SpaceX Stock Is Slumping: Is Now the Time to Buy or Hold Off?

Space Exploration Technologies (NASDAQ: SPCX), which most people know as SpaceX, received a lot of attention from the press and investors when it sold shares to the public for the first time in June. The stock price certainly has been on a wild ride since the initial public offering (IPO).

The company priced the IPO at $135, with the closing price peaking at above $211 on June 16. It has dropped dramatically since then, closing at $114.92 on Aug. 6, 46% below the high price.

Does this represent a buying opportunity? Or is it a warning to avoid SpaceX shares?

Unprofitable business

SpaceX operates three business divisions: connectivity, space, and artificial intelligence (AI). Under these segments, the company builds and launches rockets, operates a broadband data network, an artificial intelligence business, and a social media site.

While SpaceX has been growing revenue at a nice clip, the businesses as a whole have been losing money. In the company's first quarterly earnings release since its IPO, it posted an eye-popping 92% year-over-year growth in second-quarter revenue to $7.8 billion. While its bottom line improved, SpaceX still lost $541 million versus a $1 billion loss under generally accepted accounting principles (GAAP).

Among its three segments, connectivity is the only one that's currently profitable. While AI experienced a jump in revenue from $737 million to $2.6 billion due to new contracts, the business still lost $1.3 billion.

Sky-high valuation

While the stock price drop has created a better valuation, it's hardly a value stock. Investors can't use the traditional price-to-earnings (P/E) ratio since SpaceX isn't profitable.

However, you can turn to the price-to-sales (P/S) ratio. On that basis, the stock's multiple has contracted from over 100 times in June to a still-rich 73 multiple. Comparing that to the market, the S&P 500 index currently trades at a P/S ratio of 4.

Certainly, investors project that SpaceX will grow faster than the market. On the second-quarter earnings call, CEO Elon Musk stated that he expects the company to reach $1 trillion in annual revenue in 2030. That's a year ahead of Musk's previous expectation.

That's very fast revenue growth, but it's important to remember that the market has already priced in big expectations. Continuing to nearly double revenue year over year seems like a tall task.

Given the premium stock valuation, I'd avoid SpaceX's shares right now. If the company experiences any hiccups, the stock price could fall further.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.