Should SpaceX Investors Be Worried About Competition From Amazon?

Amazon (NASDAQ:AMZN) dominates several markets in which it competes. It has the leading market share in the U.S. e-commerce industry and the global cloud computing space. It is also a notable player in video and music streaming, as well as digital advertising. Given Amazon's track record, nobody wants to compete with the company as it can be a formidable opponent. That's why Space Exploration Technologies (NASDAQ:SPCX) should at least acknowledge Amazon's push into some of the markets where it dominates. Should SpaceX investors be worried?

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Targeting a $1.6 trillion market

SpaceX's most profitable business right now is providing internet connectivity via a constellation of Low Earth Orbit (LEO) satellites. In the second quarter, the rocket company's connectivity segment recorded $4.3 billion in revenue (more than its two other businesses combined), up almost 66% from the year-ago period. And this unit had an operating income of $1.7 billion, up 79% year over year, while SpaceX's two other segments reported operating losses.

But SpaceX has barely scratched the surface, according to its own estimates. The company has calculated a $1.6 trillion addressable market in this industry. That's why Amazon is looking to compete in this market through Amazon Leo. The e-commerce giant has contracted launch services from Arianespace, a commercial space launch provider.

Amazon recently announced that it was adding six launches to its contracted commitment, bringing its total Arianespace launch commitments from 18 to 24. Arianespace has already put 100 of Amazon's satellites into orbit across three missions (Amazon has also contracted other companies).

Amazon already has about 400 satellites in orbit and plans to start providing internet connectivity this year. And the company's remaining contracted launches should significantly expand the constellation.

SpaceX vs. Amazon

Amazon is profitable and generates significant cash flow, which can allow it to continue investing in this opportunity, even if Amazon Leo operates at a loss for a long time. The rest of the business will pick up the slack. Further, Amazon isn't getting into the rocket business (not yet anyway). The company doesn't have to spend the significant initial capital required to build and test rockets.

Perhaps that's an advantage it has over SpaceX. But SpaceX's strategy also has its perks. The company is vertically integrated and, after spending significant upfront capital on building its rockets, the marginal cost per launch can be lower than what an outside company contracting launch services pays. That's especially true given that SpaceX has pioneered reusable rockets and drastically reduced the cost of space travel.

The company is still innovating. Its next-gen rocket, Starship, is being developed to be fully reusable, with a much bigger payload capacity than its current Falcon 9. Starship could help the company extend its lead over Amazon and other corporations that are looking to enter this market, and SpaceX's lead is already massive. According to some estimates, SpaceX has a little over 11,000 active satellites in orbit. So, it's not time for the company and its shareholders to be worried about Amazon yet.

Which one is a buy?

Amazon doesn't need to dominate the connectivity market to perform well over the medium term. The company's core business, and especially its cloud computing arm, Amazon Web Services (AWS), is booming. In the second quarter, Amazon's sales grew by 20% year over year to $200.6 billion. AWS sales increased by 37% year over year, its fastest growth rate in 18 quarters. On the bottom line, Amazon's earnings per share grew 242% to $5.75 (benefiting from equity investments).

Amazon is seeing significant demand for its cloud and AI services and could ride that wave for a long time, making the stock an attractive pick to hold at least through the next five years. What about SpaceX? Its recent financial performance was strong. Second-quarter revenue grew 92% year over year to $7.8 billion, while the net loss nearly halved to $541 million compared to $1 billion in the year-ago period.

SpaceX could become profitable soon. That's what analysts expect. Even so, the company's shares are very expensive, trading at 208x forward earnings. The business is strong, but at current levels, it may take a while for SpaceX's shares to grow into their valuation. I'd avoid the stock for now.

Prosper Junior Bakiny has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.