SpaceX – the largest IPO to ever hit the markets – has everyone talking, and like most things in our society today, it seems to be very divisive. Some say it is a marvel of capitalism and something we should be proud of, while others say it is a monolith for inequality. Who is right?
To truly understand what SpaceX really means, we have to go back to 1981 and a trip to Washington DC. I was 12 years old, and my parents wanted me to see our nation’s capital while my uncle still lived in Bethesda, MD. We did the whirlwind DC tour, and then my uncle took my father and me to spend the night on his sailboat, anchored out somewhere on the Chesapeake Bay. It was the first time in my life that I spent the night on a boat away from land. For a young boy, it was a magical night.
What does that have to do with SpaceX? Everything. Fast-forward 39 years and that young boy had grown up but still remembered that night, since that was the night when he decided that he needed to have a sailboat of his own. Unfortunately, he lives in Atlanta, which is approximately 300 miles from the nearest ocean access, and he has a demanding career, a wife, and two children…not to mention two dogs and a cat. Sailing was limited to nearby lakes and occasional family vacations.
Then Covid happened. The entire office went remote, kids stayed home from school, and the final straw was when summer camps were canceled. His wife looked at him with a look of horror and uttered the most magical words he had ever heard, “I think we need to get that boat.” All of a sudden, the dream became possible. The remote work proved what he had always suspected: that he could work from anywhere, even a boat. He just needed his laptop, a phone, and of course the internet connection.
How much could it possibly cost to have an internet connection in the middle of the Atlantic Ocean? It turns out that in the year 2020, it cost a boatload (no pun intended) of money to have internet on a boat: The upfront hardware cost was approximately $20,000, but that was just the start. The service started at about $1,000 a month if all you wanted to do is send the occasional text message, but if one truly wanted to be able to work, the cost for high-speed internet was roughly $8,000 per month. The dream was crushed.
This is when Elon Musk enters the picture. Starlink, the profitable piece of SpaceX, provides high-speed internet almost anywhere in the world – and the hardware costs $500. The service varies depending on range and data usage but starts at a little more than $100 per month. It is also month-to-month, so one can change the plan whenever needed. SpaceX did what capitalism always does: It took a thing that already existed but only for the richest of the rich and found a way to deliver it to just about anyone at a significantly lower cost.
Most people are gleefully unaware of this because they live in urban areas where the internet is everywhere. They are not looking for the internet; they are looking to escape it. However, for that 12-year-old boy who dreamed of seeing the night stars miles away from light pollution, this was a game changer. Much more importantly, it was a game changer for remote parts of the planet, where building out the infrastructure we enjoy in the west was cost-prohibitive. Starlink can truly connect the world. They did not invent satellite communication; they found a way to deliver it affordably.
This is what capitalism does. Henry Ford did not invent the car; he invented a way to build cars cheap enough for every family to afford one. Bill Gates did not invent the computer; he found a way to put them in the home of just about everyone. Steve Jobs then found a way to put those computers in our pockets. When I ran One Atlanta Basketball, and we bussed kids from underprivileged neighborhoods to our gyms; their parents couldn’t afford lots of things, including youth sports, but they all had smart phones.
Elon Musk is now a trillionaire. What about the inequality? This may surprise lots of people, but I agree: this IPO is outrageous, and the amount of money is just crazy. What caused SpaceX to not go public until it was the fifth largest company in the world? The Sarbanes-Oxley Act of 2002 is the answer. Milton Friedman pointed out in 1962 that there is a direct link between inequality and regulation. In pre-Sarbanes Oxley world, SpaceX would have gone public years ago. The increase in value from a relatively small venture to one of the largest companies in the world would have been realized by millions of 401(k) investors. Musk would still be a very rich man, as would the thousands of employees who have earned the share of the SpaceX pie. His stake would likely be smaller and shared with many more.
As far as Iron Capital clients are concerned, SpaceX is very interesting. There are no guarantees in the stock market, but the usual pattern of the hot IPO is first a honeymoon period, then lots of investors who have been tied up in a non-liquid private investment will finally be able to sell. Usually sometime between six months and a year after the IPO, this selling sets in and provides an opportunity. We will see if that happens.
To the larger question: SpaceX represents America at its best and at its worst, both. No system has ever benefited the masses as well as our form of capitalism has; yet there is little that has promoted inequality, with almost no one willing to talk about it, like Sarbanes-Oxley.
Disclosure: this article has been written on a computer connected to the internet via Starlink.
Warm regards,
Chuck Osborne, CFA
