Two months ago, Bloomberg put SpaceX in its crosshairs: Contrary to CEO Elon Musk’s boasts, the news agency argued, claims that the company’s Starlink satellite internet subsidiary is already profitable appear “suspicious.” Citing “persons familiar” with SpaceX’s finances, Bloomberg argued that SpaceX loses “hundreds” of dollars on every Starlink ground terminal it sells.
Bloomberg may even be right about that one part of Starlink’s business, but that doesn’t matter.
Razors and blades… and profit
Every ground terminal Starlink sells is analogous to a razor: a device that must be placed in a customer’s hands and then sold to them blades (or satellite Internet services, in the Starlink context) for years after that first, unprofitable sale. .
It turns out that Starlink’s internet service is indeed very profitable.
In its 2024 forecast, Payload Research estimated that Starlink will post $6.8 billion in revenue this year, most of which will come from internet subscriptions. Internal SpaceX documents show that the company hopes to achieve an operating profit margin of 60% on this revenue – which seems like a lot, because it is. Yet ground-based ISPs such as Comcast (NASDAQ: CMCSA) And Verizon (NYSE: VZ) routinely earn operating profit margins of anywhere from 20% to 40% by offering similar services, according to data from S&P Global Market Intelligence. SpaceX, which faces less competition in space-based internet services, can probably do better.
But even if that’s not the case, even an operating profit margin of just 20% to 40% wouldn’t be too shabby.
From not too shabby to ‘downright stunning’
Profits, of course, come in all shapes and sizes, from gross to operating to net, as you work through the income statement and deal with the intricacies of generally accepted accounting principles. As an investor, I personally prefer to value my companies at the cash they generate, after paying for all their capital investments, what we call free cash flow.
From that perspective, there is now one space investor who describes SpaceX’s profits as “downright staggering.”
Research firm Quilty Analytics, quoted on Ars Technica last month, largely agreed with Payload Research on how much revenue Starlink will generate this year — about $6.6 billion, up from virtually zero four years ago. After deducting capital expenditures, Quilty estimates that SpaceX Starlink will generate approximately $600 million in positive free cash flow this year.
Again, an increase from zero four years ago. Astounding indeed.
What it means for investors
If you’re a Starlink user, you might not be too happy to hear that Starlink is using your money to generate all these profits for SpaceX. But if you’re a space investor like me and looking forward to the day when SpaceX announces a Starlink IPO — as Elon Musk has promised to do — then you might be curious to see what these numbers mean for Starlink. an investment.
$600 million in free cash flow on $6.6 billion (or $6.8 billion) in annual revenue equates to a free cash flow margin of roughly 9% for the Starlink business. To put that in context, Verizon generated $20.1 billion in positive free cash flow last year. On revenues of $134 billion, that equated to a free cash flow margin of 15%. Comcast is less profitable, but even the $16.7 billion in FCF on $153.3 billion in revenue produced an 11% free cash flow margin.
At first glance, these numbers may seem surprising. After all, Elon Musk is supposed to be a ‘magic’ for corporate profits – but these numbers strongly suggest that his Starlink subsidiary is in fact significantly fewer more profitable than established competitors like Comcast and Verizon. However, remember that just four years ago, a Starlink didn’t even exist Unpleasant compete with these terrestrial ISPs.
With revenues 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 targeting. However, the bigger Starlink gets, and the more its efficiency of scale 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 Company Is Staggeringly Profitable was originally published by The Motley Fool
