Since its IPO earlier this year, Space Exploration Technologies Corp. (NASDAQ:SPCX)’s shares are up by a modest 4% over their first day’s closing price. The firm’s narrative is driven by its AI compute plans as it has identified a $26.5 trillion total addressable market for AI in its IPO filings. Naturally, the debate surrounds the firm’s ability to capture this market and whether the spending costs it’s incurring are justified. As for Cramer, he believes that you should buy Tesla, Inc. (NASDAQ:TSLA)’s shares if you believe in SpaceX and remarked on October 2nd:
“Well, look, it’s good to see that when gasoline goes up a lot, people think that maybe it’s a bargain to get electric. Remember I say you buy Tesla because I think SpaceX is great. By the way, SpaceX, I should have mentioned, when I was [inaudible] Colossus, that SpaceX charging people for compute. They have more compute, so SpaceX I think could have an explosion in earnings and it would be a terrific move to buy Tesla when that happens.”
Even as he thinks buying Tesla is worth it, the stock isn’t on our list of 10 Blue Chip Stocks Jim Cramer is Crazy About. See which ones are!
In its second quarter, the only period for which financial figures are available, SpaceX posted a $541 million loss on top of $7.81 billion in revenue. The firm’s capital expenditure reflected its AI ambitions, as SpaceX spent a whopping $18.4 billion in capex. Out of the $7.8 billion in revenue, SpaceX’s AI unit generated $2.56 billion but posted an operating loss of $1.26 billion. Consequently, it became clear that the AI business played a large role in SpaceX’s broader losses since the firm’s operating loss in the quarter was $143 million.
However, the AI business, courtesy of the feverish demand for capacity, does inject long term visibility into SpaceX’s revenue, provided the AI boom lasts until the end of the decade. AI giant Anthropic has agreed to pay the firm $1.25 billion per month for computing capacity until May 2029, while Google has agreed to pay it $920 million per month. Therefore, the debate for SpaceX is whether the heavy expenses its incurring are worth it when it comes to long term AI-related tailwind generation.
As for Tesla, the firm has had a tough couple of quarters. Profitability is a key concern as the firm’s non-GAAP earnings per share marked a 17.5% annual drop in its second quarter. Like big tech hyperscalers, free cash flow was also negative. During the quarter, SpaceX’s free cash flow was a negative $1 billion while its operating margin dropped by 270 basis points, courtesy of an operating income drop of 57%. As expected, AI infrastructure plays a key role in the drops. However, for Cramer, Tesla is worth buying not only if you have faith in SpaceX, but also because, like Musk, he believes that Tesla is a robotics and AI company instead of a car company.
Looking at the valuation, Tesla’s forward P/E ratio of 158 is significantly higher than traditional car manufacturing peers while its electric vehicle peers do not have a P/E ratio since they are unprofitable. Yet, the price to sales ratio of 12.98 is more than four times higher than Rivian and 12 times higher than Lucid Motors. Seems like investors are paying a rich Musk premium for the car manufacturer. Tesla’s revenue of $28 billion in Q2 is also substantially higher than Rivian’s $1.7 billion. Hedge fund sentiment in both is roughly similar, as 119 disclosed a stake in SpaceX and 116 in Tesla in Q2. Short interest as a percentage of float ranges between 1.9% to 2.45%.
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