Key Points
SpaceX recently signed another AI compute deal.
There is a vast remaining opportunity in this market.
However, investors should think twice before investing in SpaceX.
Space Exploration Technologies (NASDAQ:SPCX) boasts a $2.1 trillion market cap despite generating just $7.8 billion in revenue in the second quarter and being unprofitable. There are other signs that the stock is richly valued. For instance, SpaceX's forward price-to-earnings ratio is 204, which is incredibly high by any standard. However, the bulls would argue that given SpaceX's prospects, particularly in the artificial intelligence (AI) market, it is worth the hefty premium.
In the second quarter, the rocket company's AI revenue was $2.6 billion, up 247.5% from the year-ago period, representing a much faster growth rate than the rest of the business. According to CEO Elon Musk, SpaceX expects to reach $1 trillion in annual revenue by 2030, with most of the company's value coming from AI. That's an ambitious goal, but recent developments make it at least a bit more likely.
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Securing new deals
At a recent conference, SpaceX's CFO, Bret Johnsen, said that earlier this month, the company signed a new AI compute deal (starting in December) worth about $1.11 billion per month, or slightly over $13 billion annualized. Johnsen did not disclose with whom SpaceX signed this contract.
That aside, this deal highlights something important about SpaceX: its ability to compete in this market. SpaceX has landed important clients this year, including Anthropic and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). There is a fairly good chance the company will continue to attract significant business, especially given the AI industry's overall trajectory, provided it can meet some of its goals. AI infrastructure spending continues unabated.
The recent earnings season provided evidence for that, with several leaders in the field experiencing accelerating sales growth and expanding backlogs. But the AI build-out has limitations that SpaceX is looking to overcome by sending AI satellites into orbit. It's still not obvious that SpaceX will be able to do so, and even if it can, it will have to solve several problems before it can consistently serve customers with its AI satellites. Still, under a scenario in which everything goes well, it's not at all difficult to imagine SpaceX's revenue climbing to $1 trillion by 2030.
Should you buy the stock?
But what if everything doesn't go well? SpaceX's valuation assumes a near-flawless trajectory and execution, and the stock will fall off a cliff if it encounters setbacks, especially with its next-gen Starship rocket, which is designed to be fully reusable and is the cornerstone of many of its space ambitions, including sending AI satellites into orbit. SpaceX is an excellent company, but its current price seems too steep. I'd stay away from the stock for now and wait for a potential dip, which could provide an opportunity to purchase its shares at a more reasonable valuation.
Prosper Junior Bakiny has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.