SpaceX Is Trading Near Its $135 Offering Price. Wall Street Analysts Say This Is What Happens Next.

After a few months, Space Exploration Technologies (NASDAQ: SPCX) stock has gone on a wild ride, but it now trades right around its initial public offering (IPO) price of $135. Wall Street analysts are much more optimistic about the stock, with an average price target of $218 across the industry.

Many Wall Street analysts believe that SpaceX's radical ambitions for artificial intelligence (AI) and space-based services will set the record-breaking IPO to the stratosphere, and that the stock price will keep moving higher. But are they right?

Here's a breakdown of SpaceX's business ambitions and whether you should follow Wall Street and buy its stock today.

Ambitious AI growth

AI is the major market theme of the decade, and Elon Musk and SpaceX plan to cash in on it in a big way. The company is aggressively building data center capacity on earth, which will power its own AI services like the Grok chatbot, as well as selling to third-party providers. This makes SpaceX a neocloud company competing with Amazon Web Services (AWS) for compute services.

SpaceX's AI revenue was $2.56 billion last quarter. However, because of its massive capital spending, Musk believes its annual recurring revenue (ARR) will grow to $100 billion by the end of 2026, which could mean about $25 billion in AI revenue in Q4 alone. This will be achieved through contracts with other AI players hunting for computing power, such as Anthropic, which signed a large deal with SpaceX.

Long-term, Musk believes SpaceX can reach $1 trillion in revenue by 2030, primarily through AI infrastructure investments on Earth and, eventually, in orbit. It is going to cost a lot to get these facilities up and running -- AI capital expenditures were $15.8 billion last quarter alone -- but the company believes there is a massive opportunity in AI infrastructure that will lead to billions, and eventually trillions, in revenue.

Image source: Getty Images.

Where will profits come from?

Right now, all these AI investments are losing money for SpaceX. It had a segment operating loss of $1.2 billion and is burning a ton of free cash flow to scale up its infrastructure. Long-term, it is difficult to estimate how fat (or not) the AI segment's profit margins will be at maturity, but it will be a long way until that happens, especially once you consider the costs of delivering and monitoring data center assets in orbit.

In the short-term, profitability can be relied on from the Starlink internet service. Last quarter, its revenue grew 66% year-over-year to $4.2 billion, with $1.67 billion in operating earnings. In fact, it is the only profitable segment at SpaceX, as the space launch segment is currently losing money.

Rapid growth for Starlink gives the business a solid profit trajectory. If Starlink revenue can scale to $50 billion a year within a few years, a profit margin of 39% (which is what the Starlink division generated last quarter) would mean $19.5 billion in segment earnings.

Is Wall Street right about SpaceX?

$19.5 billion in segment earnings may be a lot for most companies, but this is just a splash in the bucket for a stock with a market cap of $1.9 trillion. If it were to reach the average Wall Street price target of $218, the market cap would approach $3 trillion.

Compared to Starlink's segment operating earnings, that would be an earnings multiple well over 100x, based on forward estimates a few years ahead.

With this in mind, the potential for SpaceX stock all comes down to the investments in AI and how profitable they can be. If SpaceX can deliver its promise of $1 trillion in revenue with a decent profit margin, maybe the stock deserves to trade at the average Wall Street price target. But if you think these are grandiose claims with little chance of actually happening, the right bet is to avoid SpaceX stock for your portfolio.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.