When investors think of Space Exploration Technologies (SPCX +1.25%), better known as SpaceX, they likely think first of its Falcon and Starship rockets, which can launch their payloads and then land back on Earth to be reused. While that technology is incredible and game-changing, it's not what actually is driving most of the company's business.
Instead, SpaceX has a secret weapon that's hiding in plain sight, and if investors understand what it could do for the stock, it would change their perspective on it overnight.
Image source: The Motley Fool.
Is SpaceX really just another AI company?
SpaceX operates in three segments: space, AI, and connectivity. Space is what it's known for, but that part of the business really isn't doing a lot for the company. In the second quarter, the revenue split looked like this:
| Segment | Q2 Revenue |
|---|---|
| Space | $962 million |
| Connectivity | $4.29 billion |
| AI | $2.56 billion |
Data source: SpaceX.
So, while space may be what investors are focusing on, it's far from the largest segment. It's also growing the slowest.
Another area investors may focus on is connectivity, which is primarily the Starlink satellite broadband service. Starlink is an incredible technology that's rapidly gaining adoption; however, there is a limit to how many customers actually need satellite internet service. So while this segment is growing pretty quickly right now, it will eventually plateau.
That leaves AI, which I view as SpaceX's true secret weapon. Prior to going public, Elon Musk-led SpaceX acquired another Musk-led company: xAI, which also owned X, formerly known as Twitter. While I'm not concerned about the social media platform, I am more excited about Grok, the large language model that's associated with it.
NASDAQ: SPCX
Key Data Points
Grok has become one of the most popular large language models (LLMs) to deploy and is among the best at maintaining up-to-date information, as it sources data from X for real-time updates, something other AI models don't do. Several companies are clearly finding value in these AI models, as SpaceX's AI division revenue has exploded over the past year. In Q2, it grew at an impressive 213% year-over-year pace. I wouldn't be surprised to see the AI segment's growth rate accelerate over the next few quarters, turning it into SpaceX's largest division by revenue.
SpaceX management appears to be thinking along the same lines, as it spent $15.8 billion on capital expenditures for its AI division during Q2. For reference, the other two divisions had $2.5 billion in combined capex.
This will lead to strong long-term growth as long as its technology maintains its position near the top of the LLM market. But does that make SpaceX an investable stock?
SpaceX has a lot of growth priced in
SpaceX stock is far from cheap. It has a $2.1 trillion market cap and is expected to generate nearly $50 billion in revenue this year. While that may sound like a lot, the reality is that companies of similar size outclass it. Taiwan Semiconductor Manufacturing has a market cap of $2.4 trillion and generated over $40 billion in its most recent quarter. Meta Platforms is a bit smaller than SpaceX by market cap and generated over $60 billion in its most recent quarter. And both of those companies are already highly profitable, while SpaceX is not.
There's clearly a size mismatch here, and SpaceX's business will need to do a ton of growing just to justify its current market cap. Next year, Wall Street analysts estimate SpaceX will generate $113 billion in revenue. While that's closer to the levels its market-cap peers are booking, it would still have a long climb ahead of it to reach parity with them.
So, I'd estimate that there are at least three years of revenue growth baked into SpaceX's stock price right now. That could make the stock dead money for the time being. As a result, I think investors should look to other stocks, especially in the AI realm. SpaceX may be able to turn itself into a viable and profitable business, but its stock is so pricey today that it may not provide the returns investors want in the next few years.
