SpaceX Stock Fell After the Midterm Elections. Is This a Buying Opportunity?

Space Exploration Technologies’ (SPCX +8.62%) volatile year continues. The company’s shares took a tumble after the recent midterm elections in the U.S., as the results raised concerns about increased regulatory scrutiny on various corporations, including Elon Musk’s businesses. As of writing, SpaceX’s shares are trading at about $125, roughly 7% below its IPO price. Is now a good time to buy the stock?

Image source: Getty Images.

SpaceX is targeting a potentially huge AI market

Don’t let its name fool you: SpaceX’s largest opportunity lies in the artificial intelligence (AI) market. The company itself said as much when it identified a $26.5 trillion opportunity in AI, accounting for almost 93% of its total addressable market of $28.5 trillion.

SpaceX wants to bring 10 gigawatts of compute online in 2027 to tap into this opportunity. For context, what SpaceX wants to build in one year is on par with the individual worldwide capacity currently at the disposal of major hyperscalers like Microsoft (MSFT -0.99%), Alphabet (GOOG +0.78%) (GOOGL +0.78%), and Amazon (AMZN -0.35%).

That won’t be a cheap undertaking for SpaceX, but the company is seeing such massive demand for compute capacity that it thinks it’s worth it. During the company’s third-quarter earnings call, management pointed out that SpaceX could rent out compute several times over its capacity if it said yes to every request. So, higher capacity, combined with increased AI spending, could supercharge SpaceX’s revenue growth, particularly within its AI segment, dubbed Super Intelligence (SI).

In the third quarter, SpaceX’s total revenue increased by 161% year over year to $14.6 billion. SI revenue came in at $7.6 billion, up 830% compared to the year-ago period. SpaceX reported a net income of $4.4 billion, significantly better than the $1.1 billion net loss recorded in the prior-year quarter.

SpaceX achieved outstanding results, largely thanks to its SI business, despite significant capex within this unit. That’s a great sign. Analysts expect SpaceX’s earnings per share to be positive next year, on average, even as it continues to spend massive amounts to increase compute capacity. If the AI market opportunity is even close to what SpaceX expects, the company could position itself as one of the biggest winners.

That’s even more evident once we consider the company’s continued innovation in space launch. SpaceX wants to send AI satellites into space to circumvent some of the limitations of the Earth-bound AI build-out. It will need its next-gen rocket, Starship, for that. Starship is being designed to be fully reusable and could reduce space launch costs by up to 99%, thereby unlocking even more opportunities in AI and connectivity.

The election results complicate things

SpaceX’s plans are ambitious, but there is plenty of uncertainty. First, competition is fierce, and it will remain so. Some corporations don’t have the financial means to keep up with SpaceX’s massive planned build-out, but others do. Second, SpaceX is investing in capital-intensive data centers now, hoping to monetize compute capacity over the next few years.

If demand for its services isn’t nearly as strong as the company hopes through the end of the decade, it will be a major problem. Wall Street isn’t yet fully convinced that AI spending will continue soaring. That’s partly why some companies that are sacrificing free cash flow in the short term, such as Alphabet and Meta Platforms (META +0.84%), are being punished for it.

Third, SpaceX and other companies in this industry must contend with power constraints. SpaceX will seek to get around that problem with its AI satellites, but that project has limitations of its own.

Lastly, the recent election results added even more uncertainty. Investors are now bracing for what could be a much tougher regulatory environment for SpaceX and the hyperscalers and a slowdown in the construction of data centers. It’s hard to predict precisely how these recent developments will affect SpaceX’s business, but it’s definitely an important factor to consider.

That’s why the stock dropped so much after the elections. SpaceX is getting closer to a level where I’d consider investing in the stock. However, it’s still not quite there yet, especially considering that the election results increased the risks the company faces.