Better AI Stock: SpaceX or Nvidia?

In the AI realm, many businesses are seeing rapid growth. Two of the fastest-growing are Nvidia (NASDAQ: NVDA) and Space Exploration Technologies (NASDAQ: SPCX). These two aren't competitors in the AI race, as SpaceX is a fairly large client of Nvidia's.

Which one of these two makes for the better AI investment moving forward? Let's take a look.

Image source: Getty Images.

SpaceX is a major player in the AI realm

SpaceX may not seem like an AI investment, but I think it certainly should be categorized like one. During the second quarter, SpaceX spent $15.8 billion in capital expenditures on its AI division, increasing the amount of computing power available for xAI, Musk's AI company that was acquired shortly before going public. During Q2, its AI division increased its revenue at an impressive 213% pace, to $2.56 billion.

While AI isn't SpaceX's largest division, it's not far behind Connectivity, which generated $4.29 billion in revenue during Q2. It won't take too many more quarters before AI surpasses Connectivity in revenue generation, and I won't be surprised if that happens over the next year as AI becomes more widespread.

SpaceX is clearly an AI investment and belongs in the conversation about top AI businesses, especially with that rapid growth rate. But is it a better buy than Nvidia, which is often regarded as the leader of AI investing?

Nvidia makes computing units known as graphics processing units (GPUs) that excel in a wide variety of tasks. They are the industry standard in AI computing, and nearly every company involved in AI deploys Nvidia GPUs in some capacity. SpaceX is planning on exclusively deploying Nvidia hardware going forward, and Elon Musk had this to say about its relationship:

And going forward, we've decided to build exclusively on NVIDIA because we think the Vera Rubin architecture is the best architecture. We think it's the best AI computer, and we greatly value our close cooperation and partnership on many levels with NVIDIA. So, we're exclusive to NVIDIA.

It doesn't get any more definitive than that, and it shows that Nvidia is still at the top of the AI food chain, even with potential competitors rising around it.

None of the rising competition has derailed Nvidia, as it has delivered impressive revenue growth in recent quarters. During Q2, its revenue increased an impressive 106% year over year, beating SpaceX's companywide growth figure of 92%. However, what's notable here is the size difference between these two.

Nvidia's Q2 revenue totaled $96 billion. SpaceX's totaled $7.8 billion. There's an incredible size difference, but how does that translate to future returns?

Profits are more important than revenue in the long run

Investors focus more on profits at the end of the day, and there are few companies more profitable than Nvidia. It delivered a 62% profit margin during Q2. SpaceX was unprofitable in Q2, but projects to achieve a 45% profit margin once the business is fully mature.

So, even if SpaceX could snap its fingers and be fully profitable tomorrow, it would produce less profit per dollar of revenue than Nvidia. As a result, we can use their revenue totals as a direct comparison to see which stock has the most upside ahead.

Nvidia's revenue figure is over 12 times larger than SpaceX's. So, with the two having similar profit margin goals, it should be expected that Nvidia is 12 times larger than SpaceX, but that's not the case. Nvidia has a market cap of $5.4 trillion, while SpaceX trades for just shy of $2 trillion. That tells me that SpaceX is incredibly overvalued and could have issues providing strong returns because it needs to grow into its valuation. Meanwhile, Nvidia is still growing at a rapid pace and has plenty of growth left in the tank due to the strength of the AI build-out.

As a result, I think Nvidia is the better buy of the two.

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.