Two months ago, Bloomberg put SpaceX in its gunsights: Contrary to CEO Elon Musk's boasts, argued the news agency, claims that the company's Starlink satellite internet subsidiary is already profitable seem "suspect." Citing "persons familiar" with SpaceX's finances, Bloomberg argued that SpaceX is losing "hundreds" of dollars on every Starlink ground terminal it sells.
Bloomberg might even be right about that one part of Starlink's business, but it doesn't matter.
Razors and blades... and profits
Every ground terminal Starlink sells is analogous to a razor -- a piece of equipment that needs to be put in a customer's hands to then sell them blades (or satellite internet service, in the Starlink context) for years after making that first, unprofitable sale.
As it turns out, Starlink's internet service is very profitable indeed.
In its 2024 forecast, Payload Research estimated that Starlink will record revenue of $6.8 billion this year, most of which will come from internet subscriptions. Internal SpaceX documents show that the company hopes to earn 60% operating profit margins on this revenue -- which sounds like a lot because it is. Still, 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, facing less competition in the field of space-based internet service, can probably do better than that.
But even if it doesn't, even an operating profit margin of just 20% to 40% would be none too shabby.
From none too shabby to "nothing short of mind-blowing"
Profits, of course, come in all shapes and sizes, from gross to operating to net, as one travels down the income statement and deals with the intricacies of generally accepted accounting principles. As an investor, I personally prefer to value my companies on the cash they generate after paying for all their capital investments, which we call free cash flow.
From that perspective, one space investor is now on the record describing SpaceX's profits as "nothing short of mind-blowing."
Quoted on Ars Technica last month, research firm Quilty Analytics largely agreed with Payload Research on how much revenue Starlink will generate this year -- about $6.6 billion, up from basically zero four years ago. After deducting capital expenditures, Quilty estimated that SpaceX Starlink will generate on the order of $600 million in positive free cash flow this year.
Again, up from zero four years ago. Mind-blowing indeed.
What it means for investors
If you're a Starlink user, you may not be too thrilled to learn that your money is what Starlink is using 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 an initial public offering of Starlink -- as Elon Musk has promised to do -- then you might be curious to learn what these numbers mean for Starlink as an investment.
$600 million in free cash flow on $6.6 billion (or $6.8 billion) in annual revenue works out to roughly a 9% free cash flow margin on the Starlink business. To put that in context, Verizon generated $20.1 billion in positive free cash flow over the past year. On $134 billion in revenue, that worked out to a 15% free cash flow margin. Comcast's less profitable, but even its $16.7 billion in FCF on $153.3 billion in revenue yielded an 11% free cash flow margin.
At first glance, these numbers may seem surprising. After all, Elon Musk is supposed to be "magic" for corporate profits -- but these numbers strongly suggest that his Starlink subsidiary is, in fact, significantly less profitable than established competitors like Comcast and Verizon. Still, remember that just four years ago, there wasn't even a Starlink around to compete with these earthbound ISPs.
At $6.6 billion (or $6.8 billion) in revenue, Starlink may still be a long way away from the 60% profit margins on $30 billion in annual revenue that Musk is targeting. However, the bigger Starlink gets, and the more its efficiencies of scale increase, the more profitable this SpaceX subsidiary will become.
I'm still as optimistic as ever about the coming Starlink IPO.
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