booster 7 has been viewed in hindsight as extensive and costly.
One of the most obvious casualties of the test flight was the launch area itself, which was found to be severely degraded after the dust settled on April 20. The massive downward pressure created by those 33 Raptor engines unintentionally excavated a huge crater below the launch area.
While further analysis is required, most early reports suggest that the stage zero infrastructure at Starbase will require many months of repair.
This is particularly troublesome because Starship rockets are expected to be reused—meaning the launch area needs to be able to handle the return voyage, as well as additional future launches.
This test launch therefore laid bare the weaknesses of the existing stage zero infrastructure. And while SpaceX is sure to find solutions to these problems, the effort will require significant time and resources in terms of design, engineering and implementation.
This aspect of the launch has been under the microscope because Elon Musk himself previously announced the company’s decision to forgo a so-called “flame diverter,” as highlighted in one of Musk’s tweets from October 2020.
Flame diverters and flame trenches are often used to mitigate damage to the stage zero infrastructure. They can protect the launch pad, the rocket and the rocket’s payload from the intense heat and flames produced by the booster engine during liftoff.
The flame diverter is typically a structure made of heat-resistant materials such as concrete, steel, or refractory bricks, and it is positioned directly beneath the rocket’s engine, often in conjunction with a flame trench.
Unfortunately, many expert observers have suggested that several of the Raptor engines failed during liftoff because they were degraded by flying debris. If true, that means SpaceX must address the flame diverter problem before the next test launch, because the risk of an on-the-ground explosion—stemming from a repeat of the same problem—is too significant to ignore.
Prior to the April 20 Starship test launch, an environmental impact expert named Eric Roesch correctly predicted that the event would “cause a lot more damage than anyone thinks.”
Roesch also hypothesized that SpaceX had forgone the flame diverter because it would have involved a lengthy approval process with the U.S. Army Corps of Engineers. With the flame diverter now back in play (per Musk’s tweet), that means SpaceX will likely have to navigate a lengthy approval process before it can attempt another test launch.
Potential impact on Artemis lunar missions
In a vacuum, these setbacks aren’t cataclysmic in nature. However, SpaceX is expected to use this same Starship system to deliver American astronauts to the surface of the moon in 2025 as part of the Artemis III mission.
And aside from successfully navigating maximum dynamic pressure, or max q, the test flight failed to meet most of its predetermined mission objectives.
Had things gone as scheduled, the booster would have shut down after 169 seconds, and the Starship would have then separated from the booster. After that, the Starship prototype was expected to fire up its own engine, and travel for a duration of 6.5 minutes, before splashing down in the Hawaiian Archipelago.
In reality, the Starship failed to separate, and the combined vehicle (including Ship 24 and Booster 7) experienced a Rapid Unscheduled Disassembly (RUD)—it blew up.
Based on those failures, as well as the extensive damage to the launch area, there’s fresh concern that SpaceX won’t be able to meet its Artemis deadlines.
The Artemis III mission involves a two-legged journey in which both NASA and SpaceX are responsible for one segment of the journey. NASA is in charge of building and launching the Orion spacecraft, while SpaceX is responsible for the human landing system (HLS), which is Starship. Lockheed Martin (LMT) is one of the key contractors on the Orion spacecraft.
According to an official NASA press release, “The agency’s powerful Space Launch System rocket will launch four astronauts aboard the Orion spacecraft for their multi-day journey to lunar orbit. There, two crew members will transfer to the SpaceX human landing system (HLS) for the final leg of their journey to the surface of the Moon. After approximately a week exploring the surface, they will board the lander for their short trip back to orbit where they will return to Orion and their colleagues before heading back to Earth.”
As part of the Artemis contract with NASA, SpaceX is mandated to conduct a successful, unmanned demonstration mission to the Moon before the actual mission, which is currently scheduled for 2025. The language used in the agreement also suggests that SpaceX needs to complete 10+ consecutive Starship launches—including three total flight readiness reviews—in the lead-up to the Artemis III mission.
As highlighted by Aria Alamalhodaei at TechCrunch, “The Artemis III plan also involves SpaceX sending up multiple reusable tankers and a propellant storage depot, with Starship refueling on-orbit to ensure it can make all the orbital burns required for the mission. All of these components of the mission are affected by delays to the core Starship testing program.”
Considering all of these factors, it seems like a stretch, if not an outright impossibility, to think that SpaceX will be able to meet the current Artemis deadline in 2025.
Potential impact on SpaceX valuation and future IPO
SpaceX is currently a private company—shares don’t trade on an exchange—which means the financials of the company are mostly a mystery. To date, SpaceX hasn’t had trouble raising capital, and if it continues to progress as it has, maybe it never will.
At the start of 2023, SpaceX tapped the private sector to raise $750 million, some of which may have been used to fund the recent test launch of Starship. Based on the terms of that deal, the implied valuation of SpaceX was roughly $137 billion.
It’s hard to truly assess an appropriate value for SpaceX because the company’s financials aren’t available for public review.
However, Lockheed Martin, an aerospace company, has a current market capitalization of $122 billion, which implies it is currently worth less than SpaceX. Last year, Lockheed brought in roughly $66 billion in annual revenue, whereas SpaceX is estimated to have generated between $4 and $6 billion in revenue during 2022.
Currently, SpaceX collects sales revenue from three primary sources: By selling access to its satellite-based broadband internet (e.g. Starlink), for commercial launches (satellites, people, etc.), and for its contract work (i.e. the NASA missions).
Announced back in 2020, the milestone-based contract with NASA for the Artemis missions is fixed at $2.89 billion.
Currently, it’s unknown whether the recent Starship test flight served as a completed milestone in the NASA contract. The rocket did successfully navigate max q, which is the moment when the rocket is subjected to the maximum mechanical stress during liftoff.
It’s possible that achievement during the test flight will qualify SpaceX for a milestone payment from NASA. Moreover, independent projections suggest that revenue at SpaceX could jump to more than $10 billion in 2023, as compared to between $4 and $6 billion in 2022.
Those extra funds could be critical, because valuation is one thing, while cash on hand is another.
Based on the aforementioned analysis of the potential setbacks and delays created by the recent Starship test flight, it’s more than likely that some unforeseen expenses are going to be piling up in 2023, and likely beyond.
Moreover, any additional setbacks could also place a kernel of doubt in the minds of the company’s existing and potential investors, and negatively impact the company’s ability to raise capital in the future.
SpaceX has previously toyed with the idea of going public via an initial public offering (IPO), but there’s little visibility as to when that might actually transpire. However, one can be sure that any potential SpaceX IPO would follow a successful flight test/mission, as opposed to a failure.
About a month ago, a report from The Information indicated that state-affiliated investment funds in Saudi Arabia and the United Arab Emirates were considering a potential investment in SpaceX, but as of yet, nothing official has been announced.
Going forward, investors and traders should watch carefully to see whether SpaceX is forced to raise fresh capital in 2023, because that event would shed more light on the company’s current financial position, as well as its associated valuation.
A fresh injection of capital at SpaceX would also provide Elon Musk with the opportunity to repeat his now infamous catchphrase, “funding secured.”
To learn more about trading the space exploration industry, check out this Luckbox article from earlier this year. To follow everything moving the markets during Q1 earnings season, tune into tastylive, weekdays from 7 a.m. to 4 p.m. CDT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastylive or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.