Fantastic News for SpaceX Stock Investors

Space Exploration Technologies (NASDAQ:SPCX) has been a polarizing stock since its record-breaking IPO in June. Some investors are deeply impressed by the company's innovations and expect it to deliver life-changing returns over the long run, while others are skeptical, especially given valuation concerns.

Which side is right? Perhaps it's still too early to decide, but it is at least fair to say that SpaceX gave the bulls more robust arguments with its latest quarterly update. Let's look into it.

Image source: The Motley Fool.

SpaceX blows past expectations

The market had fairly high expectations for SpaceX's third-quarter results. The company met these expectations, and then some. SpaceX's revenue soared by 161% year over year to $14.6 billion.

While SpaceX is perhaps best known for its space launch services, the company's two other segments, connectivity and Super Intelligence (SI), performed significantly better.

Space revenue increased just 6% year over year to $1.8 billion. Connectivity sales jumped 69.5% year over year to $5.2 billion, and SI revenue was $7.6 billion, up 830% compared to the year-ago period.

True, SpaceX's SI unit benefited from an acquisition that closed in August, adding $608 million in revenue to the segment. But even without that, SI sales would have grown 755% year over year.

SpaceX's connectivity and SI businesses were both profitable during the quarter, with the former posting an operating income of $2.4 billion, up 99% year over year. SI’s operating income of $431 million came in well above the operating loss of $1.7 billion reported in the same period of the previous fiscal year. On the bottom line, the company posted a net income of $4.4 billion, significantly better than the prior-year quarter's net loss of $1.1 billion.

What comes next?

SpaceX's CEO, Elon Musk, has said the company could generate $1 trillion in revenue by 2030, and perhaps even by 2029. Recent financial results certainly make this goal more achievable, but it's still an ambitious target.

Can SpaceX pull it off? On the one hand, the company's SI and connectivity businesses are firing on all cylinders and could tap into highly lucrative opportunities over the medium term. Third-quarter SI sales grew rapidly partly because the company added several artificial intelligence (AI) cloud services agreements. There is clearly significant demand for AI compute capacity, and SpaceX is cashing in on that.

If this demand remains strong over the medium term, SpaceX could be one of the winners, especially if the company can launch AI satellites into orbit as it plans to do. For that to happen, SpaceX needs to improve the economics of orbital AI, including by significantly reducing launch costs.

The company is working on that project. SpaceX's next-gen rocket, Starship, is designed to be fully reusable and could reduce average launch costs by up to 99%. To be clear, that's not the only hurdle SpaceX needs to overcome to make its orbital AI plans economically viable, but it would be a major step forward.

The company's connectivity business may also benefit as Starship becomes its main workhorse rocket. In fact, Starship flight 14 was the first time the rocket reached orbit, and it carried 26 of SpaceX's Starlink V3 satellites. These satellites are more powerful than previous versions but don't fit on SpaceX's current main rocket, Falcon 9. SpaceX's connectivity business could improve as it launches more of its next-gen satellites.

The company's medium-term outlook is robust, but SpaceX still faces significant uncertainty. Starship's development -- which is central to many of its ambitions -- could encounter obstacles, including regulatory ones. SpaceX may also see its sales growth rate drop significantly if the AI industry does not expand as quickly as expected. Amid all that, the company's price-to-sales ratio is 68.5, which is incredibly high by almost any standard.

SpaceX has a lot going its way, but I remain skeptical that the company can deliver strong returns over the medium term from current levels.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.