Elon Musk Says Spacex Has A Massive Competitive Advantage…

What is SpaceX’s advantage in artificial intelligence?

Musk argues that SpaceX has an engineering advantage over everyone else competing in the cloud computing business. His premise is that it can deploy the engineering talent pool and intellectual property base that supported the development of its rocket operations to efficiently build new data centers that produce high returns on investment.

“We’re finding that even a small amount of what we’ve learned building rockets, which are incredibly difficult, applied to data centers, yields tremendous benefits,” Musk said on the company’s first earnings call. He noted its cooling systems are well ahead of what’s needed.

The payoff potential appears substantial.

“The current economics have translated into a less than one-year payback on our new capital deployments for compute,” CFO Bret Johnsen said during his prepared remarks.

Space Exploration Technologies Stock Quote

NASDAQ: SPCX

Space Exploration Technologies

Today’s Change

(-0.91%) $-1.29

Current Price

$140.00

Key Data Points

Market Cap

$1.8TMarket cap calculated using publicly traded s outstanding only. Does not include unlisted, private, or dual-class non-traded s. Implied market cap may vary.

Day’s Range

$135.50 – $144.02

52wk Range

$104.83 – $225.64

Volume

96.7M

Avg Vol

125.1M

That stands in stark contrast to comments from Amazon CEO Andy Jassy, who outlined the economics for Amazon Web Services’ massive build-out.

“Data center capital is spent starting two years before we can put servers into them to start monetizing,” he explained. That’s just the physical limitations it’s seeing in building new data centers; it can’t even begin to monetize them for two years, let alone break even in one year.

“For servers and networking equipment, on average, it takes a little less than three years to break even on that investment,” Jassy added. Even if the cost of a data center were zero, Jassy said it would take nearly three years to break even on the equipment it buys to equip those buildings. Results from Microsoft and Alphabet suggest similar timelines for their operations.

There’s a huge gap in SpaceX’s accounting and Amazon’s accounting. Is SpaceX, a company that practically entered the cloud computing space yesterday, really so much more efficient at engineering and capital deployment that it can produce results three times better than those of the hyperscalers?

Amazon Stock Quote

NASDAQ: AMZN

Amazon

Today’s Change

(-0.94%) $-2.48

Current Price

$262.65

Key Data Points

Market Cap

$2.8TMarket cap calculated using publicly traded s outstanding only. Does not include unlisted, private, or dual-class non-traded s. Implied market cap may vary.

Day’s Range

$262.42 – $265.81

52wk Range

$196.00 – $287.20

Volume

27.3M

Avg Vol

49.9M

Gross Margin

50.77%

Why investors should be skeptical of Musk’s claims

Musk has never shied away from making bold claims about where his businesses are headed, and when they will pass various milestones. More often than not, the results fall short of his predictions. There’s reason to be skeptical about SpaceX’s ability to establish a meaningful competitive advantage in AI compute based on its engineering talent alone.

While Johnsen’s claim that it’s producing very fast paybacks on its current investments may be accurate, it’s not clear that it will be able to scale up as efficiently. SpaceX had existing infrastructure that it used to provide more compute capacity to third-party customers Anthropic and Alphabet’s Google last quarter. That’s not necessarily repeatable.

Alphabet Stock Quote

NASDAQ: GOOG

Alphabet

Today’s Change

(-0.12%) $-0.40

Current Price

$343.54

Key Data Points

Market Cap

$4.2TMarket cap calculated using publicly traded s outstanding only. Does not include unlisted, private, or dual-class non-traded s. Implied market cap may vary.

Day’s Range

$342.07 – $348.06

52wk Range

$197.46 – $404.47

Volume

10.9M

Avg Vol

22.3M

Gross Margin

60.94%

Dividend Yield

0.25%

What’s more, it simply doesn’t make sense that SpaceX could easily retain such top talent in the face of competition from hyperscalers. As mentioned, Alphabet, Amazon, and Microsoft are spending three times as much on capital expenditures as SpaceX. Their businesses are heavily reliant on efficient returns on that capital spending. They would surely pay up for top talent if it meant improving their return on capital severalfold.

SpaceX is merely in a position to provide some AI compute at a time when there’s a severe shortage of it. Alphabet has signed a contract with the company for compute because the long-term potential of serving large customers Anthropic now with its own infrastructure by offloading some of its internal AI compute needs to a third party is too good to pass up.

Alphabet can end its contract with SpaceX as soon as it builds enough capacity for itself. That could result in some excellent short-term revenues for SpaceX, but it doesn’t indicate a long-term competitive advantage in cloud computing.