SpaceX's $29B Google AI Deal: Why Investors Should Stay Cautious

Starting this month, Alphabet will pay SpaceX $920 million per month for access to compute capacity at one of its Colossus data centers. The contract, signed in June, could total $29 billion over 32 months and is one of several major AI infrastructure deals SpaceX has signed. Management expects AI revenue to ramp up significantly as it builds new data centers.

But there's a catch: either party can terminate the contract with just 90 days' notice. This isn't unique to Alphabet—SpaceX includes similar terms in all its cloud contracts after an initial ramp-up period. While that flexibility may help SpaceX sign customers faster and at higher prices, it also makes long-term revenue far less reliable.

Alphabet's motivation is clear: it's capacity-constrained. Google Cloud's backlog grew to $514 billion last quarter, up from $460 billion, and Alphabet is spending around $200 billion this year on capex to build its own data centers. CFO Anat Ashkenazi called third-party data centers a 'bridging strategy' while internal capacity is built out.

Alphabet also owns a significant stake in SpaceX, with a post-IPO lockup that doesn't fully expire until Q3 2027. That gives Alphabet an incentive to keep the contract alive at least until then, but it doesn't guarantee SpaceX will receive the full $29 billion.

The bigger issue is that SpaceX's AI revenue is driven by current supply-demand imbalances, not a durable competitive advantage. As the industry builds more capacity, companies like Alphabet and Anthropic—SpaceX's biggest infrastructure customers—will likely meet their needs internally, potentially causing a sharp revenue drop for SpaceX.

For SpaceX, the Alphabet deal represents a massive short-term revenue boost, but its durability is questionable. The 90-day termination clause means the contract could vanish quickly if Alphabet's internal capacity catches up or if it finds cheaper alternatives. That makes it risky to value SpaceX based on this deal alone.

SpaceX CEO Elon Musk has estimated the company can monetize its GPUs at $30 to $50 per watt, which is extremely high pricing. That pricing is only possible because compute is scarce. As supply and demand come into equilibrium, SpaceX won't be able to command such premiums, which would lower revenue and lengthen the payback period on its data center investments.

To justify its premium valuation, SpaceX will need to prove its AI servers offer real advantages—like lower costs or unique capabilities—in a less constrained market. Its orbital data center plans could provide a cost edge, but those technologies are unproven at scale. Until then, the company's AI revenue remains fragile.

Investors should also consider Alphabet's perspective. The tech giant is using SpaceX as a temporary fix, not a long-term partner. Once Alphabet's own data centers are online, it will likely reduce third-party spending, which could hurt SpaceX's AI business. Alphabet's equity stake in SpaceX might delay a termination, but it doesn't change the underlying economics.

In short, the $29 billion headline number is eye-catching, but the actual cash flow SpaceX receives could be far less. The stock already trades at a premium based on optimistic sales expectations, leaving little room for error.