Key Takeaways:
SpaceX is pushing to supply the Pentagon with billions of dollars in AI computing capacity, a move that would pit Elon Musk's rocket company against Amazon, Microsoft and Google for defense cloud contracts.
SpaceX is in discussions with the US Department of Defense to provide dedicated data-center capacity for running AI models, according to the Wall Street Journal. The talks, which could still fall apart, would mark one of the largest commercial agreements between the Pentagon and Musk's company, deepening a relationship that already spans rocket launches, satellite communications and missile tracking.
"SpaceX employees have discussed plans to compete more directly with neocloud firms such as CoreWeave by selling computing capacity to AI customers at lower prices," the Journal reported, citing people familiar with the matter. The pricing threat immediately dragged CoreWeave's shares into negative territory as the market priced in the risk of a margin-compressing price war.
The negotiations come as the Defense Department races to secure cloud-computing power for intelligence agencies and active warfighters deploying AI in operations. The Pentagon is seeking $30 billion for a new program called the "Artificial Intelligence Arsenal," focused on procuring high-end AI chips, according to budget documents being reviewed by Congress. Amazon said late last year it would invest up to $50 billion to expand AI and supercomputing capacity for US government customers through its AWS cloud business, while Microsoft, Google and Oracle remain deeply entrenched as prime cloud suppliers.
SpaceX's Cloud Computing Pivot
SpaceX has been rapidly building out its computing infrastructure. The company recently completed its acquisition of xAI, bringing the Grok AI model and its data centers under the corporate umbrella. In June, SpaceX signed a multi-year cloud services agreement with Google, providing access to about 110,000 Nvidia chips and related computing infrastructure. Anthropic struck a deal in May to use the full computing power of SpaceX's Colossus 1 facility in Memphis, gaining 300 megawatts of new capacity.
The company's strategy includes installing gas turbines on-site to generate its own power, a method Musk has said is faster and cheaper than waiting for grid connections. That approach has drawn a lawsuit alleging environmental violations. SpaceX has also pitched investors on the concept of deploying data centers in space.
The economics of renting computing capacity are proving more lucrative in the near term than selling access to the Grok AI model. Agreements with Anthropic, Google and startup Reflection AI could generate hundreds of billions of dollars in annual revenue combined, according to people familiar with the deals.
Who Wins, Who Loses
SpaceX's entry into defense cloud computing threatens to disrupt a market dominated by the four largest hyperscalers. The Pentagon recently approved SpaceX alongside Amazon, Google, Microsoft and Oracle to provide AI models and related technology in classified environments, signaling the department's desire to reduce reliance on any single supplier.
The competitive threat is most acute for CoreWeave and other pure-play neocloud providers that lack the scale of the hyperscalers. SpaceX's willingness to undercut on pricing could compress margins across the sector, particularly for defense contracts where security requirements limit the pool of eligible bidders.
Political risks remain. Some national security officials have expressed concern about the Pentagon's growing dependence on Musk's companies, amplified by Musk's political donations during the 2024 presidential campaign. Trump administration officials have denied those criticisms.
SpaceX shares fell 5.43% on Friday despite the positive headline, as broader selling pressure overwhelmed the brief intraday bump. The stock has been under pressure in recent weeks amid concerns about valuation and competition in the launch market.
This article is for informational purposes only and does not constitute investment advice.
