SpaceX's AI Business Is Exploding, but Is It Worth the Price?

Space Exploration Technologies (NASDAQ: SPCX) is no longer just a rocket company with an ambitious satellite internet business. Artificial intelligence is rapidly becoming its biggest source of revenue.

In the third quarter, SpaceX generated $14.6 billion in revenue, up 161% from a year earlier. Its "super intelligence" (SI) segment, which includes AI infrastructure, cloud services, and applications, contributed $7.6 billion. That was more than Starlink's $5.3 billion.

A year ago, the businesses in the SI segment generated just $813 million in quarterly revenue.

The growth is remarkable. But the real test will be whether SpaceX can turn that top-line growth into attractive returns on the billions it is investing.

Image source: Getty Images.

SpaceX doesn't need to win the AI model race

There is more than one way to make money from AI.

Some companies develop AI models and applications, but those products require enormous computing power to train and run. That creates an opportunity for businesses that provide the underlying infrastructure.

SpaceX is pursuing both opportunities. Its super intelligence segment includes a cloud computing infrastructure service, AI models such as Grok, and the coding software company Cursor, which it acquired earlier this year.

This integrated business model matters. SpaceX doesn't necessarily need the world's best AI model to benefit from the AI boom. It can also earn money by supplying computing capacity to businesses that need it to compete.

This gives the company several potential sources of AI-driven growth. But strong demand alone doesn't guarantee strong profits. The economics still depend on how much customers are willing to pay and what it costs to serve them.

The early numbers look promising

SpaceX's SI segment is already generating substantial earnings.

In the third quarter, the segment reported $5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It also recorded $431 million in operating income.

These are encouraging figures for a business expanding so quickly. They suggest SpaceX is doing more than simply attracting customers: Its AI operations are beginning to generate operating profits.

However, investors should interpret the numbers carefully. The adjusted EBITDA metric excludes a host of high costs, including depreciation on expensive computing equipment. Operating income is a more demanding measure, although it too can be affected by accounting items.

The real test is whether the business can generate substantial free cash flow after paying for its infrastructure.

The cost of growth is enormous

That brings us to the biggest risk. SpaceX spent $19.6 billion in the third quarter. Of that, $16.4 billion went to its super intelligence segment. Moreover, management expects total company capital expenditures of between $35 billion and $40 billion in the fourth quarter.

This is the other side of the AI opportunity. SpaceX is investing heavily in computing capacity because it expects demand to keep growing. If customers use that capacity and pay enough to cover its costs, the investment could prove worthwhile. But if intensifying competition and an influx of new capacity drive prices down, demand disappoints, or equipment wears out or becomes outdated faster than expected, returns on those investments could fall short.

In other words, a fast-growing business can still be a poor investment if the company spends too much in pursuit of that growth.

What should investors watch going forward?

Three key measures can help investors judge whether SpaceX's AI bet is working.

• AI revenue growth: Continued growth would suggest demand remains strong. But investors should also watch to see whether profitability holds up as the business expands.
• Cash generation: Adjusted EBITDA looks impressive, but it excludes depreciation (a major factor for data centers) and does not deduct capital expenditures. Investors need to see whether SpaceX can eventually generate substantial cash after paying for its infrastructure.
• Returns on investment: As more computing capacity comes online, do the additional profits justify the money spent to build it?

In short, investors should look beyond the headline growth rate. The question is not simply whether SpaceX can become an AI powerhouse. It is whether the cash it eventually generates will justify the enormous investments it's making to become one.

Lawrence Nga 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.