SpaceX Is Spending $18.4 Billion a Quarter. Should Investors Be Worried?

Space Exploration Technologies (NASDAQ: SPCX) generated $7.8 billion of revenue in the second quarter. It also racked up $18.4 billion in capital expenditures.

For investors, that immediately raises an uncomfortable question: Is SpaceX spending too much?

It's a fair question. But looking at those $18.4 billion in outlays in isolation misses the bigger picture. SpaceX isn't spending that money simply to maintain its current business. It's spending aggressively to build the businesses it hopes will power the company for the next decade.

Image source: Getty Images.

What is SpaceX spending on?

First, let's put the number into context. Those $18.4 billion were its quarterly capital expenditures -- money it used to build long-term infrastructure and assets rather than to pay for ordinary operating expenses. And the overwhelming majority went toward one area: artificial intelligence.

SpaceX spent approximately $15.8 billion on AI-related infrastructure during the quarter, ending the quarter with roughly 1.4 gigawatts of computing capacity, up from about 400 megawatts a year earlier. The company is also investing heavily in its Starlink satellite network, its launch infrastructure, and Starship, its next-generation rocket.

In other words, SpaceX is building new capacity far faster than most companies of its size. That's important to dissect because capital expenditures aren't inherently good or bad. What matters is what that capital eventually produces. If $1 billion of investment produces several billion dollars of additional cash flow, the spending was worthwhile. If it produces little incremental profit, it wasn't. And that brings us to the obvious question.

Why is SpaceX spending so much?

In pursuit of opportunity

The short answer is to meet massive demand.

AI companies need enormous amounts of computing power, and demand for it has exploded. To put it into perspective, SpaceX's AI-related revenue reached $2.6 billion in the second quarter, up 247% year over year.

That's extraordinary growth. Better still, management believes the opportunity is attractive enough to justify building compute capacity aggressively -- SpaceX's CFO has said that some new AI compute deployments could have payback periods of less than a year because demand currently exceeds available supply.

If that proves sustainable, the economics could be extremely attractive. Imagine spending $1 billion on infrastructure that generates so much cash that you recoup that investment in less than a year. You'd want to keep building. That's essentially the logic behind SpaceX's spending spree.

But there's an important caveat. Today's AI economics may not last forever. Data center infrastructure is attracting enormous amounts of capital from Microsoft, Amazon, Alphabet, Meta Platforms, and specialized cloud providers like CoreWeave. As more compute capacity comes online, the shortage could eventually disappear. Pricing could fall, utilization could decline, or payback periods could lengthen.

That's why investors shouldn't simply extrapolate 247% AI revenue growth into the future. The real question is whether SpaceX can continue earning attractive returns as it scales up its AI infrastructure business.

Can SpaceX afford it?

For now, the answer appears to be yes. SpaceX ended the quarter with $100 billion of cash and marketable securities on its books, after raising about $86 billion from its IPO and $25 billion from a bond sale. So it has an enormous financial cushion.

More importantly, it isn't entirely dependent on outside capital to fund its ambitions. Starlink, its satellite-internet business, is already generating substantial profits. The connectivity business produced approximately $1.7 billion of operating income in the second quarter on $4.3 billion of revenue.

That's important. SpaceX has built a business that generates recurring revenue and meaningful operating profits while simultaneously creating new businesses that could become much larger over time.

What does it mean for investors?

Overall, I think investors should take the $18.4 billion in quarterly capex seriously -- without necessarily being alarmed by it. Spending on that scale tells us something important about SpaceX: This is going to be a highly capital-intensive company for years to come.

That's both its opportunity and its risk. If it can turn its AI investments into high-return infrastructure, today's spending could create enormous shareholder value for SpaceX investors.

But there's another possibility. SpaceX could keep finding "exciting opportunities" that require billions of dollars of investment without generating equally attractive returns, which would be a very different story. And given that it trades at a market cap of roughly $1.9 trillion and a price-to-sales ratio of about 65, investors don't have the luxury of accepting mediocre returns indefinitely.

Ultimately, investors must decide whether they have confidence in the management's ability to deliver.

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.