SpaceX Made a Huge Pivot in Its Business, but the Market Hasn't Caught on Yet

There's no shortage of excitement about the revenue potential for Space Exploration Technologies (NASDAQ: SPCX), better known as SpaceX. Some analysts see it reaching trillions of dollars in annual sales across its launch services, connectivity business, and artificial intelligence segment.

That said, nobody expects it to be a straight line up and to the right. In fact, SpaceX could see a major revenue inflection this year thanks to a huge pivot in its AI segment.

The shift speaks volumes about the current state of the business and its potential going forward. And while the market is cheering some of the headline numbers, it may be underappreciating the implications for the company's finances and the stock's performance.

Image source: The Motley Fool.

The biggest revenue growth driver at SpaceX

Over the last few weeks, SpaceX has signed several deals to provide compute to other AI companies:

• Anthropic will pay $1.25 billion per month to use the entirety of its Colossus 1 data center.
• Alphabet will pay $920 million per month to use about half as many processors as Anthropic.
• Reflection AI, a start-up focused on building an open-source frontier model, is paying $150 million per month for additional compute capacity from SpaceX.

Those three contracts add up to nearly $28 billion in annual revenue, and SpaceX could look to make even more deals. "We have sufficient capacity to provide compute for our own AI models, including support of our training and inference demands, and to satisfy the obligations under these agreements," management wrote in its IPO registration filing with the SEC.

The shift is clear: The growth in SpaceX's AI revenue will stem from selling infrastructure rather than its own AI services. In effect, SpaceX is becoming another infrastructure-as-a-service business, or "neocloud," selling relatively undifferentiated compute capacity to leading AI labs that need as much as possible. Meanwhile, its own AI model is seeing so little use that it has hundreds of thousands of GPUs sitting idle in its data centers.

That shift will provide a significant boost to revenue right now, but investors need to consider how valuable that revenue and line of business are for SpaceX.

Does SpaceX have a competitive advantage?

The biggest concern for operating a neocloud company is establishing a competitive advantage. For the most part, the end product is undifferentiated. A token is a token. So, the only way to compete effectively is to keep your costs lower than everyone else.

To that end, SpaceX believes it has an advantage. "Our first-principles thinking enables us to build coherent compute at scale and at rapid speed with lower costs than most other companies in the industry," management wrote in its S-1 filing. However, SpaceX's strategy of retrofitting old factories near efficient water sources won't scale. There are only so many prime locations to construct data centers.

SpaceX may be able to find a sustainable cost advantage with orbital data centers. The cost will depend heavily on its ability to bring launch costs down by developing its fully reusable heavy-lift rocket, Starship. Management says it could launch its first orbital data centers by 2028.

What does it all mean for SpaceX stock?

The move to monetize its limited compute capacity by renting it out instead of using it for its own AI development is telling. Management expects its large language model Grok to remain a niche player among large language models. That severely limits its profit potential. With the majority of SpaceX's revenue growth stemming from its pivot toward becoming a neocloud operator, investors may want to reassess the value of that revenue growth.

Leading neocloud providers CoreWeave and Oracle have massive backlogs of compute contracts.

CoreWeave has contracted revenue of nearly $100 billion as of the end of the first quarter, with $36 billion of that to be recognized over the next two years. The total backlog is larger than SpaceX's, but its annual run rate is smaller. For reference, CoreWeave's market cap sits around $55 billion.

Oracle's remaining performance obligations total a whopping $638 billion as of the end of its most recent quarter. It's adding tens of billions of dollars in contracts every quarter. Approximately $75 billion of that backlog will be recognized over the next 12 months, and over $200 billion will hit Oracle's top line in the subsequent two years.

CoreWeave's and Oracle's strong revenue growth suggest SpaceX could achieve similar results over the coming years. However, that revenue isn't worth nearly as much as the revenue that comes from selling AI software services themselves.

That's evidenced by the price-to-sales multiples assigned to CoreWeave and Oracle: 4.2 and 5, respectively. By comparison, SpaceX trades at well over 100 times trailing 12-month sales. Even if it triples its sales over the next year thanks to infrastructure contracts, its sales multiple still sits well above reasonable levels.

Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Oracle. The Motley Fool has a disclosure policy.