Thinking of Buying SpaceX? Just Buy This Market-Thumping Stock Instead.

Space Exploration Technologies (NASDAQ: SPCX) has gotten a lot of attention from investors since it went public in June.

Elon Musk's space company is poised to be the most disruptive company in history, according to bulls, as it's already transformed space flight, and over the long term, it aims to colonize space and make human civilization interplanetary. Additionally, the company says it has identified a $27 trillion addressable market, primarily made up of AI applications.

SpaceX is investing heavily in AI following its merger with xAI, Musk's AI company, earlier this year, and the company is aiming to scale its AI compute to 10 gigawatts (GW) by the end of 2027, which is enough to power roughly 7.5 million American homes continuously.

Clearly, the company has big ambitions, but it also has a huge valuation, trading at 64 times sales, and analysts only expect the company to be barely profitable this year, forecasting $0.09 in earnings per share for the year.

After going public in June, SpaceX initially shot out of the gate, but the stock has since cooled off and is now roughly flat from its IPO price.

SpaceX's unique business model and Elon Musk's track record with Tesla have made it intriguing to investors, but the stock's sky-high valuation and its seemingly far-fetched goal of space colonization offer reasons to be cautious.

For investors, there's another stock that offers the upside potential of SpaceX without the downside risk. That's Nvidia (NASDAQ: NVDA), which has become increasingly connected to SpaceX in recent months.

Nvidia needs no introduction at this point. The AI chip juggernaut is now the most valuable company in the world, coming off a 9% surge on its earnings report after CEO Jensen Huang said next year would grow by at least 70%, compared to analyst expectations of 45%.

But Nvidia's strength alone doesn't adequately explain why it's an ideal substitute for a SpaceX investment. There's more to the story than that.

Image source: Getty Images.

The Nvidia-SpaceX connection

SpaceX may be best known for its reusable rockets or its Starlink satellite internet service, but since its merger with xAI, the company has been increasingly focused on AI, which it sees as the future of the business, including projects like orbital data centers, and that has meant a closer partnership with Nvidia.

On its earnings call, Nvidia said SpaceX was one of its lead partners for the new Vera CPU, which might come as a surprise to investors, as Nvidia's biggest customers have been hyperscalers like Microsoft and AI start-ups like OpenAI.

Elon Musk also cemented the relationship between the two companies when he said that SpaceX would build exclusively on Nvidia, adding that the new Vera Rubin architecture was the best AI computing system available.

By forming an exclusive relationship with Nvidia, SpaceX gains preferential treatment, including early access to new products, and the two companies are also working on some products together, such as a space-optimized Vera Rubin NVL72 system for orbit.

Why Nvidia is a better buy than SpaceX

Nvidia is coming off a quarter in which revenue grew 106%, adding roughly $50 billion in new sales in the quarter. The company continues to dominate the data center GPU market and has held firm against rising competition from rivals like AMD and Intel, as well as from its customers, who are developing their own chips. That resilience is a testament to the superiority of Nvidia's technology.

The biggest risk facing Nvidia seems to be that the AI boom will turn into a bubble. The stock is being priced as if its current profit trajectory isn't sustainable and that profits will eventually fall, as the stock trades at just 18 times next year's earnings per share, and EPS estimates are likely to go up after Huang called for 70% growth next year.

If the AI boom does go bust, however, SpaceX stock looks much more vulnerable than Nvidia. Yes, SpaceX still has the space and connectivity businesses, but it's staking its future on AI as the massive ramp to 10 GW shows. Its valuation is also much higher than Nvidia, putting it at a much greater risk of a crash.

Nvidia, on the other hand, is priced as if its profit growth will flatline after next year.

Because SpaceX is building on Nvidia chips, Nvidia will benefit from SpaceX's success, but the gap in valuation, as well as Nvidia's proven track record, significantly favors the chip-maker over SpaceX. Nvidia much higher floor than SpaceX, and potentially a higher ceiling, thanks to its leadership in AI chips.

Jeremy Bowman has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.