Space Exploration Technologies (SPCX -0.91%) made its name by revolutionizing the space travel industry. The company’s work on reusable rockets has enabled it to significantly reduce launch costs, making it the clear leader in the field. SpaceX is still at it. The company is working on a next-gen, fully reusable rocket, Starship, that could transform its grand space ambitions into reality. But what if the company’s space-related efforts become a minuscule part of its business as it taps into much more lucrative opportunities elsewhere?
That may power exceptional stock market returns. And according to CEO Elon Musk, that’s what could happen within four or five years. Let’s dig into what Musk said and what it means for investors.
Image source: The White House.
Is SpaceX a space or an AI company?
SpaceX operates three business segments. In addition to its space business, the company owns Starlink, which provides internet connectivity through a large network of Low Earth Orbit satellites. SpaceX is also the leader in this industry. Then there is the company’s artificial intelligence (AI) unit, where it offers several services, including access to Grok, a family of large language models (LLMs).
SpaceX also offers cloud and AI compute infrastructure services. In the company’s Form S-1 (a required filing in the U.S. before a domestic company can go public), SpaceX argued that the large majority of its total addressable market (TAM) was in the AI industry. The rocket company estimated that its AI TAM was $26.5 trillion of the $28.5 trillion total opportunity it has identified across its entire business. And Musk thinks that within four or five years, AI will be 99% of SpaceX’s value.
Beware of these risks
In the second quarter, SpaceX’s AI revenue grew by about 247.5% year over year to $2.6 billion. It accounted for almost 33% of the company’s total revenue. It grew much more rapidly than the rest of the business. SpaceX’s top-line was $7.8 billion, up 92% compared to the year-ago period. Analysts expect the company to generate $44.58 billion in revenue this year and $95.49 billion next year, compared to $18.7 billion last year.
Let’s suppose that SpaceX’s revenue grows at a compound annual rate of 100% over the next four years (that’s actually less than the company’s projection, since Musk said revenue could reach $1 trillion by 2030). If the AI segment accounts for most of its top line, it will grow even more rapidly. And if SpaceX can pull that off, the stock will almost certainly soar, even if it fails to turn a profit over this period. The market is forgiving with growth stocks that aren’t profitable, provided sales growth is impressive enough. But how likely is all that?
Space Exploration Technologies
Today’s Change
(-0.91%) $-1.29
Current Price
$140.00
Key Data Points
Market Cap
Day’s Range
$135.50 – $144.02
52wk Range
$104.83 – $225.64
Volume
96.7M
Avg Vol
125.1M
Not very. This bull thesis assumes that AI infrastructure spending will continue to grow rapidly over the next five years and that SpaceX will capture a large share of it. According to some estimates, it may exceed $1 trillion by 2029. Even assuming it does, and then jumps significantly more by 2030, the competition is fierce, and several corporations are in a much better position than SpaceX to capitalize on this. Also, as the company noted, one customer accounted for 19.5% of its AI revenue in the second quarter.
Many analysts believe that Anthropic, a privately held company and leader in developing LLMs, is the one. Anthropic may go public relatively soon, improve its financial position, and double down on AI-related spending. But if Anthropic decreases AI spending, that could materially impact SpaceX’s financial results. The space company’s reliance on a single customer for nearly 20% of its AI revenue carries significant risks. At any rate, too much hinges on everything going just right for SpaceX, which makes the stock far too risky.
