34.5% of SpaceX’s Revenue Could Disappear by Mid-2027

In October, Space Exploration Technologies (SPCX -3.81%) reported third-quarter revenue that blew away expectations. SpaceX saw $14.6 billion in total sales across its launch services, communications business, and burgeoning artificial intelligence operation, which came in 161% above the same quarter last year and well above the $12.7 billion analysts expected.

By far, the biggest growth driver was its AI segment, which has started building more compute infrastructure to lease to third parties. The segment’s revenues climbed from $813 million in the prior-year quarter to $7.6 billion this time, and it now accounts for more than half of the business’s sales. That percentage could climb significantly higher given its sizable backlog of infrastructure contracts. However, that business segment also faces a tremendous level of customer concentration risk, such that 34.5% of SpaceX’s revenue from last quarter could potentially disappear by mid-2027.

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A huge contract, but no guarantees

In SpaceX’s 10-Q, it disclosed that two customers accounted for over 50% of its total sales last quarter.

“Customer A” accounted for 16.6% of sales. It’s a large customer that has been around for a long time, and it used to account for a higher percentage of sales. It’s very likely the U.S. government.

“Customer B” was a brand new customer and accounted for 34.5% of total sales. According to Bloomberg reporting, a source “familiar with the matter” said that customer is Anthropic, which signed a deal in May to pay $1.25 billion per month to use compute capacity from SpaceX’s Colossus data center. That deal was expanded and extended in October. Under the updated agreements, it will pay $3.1 billion per month to lease SpaceX’s compute into 2029. The total value of the deal if fully exercised would be $120.5 billion.

SPCX – Space Exploration Technologies

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There’s a key detail to that deal that makes SpaceX’s largest customer a big risk. Starting in early 2027, either party can cancel those contracts with just 90 days’ notice.

Granted, the recent increase in the contracts’ total value is a good indicator that Anthropic has no plans to cancel. However, a lot may change before those deals expire in 2029. Investors shouldn’t bank on the cancellable contracts that SpaceX signed with Anthropic, Alphabet (GOOG +3.25%) (GOOGL +3.18%), or any other AI developer to last for their full terms.

SpaceX is solving a bottleneck issue

SpaceX has been able to charge a premium for cloud infrastructure because AI compute remains in short supply. The company is capable of standing up data centers and outfitting them with server racks relatively quickly, which positions it to help clients solve their compute capacity bottlenecks. What’s more, the fact that it, too, can cancel its leases gives it further leeway to find customers that will pay it premium rates.

But the compute supply shortage won’t last forever, a point that Alphabet CFO Anat Ashkenazi’s alluded to during the company’s second-quarter earnings call.

“Given the supply‑constrained environment we’re in, we are planning to expand the use of third‑party capacity in Q3 as a bridging strategy, while we continue to build out internal capacity,” she told investors. That is to say, Alphabet’s deal with SpaceX — under which it’s paying $920 million per month for compute capacity — likely won’t run the full term.

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SpaceX’s commitment to using Nvidia systems is also a risk. Anthropic uses Nvidia processors for some work, but it has pushed to expand its use of competing custom chips from Alphabet and Amazon for many of its compute needs. With Alphabet recently opening the door for third parties to buy its Tensor Processing Unit (TPU) systems, much more TPU capacity could come online, opening the door for Anthropic and others to move away from SpaceX’s high-cost Nvidia-based servers.

Finally, there’s a risk that the world’s compute needs won’t be as great in the future as anticipated. Anthropic may not grow as quickly, Alphabet may not need to offload as much capacity, and other developers may never materialize as SpaceX customers.

Considering the high sales multiple investors are currently paying for SpaceX stock, the share price doesn’t seem to adequately reflect the high levels of risk in the company’s fastest-growing segment.

Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.