Post IPO Stock Drop, SpaceX To Sell Billions In AI Compute To Pentagon, Others

If you can't beat 'em, supply 'em with data center capacity. That appears to be the latest SpaceX AI business model. It's Grok model is considered an also-ran compared to Anthropic, OpenAI, Google and various emerging Chinese competitors. 

And following the plateauing, if not outright collapse of its Tesla business - due largely to Musk's provocative political pronouncements, which served to alienate much of his autos' potential market - as well as the post-IPO return to earth of SpaceX stock, the company clearly needs to demonstrate that it can create a financially viable future. So renting out unused compute capacity (thanks to the gap between the company's data center build-out versus actual demand for its AI) makes sense. The only looming question is SpaceX's reliance on the US government for a very significant proportion of its sales and profit, which could be threatened by a change of administrations. JL

Anissa Gardizy and colleagues report in the Wall Street Journal, Surbhi Jain reports in Yahoo Finance:

For SpaceX, renting computing capacity has proven more lucrative than selling Grok AI. The company is in talks with the Defense Department about providing data-center capacity worth billions of dollars for running AI models. SpaceX has signed similar deals with Anthropic and Google and is now planning to greatly expand its cloud-computing efforts. If it moves forward, SpaceX would enter a market already served by Microsoft, Amazon, Google and Oracle - all of which provide cloud infrastructure to the Pentagon. National-security officials have raised concerns that the Pentagon is already too reliant on Musk’s services, and  huge his financial contributions to President Trump’s 2024 campaign have fueled conflict-of-interest claims.

SpaceX SPCX 6.24%increase; green up pointing triangle is in talks with the Defense Department about providing the agency with access to data-center capacity worth billions of dollars for running artificial-intelligence models, deepening ties between Elon Musk’s company and the Pentagon. 

The two sides are discussing an arrangement in which SpaceX would provide computing capacity to the department at a cost of up to several billion dollars, people familiar with the matter said. The talks are ongoing and could fall apart, the people said. 

SpaceX has signed similar deals with Anthropic and Google in recent months and is now planning to greatly expand its cloud-computing efforts, people familiar with those plans said. In recent weeks, SpaceX employees have discussed plans to compete more directly with existing providers such as CoreWeave by offering capacity to AI customers at a lower price, according to people familiar with the matter.   

If it moves forward, SpaceX would enter a market already served by Microsoft Corporation, Amazon.com, Inc., Alphabet Inc's Google and Oracle Corp — all of which provide cloud infrastructure to the Pentagon under the Joint Warfighting Cloud Capability program. 

The Pentagon is already one of SpaceX's largest customers. The company launches national security missions, provides military satellite communications through Starlink and supports missile-tracking initiatives. Leasing AI computing power would deepen that relationship, expanding SpaceX's role from delivering physical infrastructure to providing the computing infrastructure that powers artificial intelligence. That shift reflects a broader trend across the AI industry. As computing power becomes one of the world's most valuable resources, the lines between aerospace, cloud computing and artificial intelligence are beginning to blur.

A Defense Department agreement would mark the latest deal between SpaceX and the Pentagon, which relies on the company for launching rockets and managing satellites for communications and missile tracking. Some national-security officials have raised concerns that the Pentagon is too reliant on Musk’s services, and Musk’s huge financial contributions to President Trump’s 2024 campaign have fueled conflict-of-interest claims. Administration officials have denied those criticisms. 

Like many large enterprises, the Defense Department is racing to secure cloud-computing power to support divisions such as the National Security Agency as well as warfighters using AI in their day-to-day work. Amazon, a leading provider of computing power to the Pentagon, is spending $50 billion to expand capacity for government agencies with an emphasis on the Defense Department. Microsoft, Alphabet’s Google and Oracle are also major Defense Department cloud suppliers.

Pentagon officials have said they want to reduce reliance on individual tech companies as the military embraces AI. The Defense Department recently approved a slate of firms including SpaceX, Amazon, Google, Microsoft and Oracle for usage of their AI models and other technology in classified settings. A fight with Anthropic earlier this year fueled concerns within the department about being locked into one provider.

The Pentagon is seeking $30 billion in funding for a new initiative called the Artificial Intelligence Arsenal, which focuses on securing high-end AI chips. The Defense Department outlined the program in a document related to its 2027 budget requests, which are currently being discussed in Congress.

SpaceX recently acquired Musk’s xAI and went public, bringing Grok AI models and data centers into the business. To catch up in the AI race, Musk’s firm rapidly constructed massive data centers in Memphis, Tenn. Musk claimed he did so at a faster rate and lower price than his competitors, according to SpaceX public filings. Part of his strategy was to install gas turbines on-site for power generation, a move that resulted in a lawsuit alleging the company flouted environmental rules. The company has also pitched investors on putting data centers in space. 

Renting out computing capacity has proven more lucrative in the short term than selling the company’s Grok AI models, which compete with other tools for users. Deals with Anthropic, Google and startup Reflection AI could translate to tens of billions of dollars in annual revenue for SpaceX.