Stansberry Research

The Three Flaws in Elon Musk's 'House of Cards'

David LashmetStansberry Digest

What goes up will come down... SpaceX is not what it seems... The three flaws in Elon Musk's 'house of cards'... What he doesn't want you to know... Starlink's problems... Beware a SpaceX IPO...


Editor's note: Today, our colleague and friend Dave Lashmet concludes his two-part look at Elon Musk and his business interests. If you missed yesterday's essay, Dave covered why he expects Twitter (which Musk bought last year) to go bankrupt.

Today, Dave – editor of our Stansberry Venture Technology newsletter – details why another of Musk's high-profile ventures isn't all it seems...

Dave predicts Musk could use this business as a way to recoup the losses he's taking on Twitter. He believes the Tesla CEO will make a strong pitch to investors about it as early as this year – but that most folks would be better served ignoring it altogether.

Musk will need investors to fall for some costly misconceptions about his SpaceX business. Don't be one of them...


It's a house of cards for investors...

You probably know that Elon Musk's private space-launch company, SpaceX, builds impressive rocket ships...

The company's key innovation is reusable rockets that can land back on a launch pad. This dramatically cuts the cost of space launches, and SpaceX has been revolutionizing this market.

SpaceX has also advanced the manned space program – both with supply capsules and crewed capsules. But all these ventures have low net margins. And just like with Musk's Tesla, rivals are catching up...

In this case, Blue Origin – another private firm, backed by Jeff Bezos – also has reusable rocket ships.

Most of the world dismisses this topic as toys for billionaire boys. But retail investors need to wake up now...

Elon Musk is planning an initial public offering ("IPO") for SpaceX, selling shares that will let him walk away with billions in profits. This is Musk's "other way out" of the Twitter debacle – his plan to recoup billions of losses – that you read about yesterday.

But SpaceX's IPO – which may happen as early as this year – will be a disaster for investors. As I (Dave Lashmet) will show today, SpaceX is a house of cards. It's worth a fraction of its supposed value.

Arguably, it's a zero.

Let me explain...

SpaceX doesn't add up...

Both Main Street investors and Wall Street banks need to know three facts about SpaceX...

1. Musk is still raising equity for SpaceX, at a total valuation of $137 billion, a value the firm invented. 

That's how premarket startups work... Hedge funds get a chance to buy shares at a price you've set.

That doesn't mean they necessarily agree that the company is worth that much. Many of them are planning to flip their shares at IPO time.

Hedge funds and other private investors have an interest in hyping up a company that's going public. Their goal is to ride the "greater fool theory" – knowingly overpaying for a stock because they think they can sell it to someone else who'll overpay even more. As long as these investors can get other people excited about a stock, they don't have to keep it.

Instead, it's everyday investors who will end up owning SpaceX's $135 billion valuation.

That's fact one.

2. Currently, SpaceX is losing money.

In October, Musk tweeted that the company was losing around $20 million per month.

What's the value of a firm that's losing money? Not much.

Granted, developmental firms are building to a future goal: a new drug, a new device, or something... Further, they own assets like laboratories, equipment, or intellectual property. And some of the losses stem from providing satellite Internet service to help the Ukrainian war effort.

Mostly, though, a business losing money has the value of its team. It's this team that – with the right changes like a breakthrough or a new manager – can return a company to profitability.

3. The huge disconnect between a $135 billion valuation and SpaceX's negative profits is tied to Starlink.

Starlink, one of SpaceX's business lines, is a collection of satellites that promises to offer Internet from space for millions of paid subscribers.

Unfortunately, it's not a network of satellites. Despite SpaceX launching thousands of them into space, each satellite acts alone. It echoes your data straight back down to the Internet near you.

Because these satellites don't work together, Starlink has no "network effect" – a success that builds on itself as more users join. Instead, when many new users connect to a Starlink satellite, it gets overwhelmed.

Just as important, small satellites close to Earth are short-lived assets. They run out of fuel, fall, and burn up...

So SpaceX is the massive proliferation of an idea that works in testing but can't work on a larger scale.

This is Starlink's fatal flaw... And SpaceX does not want investors to understand this before its IPO.

Again: SpaceX's lofty $135 billion valuation is not tied to its rockets, but rather to subscription Internet. As an out, SpaceX is offering a future solution – one that also won't work, but which appears promising on the surface: second-generation satellites for Starlink.

As none of them exist yet, it's hard to call SpaceX's bluff. Still, if you understand networks, understand space, and understand hardware, it's easy to see the flaws.

Here's the point... SpaceX's IPO strategy will try to present Starlink as valuable now and more valuable in the future. So as a warning to you and any banker who reads on, let's review Starlink's flaws in more detail...

Flaw 1: Starlink has no network effect...

In the simplest sense, a space-based, two-way communications satellite works like a cellphone tower. There's an antenna, a way to convert analog waves into digital ones and zeros, then there's routing...

From there, an incoming signal has to go out again, so it's converted from ones and zeros back to waves. Like an Earth-based antenna, a space antenna needs a support structure. Plus, it needs a power source.

Since you can't plug in your space-based antenna, you need solar panels – and batteries for the night. Many satellites do this – for military uses, for S.O.S. signals, for satellite phones, and so on.

What makes SpaceX's Starlink satellites different is that they are tiny, and the company can stack many of them inside a rocket. Each satellite has the power and throughput capacity of one cellphone tower.

This size advantage lets SpaceX launch thousands of satellites. Unfortunately, they all act independently.

One way to prove this is with the current map of Starlink's coverage over the oceans. Here's that map...

See the light blue sections surrounding the coast? That's what Starlink serves right now, pre-IPO.

Flat maps can be misleading, of course – even if this world map seems familiar – since the Earth is a big ball. So Greenland is not that big. And New Zealand is not that small...

To figure out how far out Starlink can cover over the oceans, look to the Gulf of California in Mexico. It's about 100 miles from Mexico's mainland across to the Baja Peninsula, which scales the light blue rings on this map.

This means once you stray too far from land – and a fixed downlink – no single satellite can help you.

This also means the satellites do not work together. One satellite is all you get till the next one passes. And because they're all in orbit, they all keep moving. At any one time, you get one single "tower" overhead.

For one user, this sounds amazing. For an individual investor in SpaceX, this might sound amazing, too. But now imagine if there was one cell tower for all of New York City... and its entire metropolitan area.

That's Starlink's problem...

Each satellite serves about a 100-mile-by-100-mile-square area as it passes overhead. However, a cell tower only serves 1,000 users before it gets overwhelmed with data and slows down.

The same thing is happening at Starlink – not surprising, as their satellites are space-based cell towers with similar capacities. Here's an independent review of upload and download speeds for Starlink in the U.S., as more users join...

What you can see is there's no network effect: The more users that join, the less each user benefits. Though no one has audited these numbers, SpaceX claims Starlink has a million subscribers.

SpaceX's business plan calls for 30 million paid subscribers, who'd generate a projected $30 billion in turnover.

But at 30 times fewer subscribers than that, Starlink is already failing. It's overwhelmed.

Flaw 2: Starlink's satellites are perishable...

You might think, "No problem. SpaceX will just add more 'towers,' like Verizon or AT&T would do."

The trouble is, Starlink's towers only last about five to 10 years. And so they don't end up as space junk, satellites nearing the end of their lives receive final orders.

For low-Earth orbits like SpaceX uses, the order is "descend." That means they burn up by friction as they enter the atmosphere.

The entire collection of satellites SpaceX has put up is on a ticking clock. Its "towers" fall.

Do you see now why SpaceX is in a rush to do its initial public offering? It wants to get your money before its assets become meteors.

Of course, it's possible to build a satellite with a longer life – if you add a nuclear reactor. SpaceX didn't, though.

Instead, the limiting factor is fuel to maneuver. Solar panels must point up while antennas must point down. Yet the pull of Earth's gravity is not equal everywhere around the globe. That's why a satellite gets tilted.

A bigger satellite can add more fuel to maneuver, and this alone can give bigger satellites a longer life. SpaceX went small, though, so as soon as its Starlink network is complete, it has to launch all its satellites again.

That's why Starlink is not a permanent solution – or even a medium-term solution. It's a short-term play.

You don't have to take our word for this...

Starlink got cut from the federal program for rural broadband. The goal of this U.S. infrastructure program was to build fiber-optic cables out to rural communities.

First off, fiber is glass, and it's buried in the dirt. So it lasts for decades. It won't burn down in a decade. Second, fiber networks have proven to be scalable – you can add more colors or switch them faster...

Third, the cost for this bandwidth drops over time. With fiber, technological advances lead to a cheaper Internet. For Starlink, nothing like this happens. Future satellites are likely to be far more expensive – not less...

Flaw 3: Lasers will not save Starlink...

SpaceX's proposed solution to all of these problems is its magical Gen2 Starlink satellites. But just like magic does not exist, neither do these satellites. In tech slang, they are "unobtainium."

Here's why: Starlink's Gen2 satellites promise to use lasers to bring the Internet to mid-ocean jets and cruise ships. Unfortunately, using lasers to move data from satellite to satellite is just a research-stage technology.

In other words, it's technically possible to shoot a laser from one satellite to another, but not routinely. It's so hard because both satellites have to be perfectly aligned – because they are a long way apart.

The cost of missing the target is that all the data you want to deliver gets lost and you have to resend it. More to the point, the longer you keep satellites aligned, the more fuel you use up to reposition them.

Since fuel is one limiting factor in how long a satellite lives, the more fuel it burns, the shorter its life. You also have to power the laser, which takes more solar panels and more batteries during the night.

This means your satellite is larger (and more expensive) – so you can pack in fewer of them per launch.

There's another fatal flaw...

Imagine a Starlink customer is in a jet and tries to download an e-mail in the middle of the ocean.

All this data has to reach the shore to hit the Internet. Then new data has to return to the starting user. Thus, the magic Gen 2 satellites must do their own work, plus carry many other satellites' data, TWICE.

So, even more magic is needed... We can't describe exactly how this works, as it's unbuilt and unproven. Chances are, Gen 2 also gets a technology upgrade... so, like an LTE (4.5G) cell phone tower in space. We could also see much larger antennas – so maybe they can each act like 10 cell towers, for 10,000 users.

But that's all just sales pitches and rumors at this point.

Here's where this matters to investors...

Allegedly, the new Gen 2 satellites are up to 10 times the size of the original Starlink satellite stacks. Since launch weight is limited, you can only put up a tenth as many satellites per space launch.

If you launch 10 times more rockets to increase your throughput by a factor of 10, you haven't dropped your costs. And even if lasers (or a simple radio) help over the oceans, cities are a mess. That's because each Gen 2 satellite can only take up or beam down data to the limit of its own antennas.

Again, think of New York City. At least 25 million live within 50 miles of it. Birmingham, Alabama, is the 100th-largest U.S. city, with 212,000 people. But metro Birmingham has 850,000.

Within 100 miles of Birmingham, at least a million people could want SpaceX's bandwidth. Each current Starlink satellite has only a thousandth of that capacity – and Gen 2 will have a hundredth.

In other words, "unobtainium."

SpaceX wants more U.S. subscribers, but it cannot possibly serve them...

That's why every other satellite firm leaves land-based Internet to wireless phones and to fiber optics. Then they put truly massive 10,000-pound satellites over the ocean to cover 100,000 users at once.

That's also why fiber has won the battle for rural broadband, and Starlink lost. So SpaceX's gig is up. There are better satellite firms out there already. I've recommended a few in Stansberry Venture Technology, including one we closed for triple-digit gains last month.

In December, I also recommended subscribers buy shares of a major aerospace and defense company that sold billions worth of satellites in the third quarter of 2022. Shares of this business remain below my recommended buy-up-to price.

If you're interested in learning more about this and the other opportunities I recommend in Venture Technology and how to start a subscription, click here.

In sum, beware of the SpaceX IPO if or when it happens...

Rather than admit Starlink will never bring steady positive revenue to SpaceX, Elon will simply IPO it. The buzz will be enormous. The hype might even be profitable for Musk and private investors – generating the cash Musk needs to sustain his floundering social media business without having to sell more of his Tesla shares. But it won't last.

Later, he can blame investors for not paying the costs needed for a perishable, disconnected space network. In sum, he'll blame you for believing him about SpaceX, as he makes $50 billion to cover his Twitter loss.

Doesn't that sound fun? If not, then don't buy SpaceX when Musk offers you everything – like shares going "to the moon" – because of its Starlink systems. Because, on the contrary, it offers you nothing. Beware.

New 52-week highs (as of 1/18/23): Novo Nordisk (NVO).

In today's mailbag, feedback on yesterday's Digest and Elon Musk's takeover of Twitter... As always, send your comments and questions to [email protected].

"Musk bought an ultra-liberal enclave that was on a mission to permanently silence half the country's population, not based on dangerous or violent speech but based on political affiliation. Best case he reinvents it to be unbiased. Worst case he burns it to the ground. Either way, I say good for him!" – Paid-up subscriber Tim P.

"Musk made it clear before he bought Twitter that he did not care about the economic side of the deal. It's all about freedom of speech with him. He'll tell you that he understands there should be rules regarding what can be posted on Twitter, but he also insists that the rules should apply fairly to all...

"Yes, he fired many and perhaps too many of Twitter's employees, but in the process he has exposed enough shenanigans at Twitter to make that half of America that was censored feel vindicated. Hopefully, and that is a BIG hope, Congress will change the law and impose adequate accountability on all platforms. If they do, the $44 billion Musk spent on Twitter will pale in comparison to what our government spends to accomplish nothing except more wars." – Paid-up subscriber Luis A.

"Dave, While I agree with your financial insights on Twitter and Tesla (I never bought or tried to short either), but I think it is somewhat hypocritical to comment negatively about Musk's lack of content moderation on Twitter without criticism of the former Twitter board who had banned or shadow banned conservative or anti vax speech (they did not yell fire in the theatre). Musk freed social media and paid a big price to do so. He is more courageous than most of us!" – Paid-up subscriber Larry N.

Good investing,

Dave Lashmet
Seattle, Washington
January 19, 2023