Buying SpaceX Stock Isn't the Same as Buying Tesla's IPO Back in 2010. There's One Massive Difference

Space Exploration Technologies (SPCX +1.21%), also known as SpaceX, went public earlier this month amid some tremendous excitement. The rocket company, which is run by CEO Elon Musk, has a valuation of around $2 trillion, making it more valuable than another one of Musk’s companies: Tesla (TSLA +3.17%).

Investors may have been bullish on buying the newly listed stock in the hopes that it could be the next Tesla and generate terrific returns. Tesla, after all, has skyrocketed since going public and has been one of the top growth stocks to own over the past decade, rising nearly 2,700% over that stretch. There is, however, one very important distinction between its IPO and SpaceX’s.

Tesla’s valuation was significantly more modest when it went public

Not long after SpaceX went public this month, it briefly eclipsed both Amazon and Microsoft in market cap. It was brief, but that meant it was the fourth-most-valuable stock on U.S. markets at least momentarily. Not only was it in the trillion-dollar club — which is already a considerable accomplishment given its lack of profitability — but it was more valuable than some of the most iconic companies in the world. Even today, despite its recent share price decline, its valuation remains far higher than that of Meta Platforms and Berkshire Hathaway.

Back when Tesla went public in 2010, it wasn’t valued nearly as high in relation to the leading U.S. stocks. There was no danger that it would get anywhere near Microsoft or Amazon in valuation anytime soon.

TSLA Market Cap data by YCharts

Investors should never ignore valuation

SpaceX undoubtedly has some tremendous growth opportunities in space and artificial intelligence, but with such a high valuation, investors are effectively pricing the stock as if it’s a sure thing. But the reality is that it’s still a cash-burning business, and it’ll likely remain that way for years. It can be incredibly risky for investors to buy a stock as highly valued as SpaceX when its fundamentals are shaky. That can create significant downside risk, as it leaves the stock vulnerable to a substantial decline in value.

On Monday, the stock closed at around $155, the lowest level that it’s closed at since going public. What’s troubling is that it can still have plenty of room to fall even lower because its valuation has become so egregious out of the gate.

Tesla proved to be an exceptional investment in part because the business turned a profit and proved its naysayers wrong. But if it had begun trading at an enormously high valuation, investors’ returns would have looked far different. It’s an important reminder of why valuations should never be ignored, as buying a stock at a high price can have a drastic impact on your overall returns.