SpaceX Thinks This "Early Stage" Business Is Critical to Its $1.77 Trillion IPO Valuation

With the SpaceX initial public offering (IPO) just days away, it's critical for every potential investor to review the company's IPO prospectus. In this 370 page report, a few critical details are revealed. Arguably, the most important figures to understand are SpaceX's claimed total addressable market, or TAM.

"We believe we have identified the largest TAM in human history," the company brags. "We estimate that our quantifiable TAM is $28.5 trillion."

Perhaps surprisingly, only 1% of this total addressable market deals with rocket launches -- a business segment that SpaceX forecasts only has $370 billion in potential runway. Less than 6% of SpaceX's total addressable market, meanwhile, deals with its Starlink internet service -- currently, its sole profitable business.

Instead, a whopping $26.5 trillion of SpaceX's total $28.5 trillion claimed TAM deals with a single business segment that even the company admits is still "relatively early stage."

Image source: Getty Images.

This "early stage" business is SpaceX's biggest growth catalyst

SpaceX CEO Elon Musk has a penchant for forming conglomerates. That is, his businesses often serve a wide variety of end markets. Tesla (NASDAQ: TSLA), for example, is best known as an electric vehicle (EV) stock. But the company has invested billions of dollars into other initiatives, everything from artificial intelligence (AI) to utility-scale battery packs. Based on Tesla's $1.2 trillion market cap, it's safe to say it is valued based on these unprofitable ventures than its current automaking business.

SpaceX is no different. The company has a broad portfolio of interests, all of which have strong synergies but are not always completely interconnected. For example, the company is the world's largest rocket company. But it also operates the largest low-earth-orbit satellite network, with dreams of establishing a permanent human base on the moon, orbital data centers, vertically integrated semiconductor manufacturing facilities on the ground, and much more.

But there's one business segment that stands out most: artificial intelligence.

"We believe our next trillion-dollar market is AI compute," the company's IPO prospectus reveals. It values this total opportunity at $26.5 trillion: $2.4 trillion for AI infrastructure, $760 billion for consumer subscriptions, $600 billion for digital advertising, and $22.7 trillion for enterprise applications.

Here's the catch: SpaceX's AI division generated just $3.2 billion in revenue last year with negative net profits. "Our AI business is in a relatively early stage," SpaceX cautions, even though this division holds most of its growth potential and therefore disproportionally accounts for the company's targeted $1.77 trillion IPO valuation. Indeed, a big majority of SpaceX's capital expenditures have been and will continue to be aimed toward supporting its AI efforts. Apart from capital spending, the company also has a standing $60 billion acquisition offer for Cursor -- an AI coding agent -- that still commits SpaceX to buying $10 billion in compute from the start-up even if an acquisition isn't closed.

Basing a $1.77 trillion valuation on a money-losing business that generated just $3.2 billion in sales last year should generate extreme levels of skepticism. But some analysts think optimism is warranted. Analysts at Morgan Stanley, for example, believe that SpaceX's revenues will hit $3.4 trillion by 2040 largely due to seismic growth in its AI division. Meanwhile, Goldman Sachs predicts AI revenue to surge to $322 ​billion by 2030.

It should be noted that both Morgan Stanley and Goldman Sachs are underwriters for the SpaceX IPO. The firms could earn hundreds of millions of dollars in fees from the public sale. Their bullishness, therefore, should be taken within that context.

Still, there's no denying that AI is a critical storyline for the upcoming SpaceX IPO. Investors can't just have faith in rockets or Starlink to justify that company's lofty valuation target.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.