The SpaceX (SPCX) stock has taken its investors on a bumpy ride since its June debut.
Shares are down 6.9% year-to-date through Aug. 26 and over their nearly three months of public trading, according to Yahoo Finance data. At around $139.63, the stock traded 38% below its June record of $225.64.
Investors are now looking for the next business that’s capable of justifying SpaceX’s lofty valuation, but Bank of America has identified an important wrinkle in its wireless ambitions.
SpaceX has kept expanding beyond rockets. Its first public earnings report showed quarterly sales ballooning almost 50% to $7.81 billion as Starlink and AI sales surged, per Reuters.
The company also acquired 65 megahertz of EchoStar (ECHO) spectrum for $19.6 billion, allowing Starlink greater room to evolve beyond satellite broadband and direct-to-cell coverage into a broader mobile offering.
That opens up the door for a massive new market, but it also moves SpaceX a lot to entrench telecom operators.
As reported by Seeking Alpha, Bank of America sees that wireless push as credible but feels executing it might require a lot more terrestrial infrastructure, industry cooperation, and time than SpaceX investors currently expect.
BofA sees a costly catch in SpaceX’s wireless push
BofA’s takeaway is that SpaceX’s wireless push might actually help its apparent targets.
Following discussions with T-Mobile (TMUS) CTO John Saw and Crown Castle (CCI), BofA analyst Matthew Griffiths said Starlink is more likely to complement terrestrial networks instead of replace them.
The problem at this point is primarily infrastructure.
SpaceX has satellite capacity and cellular spectrum, but going up against a nationwide carrier requires a lot more transmitting signals from orbit. It would require thousands of towers and small cells, along with energy, fiber, leases, and zoning approvals, along with multiple years of construction.
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One potential shortcut involves customer-hosted femtocells, or miniature cellular base stations.
However, he estimates that matching T-Mobile’s outdoor coverage requires between 500 million and 1.5 billion femtocells nationwide. At nearly $1,000 each, the equipment alone might cost hundreds of billions of dollars before fiber, power, or maintenance.
Crown Castle argued that femtocells are a lot better in filling isolated coverage gaps. For broader service, SpaceX still needs towers offering reliable coverage, permitting support, power, and fiber.
SpaceX has the money to deploy sites quickly. Even so, BofA said matching established carriers on coverage, capacity, indoor reception, and seamless mobility requires massive spectrum along with several years of execution.
Starlink aims far beyond rural broadband
Plans for Starlink were originally straightforward.
It involved using low Earth orbit satellites to provide broadband where fiber and cellular towers are unavailable.
That said, Musk’s wireless ambitions are far bigger. When SpaceX and T-Mobile announced direct-to-cell connectivity back in August 2022, Musk said:
“The important thing about this is that it means there are no dead zones anywhere in the world for your cell phone.”
That service uses Starlink satellites and carrier spectrum to connect ordinary phones in areas beyond terrestrial coverage. However, SpaceX is looking to the past, complementing wireless carriers to go up against them.
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As reported by LightReading, SpaceX scooped up 65 megahertz of wireless spectrum from EchoStar for $19.6 billion. President Gwynne Shotwell subsequently said SpaceX would add terrestrial infrastructure to create a “true mobile service,” expecting to secure “quite a few” customers from T-Mobile, AT&T, and Verizon, believing that Starlink’s service would be better.
Musk’s claims have been even loftier, as reported by GeekWire, arguing Starlink might “deliver a majority of the world’s internet” in “less than 10 years.”
Those are incredibly aggressive claims.
Starlink’s satellite advantage is the strongest in rural areas, disaster zones, aviation, and maritime connectivity. Moreover, dense cities offer far greater capacity, indoor coverage, and network reuse than satellites alone can provide.
That’s where BofA’s findings are so pertinent.
SpaceX could eliminate multiple dead zones, but matching nationwide wireless networks would require thousands of terrestrial sites, more spectrum, fiber, power, and local permits. Starlink could, in many ways, become a formidable wireless layer without fully replacing tower-based networks.
Starlink still pays SpaceX’s bills as AI spending explodes
Starlink is still paying the bills at SpaceX, even as Musk predicts AI could become its largest business.
SpaceX’s Connectivity segment, the closest proxy for Starlink, generated a tremendous $4.29 billion in Q2 sales, up 66% year over year.
That represented an eye-catching 54.9% of SpaceX’s $7.81 billion in sales, compared to $2.56 billion from AI and $962 million from launches, as per company results.
Starlink produced $1.66 billion in operating profit, while AI lost around $1.26 billion, and SpaceX posted a $541 million net loss.
Starlink wrapped up the quarter with 12 million subscribers, double its prior-year total. However, average monthly sales per subscriber tanked 22% to $66 as SpaceX expanded through cheaper international plans. That makes its enterprise, government, aviation, and maritime customers a lot more important. Musk expects enterprise sales to “substantially exceed consumer revenue.”
Yet he forecasts a major shift toward AI.
“Definitely, our AI revenue will exceed all other SpaceX revenue probably in September,” Musk told employees, adding it would “significantly exceed” the rest of SpaceX in Q4.
That’s a steep climb to say the least. AI generated $2.56 billion in Q2, while SpaceX’s other businesses produced $5.25 billion. Assuming those operations remain flat, AI sales will need to more than double to go past them.
Moreover, as we look ahead, Musk plans to expand AI computing capacity from 1.4 gigawatts to 10 gigawatts by the end of 2027, generating $300 billion to $500 billion annually.
However, Q2 AI sales annualize to just $10.2 billion, and SpaceX spent $15.8 billion on AI infrastructure while the operation remained unprofitable.
What BofA’s warning means for SpaceX investors
BofA isn’t predicting failure for SpaceX investors, but it’s questioning how much of Starlink’s status as a potential national carrier disruptor is being priced-in by investors.
That matters a ton because its valuation leaves virtually zero room for missteps.
According to Seeking Alpha data, the stock’s trading at over 1,585-times forward non-GAAP earnings, 11,472% higher than the sector. In essence, investors are already paying for success across every major SpaceX vertical.
As we look ahead, investors need to look out for tower-leasing agreements, carrier partnerships, and new spectrum purchases along with direct-to-device revenue disclosures.
Moreover, growing enterprise sales and stable Starlink margins will strengthen the thesis even more. Surging terrestrial spending without corresponding subscriber growth will weaken it.
For existing shareholders, wireless offers meaningful upside, but it shouldn’t be valued as an imminent takeover of the U.S. mobile market.
Perhaps the strongest bullish signal might be SpaceX effectively partnering with others in sharing network costs. On the flipside, the biggest risk involves trying to build the entire network on its own.
