Future Outlook for SpaceX Stock

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It was taken care of almost as quickly as it helped. It feels good to get help, Quick. It feels good to GaIiCo. Feel like you're being told to wave a magic AI wand and everything will just get better? Sure, AI can chat and summarize But what about big business problems like rerouting stock through a canal that won't unblock Enterprise AI needs context for that, so Solonus provides it. The Solonis context model gives AI operational clarity so agents know how your unique business runs and how to improve it Meet the model at CE l o nis. com slash context. s. If money is evil, then that building is held Welcome to Profperty Markets. I'm Ed Elson. it is june twenty fourth. Let's check in on yesterday's market vitals The major indices declined as tech stocks dropped around the world, more on that in a moment. Meanwhile, oil continued its decline And finally, the dollar hit its highest level since November growing expectations for rate hikes this year. Okay What's happening Tech stocks are selling off and the pain is hard to ignore. So far this week, the NSDAQ one hundred is down roughly four percent meananing that the index has shed over a trillion dollars in the last two days alone Chhip makers are among the hardest hit with an index of semiconductor companies dropping eight percent yesterday The route has gone global too Asian stocks taking a steeper dive, South Korea's cospy is down ten percent from near record highs, but the biggest drop we've seen was SpaceX. The company issued a twenty five billion dollars bond offering to finance its AI operations And over the past three days, the stock has fallen around twenty percent. So for more on this latest drawdown in the tech market, we're speaking with Gil Luria. Head of teechnology Rsearch at DA Davidson Gil, good to see you. a lot of pain in the tech sector at the Chip stocks, especially AMDs down five percent this week Nvidia is down five and a half percent, TSMC and Broadcom down eight percent and What is going on here Why are investors so concerned right now Characterize it as a lot of volatility. The dispersion in outcomes for next year is bigger than it's been in a while. If you think about it, if AI goes well, GDP in the US may grow up five percent next year If AI rolls over And the cycle is over, GDP may only increase by one percent or two percent next year. Usually we're trying to figure out if GDP is going to go two point eight or three point two Right now, the range of outcomes is really big. So anything Anytime something happens in AI that makes people more optimistic theseese semi stocks continue to run. And anytime there's a sense in the market of maybe we're close to the top then we get these big corrections. So most of what we're seeing right now is just tremendous volatility What do you make of what's happened with SpaceX here? I mean, we talked about it last time. I think we talked before it went public or at least maybe in the first few days U and it's been kind of a stunning drawdown. U I'm not personally that surprised by it because I mean, I kind of thought this had to happen eventually, but what do you mean? You were very vocal about that. You were very vocal. And I think that was very helpful to investors going in. you spent a few days preparing investors that there's going to be a first day pop, which happened And then then the stock may come down from there And that's happened. without all those things that we talked about last week, which is there's going to be shares unlocked and there's going to be a lot of activity around index inclusion and no non index inclusion. So another place where we're going to see even more volatility, but thankfully you did prepare at least your viewers and listeners for this outcome On that point, we haven't seen those lock upp expirations yet. I mean, this is, as you say, it seems to be just pure volatility and it seems to be triggered buy this twenty billion dollars bond offering to, I guess finance the AI buildout. I mean, if we were to sort of draw that to its logical conclusion, I assume that means something like investors are worried about the fact that they need to raise more money to spend more money on AI, where is the return going to come from, which goes back to AI bubble concerns where is the ROI on this technology Do you think that that is sort of fueling the anxiety here? Is that what is ultimately triggering people's decision to sell? Yeah, all these things are contributors to the this. I mean, they just went out and raised eighty five billion dollars in equity capital And now they're raising another twenty five of debt. Now some of it is to pay other loans, some of it may not be either way, they need to invest very substantially in this AI compute. Now to be fair to them, this is a business that's in tremendous transformation right in front of our eyes, right? From a business that had most of its revenue from Starlink and then about a quarter of the revenue from space exploration Now with the anthropic Google and Reflection contracts, most of their revenue is coming from a neo clloud business fromom anying on data center capacity to to AI labs. So their business is completely different than it was a year ago. This business, the business that is now their biggest business, this neo clloud business is incredibly capital intensive So they do need a tremendous amount of capital. Now part of this is they're monetizing existing data centers, but they also want to build a lot more data centers. not to mention they want to build some of them in space. What do you make of what's happened to big tech in this sell off as well? Because they've really been drigged into this. Alphabet had a pretty significant sell off. was Maybe a different story because a couple of their AI researchers left the company and then went over to a competitor, which got a lot of investors concerned. But also Amazon's down, three percent this week, Meta down, two percent, Microsoft down as well U What do you make of big tech valuations and what is their role this in this story So the sentiment around those companies is they're spending too much money They're not going to get the return. We would rather invest in the companies that they're spending on So mostly chip companies as opposed to the companies that are spending their cash flow on those chips. And that's what the market is reacting to now. but I wouldn't I would say the Google changes are actually very important. The two people that left Google for the frontier labs two of the only people in the world that can understand AI right now You can really count the people in the world that can figure out how to develop a better model is probably less than a hundred people globally. And the two that left Google are probably top ten So the fact that they said Google is so bureaucratic that Google Datmind will not lead us to superintelligence. We should go to open AI and anthropic is actually a sign that there's may be cracks in this notion that Google is the AI winner which is how it got from a stock at one hundred and eighty to a stock over three hundred fifty. So that's specific to Google, but broadly speaking, investors donon't believe the returns are coming. It doesn't matter that Amazon, Microsoft and Google are telling us, of course the returns are coming. We've already sold this data center capacity. We know it costs. We know we have a markup, we know we have a return. invvestors are just not buying that right now How do you sort of justify or explain what's going on in terms of just the delta between some of the valuations that we're seeing in AI, which are certainly overpriced. I mean, SpaceX would be sort of ground zero, the perfect example trading it you know, a hundred times revenue last year's revenue, but then there're also companyies like Microsoft like meta and they're they're price to earnings multiples are historically quite low right now. I mean, how do we sort of make sense of this market if you have this massive difference between all of these different players in AI? The market is being inconsistent The valuation of NVIidia, Microsoft, Micron and to some extent Amazon is a valuation that implies that this AI thing isn't going to work out and we're at the peak of the cycle and it's going to roll over next year. The valuation of Cerebrus and Oclo And all these optical companies implies that an Intel implies that the cycle will continue through twenty thirty. So the market is being inconsistent right now because the people that don't believe that NAI are are unwilling to buy those big companies, but then the people that do believe in AI are only buying the marginal AI participants. We see that as an opportunity. to buy great companies like Microsoft, like Nvidia, like Micron evaluations because if this isn't peak cycle, if the AI thing actually works out Those stocks will be a lot higher in a year or two Do you have any concerns about what we're seeing in the macro environment specifically I mean It's kind of amazing and remarkable the fact that what's happening in Iran does ultimately affect a lot of these names because ultimately it could mean higher interest rates if we do see rate hikes, which is Probably one of the biggest anxieties for investors on Wall Street right now and no one seems able to agree Are you looking at interest rates? Are you concerned about interest rates, especially as it relates to those names and whether or not they are buying opportunities? Oh, absolutely. And right now, again, the market is of the mind that Iran will not be an issue going forward. Therefore, oil prices will remain low, inflation will remain low, and we will not need to increase interest rates. But that obviously as we've noticed over the last four months can change very quickly And so we absolutely have to keep an eye on that because that would be the major impact at a cyclical level. and then they AI trend we're talking about is a secular trend, but overlaid on all that is a cyclical aspect of it, which is very much impacted by inflation and the need to raise interest rates possibly. Gil Lia is head of teechnology research at DA Davidson Gill Really appreciate your time. Thank you. Thank you After the break A closer look at the minimum wage. And for even more markets insights, you can subscribe to my weekly newsletter, simimply put at simply putut. profgmedia. com Support for the show comes from OdDu. Running a business is hard enough, so why make it harder with a dozen different apps that don't talk to each other? 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There's no worse feeling than making a major investment in something only to realize it didn't exactly live up to the hype, such as buying a nice piece of tech that ends up in storage collecting dust or Taking a business workshop where your main takeaway was little more than a few motivational words If you work in marketing, this can happen with ads. You optimize for the numbers, that look great, impressions, reach and reactions. But when they don't show revenue, will, that can turn into an unfunund conversation with the CFO. LinkedIn has a word for that, buull spend Reach the right buyers with LinkedIn ads and invest in what looks good to your CFO According to the twenty six Dream Data benchmark Report, LinkedIn ads generated the highest Roas of all major ad networks. It's one hundred twenty one percent. 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But while Washington stood still, much of the country moved forward, thirty states have increased their minimum wage twenty still used the federal flow of seven dollars and twenty five cents Our guest today realized that a natural experiment was going on across the country. so he asked what happened to pay, employment and local economies where wages went up. And what can those real world experiments tell us about whether and how the federal government should raise the minimum wage today? Joining us to discuss his findings, we're speaking with Aron Duay Provst prorofessor of economics at the University of Massachusetts, Amherurst and author of the wage standard What's Wrong in the Labor Market and How to Fix it. Aron, thank you so much for joining us on the show, you have been studying minimum wage policies across the country. pointed out a simple and important point, which is that we've experimented with this at the state level What were your findings? You know, as I like to sometimes say The silver lining of dysfunctional policy making is that they provide us with natural experiments. So it's not a great way to set federal minimum wage to let it not know, change for over seventeen years, but it did mean that thirty states now have raised their minimum wage. On average today, those thirty states have something a little like a little over fourteen dollars an hour minimum wages. In contrast the other twenty states, the minimum wage remains seven hundred twenty five That is so low, by the way, that it's essentially like not having a minimum wage because very few people actually get paid that little. So we're basically, for the first time since the nineteen thirties when we first introduced the minimum wage, we have like a little less than half the country with no minimum wage versus the other half sometimes with fairly strong minimum wage maybe even the levels of close to UK or France. So this is a contrast. And so what I did is to look to say, this is really simple. you know, sometimes getting causal evidence of any policy or something like that, which we economists you spend a lot of time trying to figure out It's hard, It's hard work and people disagree, et cetera. But this is one of those cases where it's actually pretty straightforward. You just look and look at these thirty states, look at these twenty states. just plot what happens to their wages, plot what happens to their share of people who are working. And it turns out that tells us a pretty compelling story So one of the things that we hear a lot about on why we shouldn't raise the minimum wage is that it's going to be a problem for employment that if you basically force employers to pay employees more, then fewer people will be employed about What did your data find on that front? Yeah. So just as a way of thinking about this If we have a really well functioning market, labor market where compompanies are really competing hard for workers. If suddenly the government comes in and sets wage even higher than what companies were paying, some jobs will be lost because companies are just not going to be willing to hire those individuals. At the same time, if the market is not quite working that way. And the market has, here's a funny word that economists use monopsony power, which means that employers of some degree of choice Should I pay a higher wage and have lower quits and easier recruitment or should I pay a lower wage and save on labor costs, but then have higher quits and you know harder time recruiting. In such a market, a higher federal higher minimum wage could end up killing jobs, but killing vacancies and reducing turnover. So then it becomes an empirical question. And so here's what we found. So when when I look at this twenty ten to twenty twenty five, o, a broad set of fifteen year period In the states that raise their minimum wage If you take the most impacted sector, that's restaurants. okay? This is the low wage sector, a size sizable portion of the minimum wage workforce work at restaurants. Restaurant pay in these thirty states today is maybe about on average, like eight percent or nine percent higher than in the other twenty states Okay, then that it than it was say compared to twenty thirteen before this gap emerged. So very clear wage growth. in these thirty raised states compared to the twenty states that stayed put What happened to jobs? We can look at restaurant jobs per capita It is virtually the same today as it was in twenty thirteen in these two states. Clear increase in wage pretty much sideways change in jobs in the most highly impacted sector restaurants. In other words, The main argument against the minimum wage, which is that it causes lower employment we have evidence that is actually not true at least in the states that we have looked at which makes me That's right. Yeah. it makes me wonder Is there any need valid argument against the min raising the minimum wage and it doesn't seem to be the case. There's a number of things to think about. So one thing I will say is that by the way, this is the simplest comparison, but of course we can make fancier comparisons. and other work that I have done, I've said, well, maybe there are different things going on. We can compare neighboring counties, just one side of the border raised it, another didn't. So very similar otherwise. and I show this in the substack post. you can compare the neighboring counties across the state line. againg, clear a change in wage. Absolutely no change in relative employment in the two sides. And there are other things you could do. You could look at broader set of industries of low wages, et cetera. And the story doesn't change. Now so how do employers actually absorb this? And that actually gets to an important thing to recognize. And so I talk about this in the book called the three Ps. So first of all, there's some productivity offset Higher wage does increase productivity in a couple different ways. It doesn't pay for itself, but it does offset some of the cost in higher wages Then there's some reduction in profits, but then the final piece is prices. And here, it is true that a higher minimum wage does lead to somewhat higher prices for particular goods and services, particularly like a burger may cost a bit more If you look at the overall cost of living in estate, it is not visibly affected by a minimum wage, but particular things may cost a bit more in order for lower wage workers to have a higher pay So that's kind of the way we can think about how the minimum wage actually gets absorbed. mostost people are tend to sort of support having a higher minimum wage when understanding these are some of the trade offs that we may face. What do you think is the next step here? Because it seems like we have a solid body of evidence demonstrating that all of the fears that we had that some may have had around the minimum wage being raised are not actually true U And now, I mean, we have clearly a cost of living crisis in the country increasingly in affordability crisis. It seems like this might solve a lot of those problems, simimply raise the federal minimum wage and therefore we would see more wage growth as demonstrated in the evidence that you've laid out, especially among the lowest earners. And perhaps it might start to solve our problems. I mean, is the next step taking this to the federal government and raising the federal Mimum wage? It's certainly the case that theres that lack of wage growth is a big part of the affordability crisis. And so finding ways of raising wages is key. And that's why sort of I wrote the book, and one of the pillars that I argue is exactly raising the minimum wage. The other one, by the way, is full employment, which also plays a very important role in helping giving more leverage to workers When we think about raising the minimum wage, at this point, the federal minimum wage has been stagnant, like we said for seventeen years. So it is absolutely critical that we do raise it. You know it's actually it's something that there's a broad base of support in this country for doing this. And the problem is really in Washington And so of course, we can keep raising more state minimums. That is something that I think we'll probably continue to see efforts. But at the end of the day, not all states you can actually put this on the ballot. And sometimes there's different factors that affect kind what legislatures are going to do. And this is why it's really critical for the federal government to do its job and actually have a minimum wage. And the key thing will be the next time we raise the federal minimum wage, we should make sure we do not let this happen again where we go for over a generation. And there's a really simple fix, which is you index the minimum wage, which many states increasingly do. So every year it's automatically raised. It doesn't require us to debate this ad nauseum over and over again and just let it do its job And so I think we have the tools. I think we have the evidence. and I think it's a matter of having the political will Aron Dubeay is Provost prorofessor of economics at the University of Massachusetts, Anne Hurston, author of the Wage Standard, What's Wong in the Labor Market and How to fix it Professor Duubet, we really appreciate your time and I'm in full support and full agreement. So thank you. Thanks for having me. Great to be here As we end this episode, a quick check in on my SpaceX prediction. Two weeks ago before SpaceX went public, I predicted that the stock would rise at least twenty five percent. on the first day of trading. That it did. The stock hit one hundred and seventy six dollars on day one almost thirty percent and then continued to rise the following week, hitting a high of nearly two hundred and twenty dollars per share. So two of my prediction, however, was that over the next six months, the stock would get cut in half. Why? Because I believed and still believe that the valuation makes no sense. and also because billions of dollars worth of lockups would soon expire, thus allowing early investors to sell their shares, thus putting downward pressure on the stock. That hasn't happened yet However, we are starting to see Warning signs, the stock has already fallen as much as thirty percent in just a few days It also shed four hundred billion dollars in market cap in a single day, which was the second largest one day wipeout in stock market history. And while it did recover some losses yesterday It's still twenty two percent off of its ties Now keep in mind, this is all happening before any of the lockups have even expired, which means that the stock has yet to go through the real test whichich is when thousands of investors will choose whether to hold the stock at an unreasonable valuation or sell it