Nearly 13% of SpaceX's $4.4 Billion Profit Came From This "Boring" Investment
Key Points
SpaceX generated $4.4 billion in net income during the third quarter.
Notes in SpaceX's 10-Q revealed the company recognized an unrealized gain from its investment in The Boring Company.
A cleaner way to measure profitability for SpaceX is to look at operating income.
Elon Musk's Space Exploration Technologies (NASDAQ: SPCX) recently published its third-quarter earnings report. Revenue soared 161% year over year to $14.6 billion while the company generated $4.4 billion in net income.
A closer examination of SpaceX's financials revealed an unusual contributor to its profitability. The company recorded a $561 million investment gain from another Musk-controlled business, The Boring Company.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
SpaceX is not alone when it comes to benefiting from an investment in another company. Earlier this year, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) reported a material investment-related gain following SpaceX's initial public offering (IPO).
Understanding these transactions illustrates an important nuance between accounting profits and the cash generated from an underlying business.
Image source: Getty Images.
How an outside investment boosted SpaceX's profits
The Boring Company is Musk's tunneling and transportation venture, which aims to build underground infrastructure that alleviates traffic congestion. While the business is not as well- known as SpaceX or Tesla, it was actually responsible for a meaningful addition to SpaceX's reported earnings during the third quarter.
Last month, The Boring Company raised $3 billion in a financing round that valued the business around $20 billion. Since SpaceX owns equity in The Boring Company, the new valuation became an updated benchmark for valuing the investment.
Under generally accepted accounting principles (GAAP), companies are required to book changes in the value of their equity investments even if those investments have not yet been sold. As a result, SpaceX recorded a $561 million unrealized gain under Other income in the third quarter.
To put that figure into perspective, the gain was equivalent to about 12.7% of SpaceX's $4.4 billion in total net income. It's important to understand that SpaceX did not actually receive $561 million in cash from this transaction. The company simply recognized an increase in the estimated value of an external investment.
Alphabet benefited from a similar accounting phenomenon
In 2015, Google joined Fidelity in an investment in SpaceX. In Alphabet's second-quarter earnings report, the company's income statement showed a $98 billion increase in Other income -- boosting net income to $112.2 billion. According to notes in its 10-Q filing, Alphabet disclosed that Other income consisted primarily of "unrealized gains in our equity securities portfolio from SpaceX and a private company."
Forget net income, focus on this instead
These examples highlight why investors shouldn't evaluate profitability solely on net income. Accounting gains can make earnings appear strong during one quarter, even if those gains don't actually reflect improvements in a company's underlying operations.
For SpaceX, the more useful profitability measurement is operating income. SpaceX generated $2.8 billion in operating income during the third quarter, reversing an operating loss of $273 million during the year prior.
With that said, SpaceX's spending plans tell an equally important story. The company spent $19.6 billion in capital expenditures (capex) during the third quarter alone, primarily supporting AI infrastructure, Starship development, and satellite production. SpaceX CFO Bret Johnsen guided between $35 billion to $40 billion in capex for the fourth quarter, suggesting SpaceX is not going to slow down its infrastructure buildout.
The reason behind the accelerating spend is telling. In recent weeks, SpaceX agreed to acquire nationwide 800 MHz wireless spectrum from Grain Management, which could help Starlink expand into traditional cellular connectivity. Meanwhile, the company is also considering deploying smaller radios on existing Starlink installations and cellular towers, potentially reducing external reliance on incumbent telecommunications infrastructure.
This creates an interesting dilemma for SpaceX investors. The company is pursuing a number of opportunities across AI infrastructure, space exploration, satellite communications, and wireless connectivity, but each of these initiatives requires additional capital.
Ultimately, SpaceX didn't do anything inherently improper by recognizing gains from The Boring Company. Investors should understand that a company's reported profit doesn't always tell the whole story, though. Understanding where earnings originate, how much cash flow the underlying businesses generate, and how much capital is required to sustain future growth is more essential when evaluating long-term investment opportunities.
Adam Spatacco has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.