Before investing in Starlink's IPO, we need to know how much revenue the company is making.
Two months ago, Bloomberg took aim at SpaceX, arguing that the company's claims that its satellite internet subsidiary, Starlink, was already profitable, despite boasts from CEO Elon Musk, were “dubious.” Citing a “person familiar with” SpaceX's finances, Bloomberg claimed that SpaceX was losing “hundreds” of dollars on each Starlink ground terminal it sold.
Bloomberg may be right about that part of Starlink's business, but that's not the point.
Razors, blades…and profits
Every ground terminal that Starlink sells is like a razor: a piece of equipment that will be in the hands of customers for years after an initial unprofitable sale, and that will require selling the blade (which in Starlink's context is satellite internet service).
After all, Starlink's internet service is highly profitable.
In its 2024 forecast, Payload Research projected that Starlink will record $6.8 billion in revenue this year, with the majority of that coming from internet subscriptions. According to an internal SpaceX document, the company expects a 60% operating margin on that revenue. That sounds like a lot, and it is. Still, Comcast (CMCSA -0.28%) and Verizon (VZ -0.94%) By offering similar services, SpaceX routinely earns operating margins of 20% to 40%, according to data from S&P Global Market Intelligence. With less competition in the space-based internet services space, SpaceX could probably do better than that.
But even if that doesn't happen, operating margins of 20% to 40% wouldn't be bad at all.
From Not Bad to “Just Amazing”
Of course, profits come in many shapes and sizes, from gross profit to operating profit to net income, as you traverse the income statement and deal with the complexities of generally accepted accounting principles. As an investor, I personally like to evaluate companies on the following criteria: cash The profits generated after paying for all capital investments are called free cash flow.
In that light, one space investor has gone public to describe SpaceX's profits as “just staggering.”
Research firm Quilty Analytics, cited by Ars Technica last month, largely agrees with Payload Research on how much revenue Starlink will generate this year, predicting roughly $6.6 billion in revenue, up from nearly zero four years ago. Quilty estimates that after deducting capital expenditures, SpaceX Starlink will generate positive free cash flow of around $600 million this year.
That's up from zero four years ago. It's really surprising.
What it means for investors
If you’re a Starlink user, you might not be too happy to know that Starlink is using your money to make SpaceX this much money, but if you’re a space investor like me, and you’re eagerly awaiting the day that SpaceX announces an IPO for Starlink (as Elon Musk has promised), you might want to know what these numbers mean for your Starlink investment.
Free cash flow of $600 million on annual revenue of $6.6 billion (or $6.8 billion) means the Starlink business has a free cash flow margin of about 9%. By comparison, Verizon generated positive free cash flow of $20.1 billion over the past year, giving it a free cash flow margin of 15% on revenue of $134 billion. Comcast is less profitable, but its FCF of $16.7 billion on revenue of $153.3 billion still gives it a free cash flow margin of 11%.
At first glance, these figures may seem surprising — Elon Musk is supposed to be the “wizard” of corporate profits, after all — but these figures strongly suggest that his Starlink subsidiary is in fact significantly more profitable. few That's a higher margin than existing competitors like Comcast and Verizon, but remember that just four years ago, Starlink didn't even exist. To They compete with these terrestrial ISPs.
Starlink's $6.6 billion (or $6.8 billion) in revenue may still be a long way from Musk's goal of a 60% profit margin on $30 billion in annual revenue, but the bigger Starlink gets and the greater the economies of scale it can achieve, the more profitable the SpaceX subsidiary will be.
I remain as optimistic as ever about Starlink's upcoming IPO.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Comcast and Verizon Communications. The Motley Fool has a disclosure policy.
