To Infinity and Beyond
“To infinity and beyond!” is the iconic catchphrase popularized by fictional Buzz Lightyear in the “Toy Story” film franchise, first uttered in 1995. Voiced by actor Tim Allen, Buzz uses the phrase as an optimistic mantra to dream big, reach for the stars, and embrace limitless possibilities. SpaceX, Elon Musk’s aerospace, satellite communications, and artificial intelligence company, is set to sell shares to the public this week. The mission of SpaceX is multi-planetary, seeks to understand the nature of the universe, and has a goal to “extend the light of consciousness to the stars.” I guess that is the beyond part. In the meantime, only the communications business of SpaceX is profitable.
The new “Toy Story 5” movie, due out June 19th, focuses on the biggest threat yet: modern technology and screen time. The anthropomorphic toys struggle to stay relevant with the shift to digital entertainment and group chats. This echoes concerns that AI will replace certain job functions in our economy. Along those lines, two mega-cap artificial intelligence related companies, OpenAI and Anthropic, have both recently filed for initial public offerings at near trillion-dollar valuations. With SpaceX, the IPO pipeline is now worth about $3.6 trillion. Only a fraction of that will be tradable though, and major stock market indexes will incorporate these stocks over time. SpaceX will be added to the Nasdaq-100 index shortly, while adding it to the S&P 500 will take a year. While the sky is the limit for potential growth from these companies, there is another famous quote, this one from the movie “Jerry McGuire.” Show me the money!
SpaceX and Anthropic are on track to lose billions of dollars, especially as they seek to operate advanced AI models that so far have cost far more to train and operate than the revenue they generate. Anthropic expects to generate an adjusted operating profit in the June quarter, although the company might end up losing money for the full year. Only the Starlink portion of SpaceX is profitable right now. For a $1.77 trillion starting valuation, SpaceX only generated $19 billion in revenue last year. That amounts to a market capitalization of about 95 times its revenue. The S&P 500 Index trades at less than 6 times revenue and the average stock trades closer to 3 times revenue. Plenty of successful companies have lost money for years on the road to consistent free cash flow and profitability. Amazon# famously lost money for the first six years of its existence, reinvesting into a range of disruptive ideas for many years after that. Earnings eventually caught up to the valuation, but it took quite a while.
Inflation and Settlements Here On Earth
The U.S. Consumer Price Index (CPI) for May was reported this morning, showing a 4.2% increase from the prior year. The reading was in line with expectations, while energy accounted for over sixty percent of the monthly increase. The core inflation rate (excluding food and energy) rose 2.9% over the prior year, following a 2.8% increase in April. Airfares, medical care and recreation were among the areas that saw increases in May. Car insurance, furniture and new car prices saw some declines, providing some minor relief to consumers. Inflation is looming large for Federal Reserve policymakers as they gear up for their first gathering under new Chairman Kevin Warsh next week. The central bank is facing inflationary shocks from tariffs, energy costs and the investment boom in artificial intelligence build out. Investors entered the year expecting further interest rate cuts. However, expectations are rising that the Fed will have to raise interest rates by the end of the year.
Existing-home sales in the US accelerated to their fastest pace of the year in May, providing a dose of optimism after a tepid start of the spring selling season. Contract closings rose 3.2% to an annualized rate of 4.17 million last month. In May, the median sales price of an existing home climbed 1.3% from a year ago to $429,300. Meantime, inventory rose slightly from a year ago to 1.55 million, a 4.5 months supply at the current sales pace. First-time buyers returned to the market, accounting for 35% of sales in May, the highest share since June 2020.
Reaching Escape Velocity
Technology stocks took a tumble last week after reaching new highs. Markets attempted a rebound on Monday, but gave up some ground yesterday. Seven of 11 S&P 500 sectors were actually positive yesterday, with 7 sectors up about 1% or more. Rotation and digestion (or indigestion) continue to characterize recent market trading. Stock market futures are indicated lower this morning on renewed Middle East tensions, although inflation numbers for May were not as bad as feared.
The performance of mega-cap technology IPOs has a storied history. Typically, high profile technology stocks such as Facebook (now Meta# Platforms) have declined after the initial IPO excitement, but can eventually grow into their valuations. Investors so far are tolerating seemingly infinite spending on capital for data centers and AI technology right now. But beyond the point of profitability, valuation will matter more. SpaceX, Anthropic, and OpenAI will need to break free of the pull of operating losses in order to meet their lofty goals and valuations longer term.
In 2008, a Buzz Lightyear action figure was launched into space aboard the International Space Station, where the iconic toy spent 15 months orbiting Earth. Today, real actress Elizabeth Hurley turns 61 along with Jeanne Tripplehorn who turns 63, and Gina Gershon who celebrates 64.
Christopher Crooks, CFA®, CFP® 610-260-2219