Will Starlink IPO Before SpaceX? What Investors Should Know.

Globe and Mail

5 hours ago

Key Points
Starlink operates as a subsidiary of SpaceX, and specializes in satellite internet services.
There are multiple ways that SpaceX could take Starlink public while still maintaining majority control of the business.
Industry estimates suggest that Starlink is SpaceX's largest source of revenue and is generating positive free cash flow, making now an interesting time to consider an IPO.
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Be it in investing or life in general, people often want things that they can't have. When it comes to stocks, it's not uncommon for investors -- particularly retail investors -- to fawn over the prospects of owning equity in high-profile start-ups. Unfortunately, these types of investments are generally reserved for venture capital (VC) firms, private equity funds, or accredited investors.
One of the most popular start-ups in the world is Tesla CEO Elon Musk's space exploration company, SpaceX. As of this writing, industry research suggests that SpaceX is the most valuable private technology company in the world -- having achieved a valuation of $350 billion earlier this year.
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In addition to rocket ships, SpaceX also provides satellite internet services through a subsidiary business, called Starlink. Over the last few years, Starlink's popularity has fueled speculation that it could potentially go public. But seeing as how Starlink operates within the broader SpaceX orbit, how would such a transaction even work?
Let's dig into the mechanics around a potential Starlink initial public offering (IPO) and assess how and why such a deal could benefit SpaceX.
SpaceX, Starlink, and retail investors: It's a complicated situation
A concept that retail investors may not fully understand is that when you invest in a business -- especially one that is diversified -- you effectively gain a form of ownership in the various segments of the company.
For example, if you're interested in autonomous vehicles and want to invest in Waymo, the easiest way to do that is by owning Alphabet stock. Waymo is a subsidiary of Alphabet, and so owning the stock provides investors with exposure to the company's entire ecosystem including Google, YouTube, Google Cloud, Waymo, and much more.
Along the same lines, if SpaceX were to go public, investors would be able to buy stock through their brokerage account and have an ownership stake to the entire business (including exposure to Starlink).
But what would a situation look like that features a completely separate initial public offering for Starlink? There are multiple different ways that SpaceX could structure such a deal.
One option could be for SpaceX to partially spin off Starlink as its own legal entity and subsequently offer a certain percentage of the business through an IPO.
Perhaps a more interesting structure would be for SpaceX to create a tracking stock just for the Starlink division. In such an event, investors could buy shares in stock that only tracks the performance of Starlink as opposed to the entire SpaceX operation.
The broader point here is that taking Starlink public before SpaceX is entirely doable... but it's also complicated and requires some creative thinking as it pertains to deal structure. Taking this one step further, what would SpaceX's motivation be for taking Starlink public?
Does a Starlink IPO even make sense for SpaceX?
One benefit of taking Starlink public is that it would provide investors with some autonomy regarding how they want to allocate capital. In other words, by listing Starlink and SpaceX as separate public entities, investors have a choice over buying exposure into a lumpy aerospace and defense business (SpaceX) or a subscription-based, recurring revenue internet services company (Starlink).
As a private company, SpaceX is not required to disclose its financial profile. With that said, sending rocket ships to space is a complex, time-consuming ambition. Moreover, space exploration is not exactly a linear type of business. What I mean by all of this is that SpaceX's core business doesn't necessarily have predictable revenue streams, but it requires hefty investments across research and development (R&D) and capital expenditures (capex) on an ongoing basis.
According to a report published by Payload Space earlier this year, Starlink is believed to be the largest source of revenue within the entire SpaceX business. In addition, it's also suggested that the overwhelming majority of Starlink's revenue stems from recurring subscription services.
With that in mind, Starlink's actual profitability profile is not entirely known. Reporting from Bloomberg has suggested that Starlink's profitability profile is not robust given the high costs of building and launching satellites. But on the other side of the equation, some would argue that Starlink's internet subscriptions help offset the maintenance costs affiliated with low-margin satellites.
While the company's precise financial picture independent of SpaceX is not entirely known, I remain optimistic that a Starlink IPO would be well received. A Starlink IPO could represent a capital infusion for SpaceX while still allowing the company to retain control of Starlink from an ownership and governance perspective.
In other words, SpaceX can leverage proceeds from a Starlink IPO to reinvest in the core space exploration business. This would permit for more aggressive investments in the core rocket business, ultimately helping SpaceX intensify the competitive landscape with the likes of Blue Origin or Rocket Lab.
Given Starlink's reported explosive growth and SpaceX's ability to maintain control over the satellite business, I think Musk should seriously consider taking Starlink public sooner rather than later.
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