SpaceX slides as AI spending worries overshadow early returns

SpaceX's shares fell 12% after its first earnings call as a public company, with investors concerned about the company's ability to sustain profitability in its Starlink business amidst costly AI investments.

SpaceX touted faster-than-expected returns from its AI spending on its first-ever earnings call as a public company.

But investors remained concerned about how long its profitable Starlink business could continue to bankroll costly investments in data centers and Nvidia chips. The company's shares fell about 12% on Wednesday, dropping well below ‌their $135 IPO price in less than two months since the company's blockbuster debut.

"With capex expected to remain elevated and investor enthusiasm cooling, I believe the stock could remain under pressure ahead of the lock-up expiration," said Carolane de Palmas, market analyst at brokerage ActivTrades. "That could translate into significant volatility as markets reassess SpaceX's valuation and cash-burn trajectory."

SpaceX reported AI revenue that more than tripled from a year earlier and disclosed several new cloud computing agreements, even as quarterly capital spending on ‌AI climbed to $15.8 billion. Chief Financial Officer Bret Johnsen said the economics of those investments were improving rapidly, but also signaled that AI spending would remain elevated.

"The current economics have translated into a less than one-year payback ‌on our new capital deployments for compute," Johnsen said, adding that SpaceX had signed another $6.7 billion in cloud computing contracts since the end of the second quarter and was on track to reach a $100 billion annualized revenue run rate by the end of the year. That stands in contrast to traditional data center investments, which typically take years to recover their upfront costs.

"Elon has continued to surprise investors on what innovation and technology can do, but there has always been a mismatch in terms of the time frame of when that execution is going to occur," ⁠David Wagner, portfolio ​manager at Aptus Capital Advisors, said, referring to Musk's often-rosy ⁠outlook at his EV company Tesla that he has regularly missed. "I believe the numbers. I would say that yes, those numbers are aggressive, but it's not a fantasy. The pieces exist, they just require flawless execution."

THE AI PAYBACK BET The comments at the post-earnings call marked a ⁠shift in the investment debate surrounding SpaceX.

Before the earnings release, investors largely viewed Starlink's growing cash flows as the primary source of funding for the company's AI ambitions. Management is now arguing that AI infrastructure itself is beginning to generate enough revenue to finance ​further expansion. To be sure, the company spent about $18.4 billion on capital expenditures during the quarter, roughly a fifth of the $85.7 billion it raised in its June IPO, and remained deeply free cash flow negative as ⁠it continued investing heavily in AI infrastructure.

"We've watched the same scrutiny land on Big Tech this earnings season, where investors have questioned open-ended wallets and started demanding a visible return on them," said Josh Gilbert, lead analyst at trading platform eToro. "SpaceX faces that test with an added degree ⁠of ​difficulty because it's asking shareholders to bankroll data centres in orbit."

SpaceX's AI business generated $2.6 billion in second-quarter revenue, up more than three-fold from a year earlier although it remained loss-making on an operating basis. Even so, the company is not easing off its spending. Johnsen said capital expenditures over the next two quarters would likely remain at levels similar to the second quarter as SpaceX continues expanding AI compute capacity, Starship production and next-generation Starlink satellites.

"New compute capital ⁠monetizes so fast it behaves more like cost of goods than capex," said Michael Monaghan, portfolio manager of the Founders 100 ETF, which holds SpaceX shares. SpaceX executives said demand for AI computing continues to outstrip supply and ⁠that they expect to end the year with more than two ⁠gigawatts of compute capacity. If demand remains strong enough to keep that infrastructure fully utilized, AI could increasingly fund its own growth rather than relying on Starlink's cash generation.

"The relationship between capex and revenue is unsustainable, so capex has to fall or revenue has to grow tremendously, and that is where faith in Musk's vision, engineering leadership and ‌execution track record separates the bulls from ‌the bears," said Drew Cupps, portfolio manager at Polen Capital, which holds a position in SpaceX.