Motley Fool Money - Quantum Computing… In Space!

Starting point is 00:00:00 We're using quantum computing and AI to blast off into space as we digest earnings today on Motley Fool Money. It's Tuesday, November 11th. Welcome to Motley Full Money. I'm your host, Emily Flippin, and today I'm joined by Fool analyst Jason Hall and Keith Spites to discuss two trendy topics, quantum computing and space travel. Okay, well, really, we'll be digging into earnings for three companies that are kind of trying to make one or both of those things of reality. We'll get to are to space and space-adjacent businesses, Rocket Lab and AST Space Mobile later in the show. But Jason, I really want to start with CoreWeave today. Now, CoreWeave isn't directly a quantum computing stock. They're not in space either, but. And they're not in space. Yeah, fair enough.

Starting point is 00:00:57 They sell the GPU access, not quantum processing units. But they do sometimes get lumped into that space because of their close connection with Vintyna, and they do have that hypergrowth, AI-centered business. So I understand why people lump them together. Shares are down nearly 15% today, despite the fact that they saw yet another continuation of a booming top line. I mean, are you excited about Corleave, at least more than the market seems to be today? I don't want to say I'm excited, but I see what's exciting about the business. And I also understand why the stock is coming down. It has gone on a bit of a parabolic run since it went public. The debut price, it was uptrading the first day after the stock debuted. It's more than doubled. It's come down over the past few months,

Starting point is 00:01:43 but there's still a tremendously rich valuation based on the expectation. So even with the sell-off, that's important to remember. So here's the core, for those that haven't followed CoreWeave. It's built up some really strong IP that it says makes its data centers better and more efficient for AI developers. It's partners, it's a who's who in AI and cloud computing. It has a almost $60 billion backlog. $50 billion of that is contracted remaining performance obligation or RPO. Growth rates are certainly astronomical, if we can kind of keep that theme going. And they're likely to remain exceptionally high for some time to come.

Starting point is 00:02:23 There are also some signs that its scale up is driving improvements. If we look at its financial results, adjusted EBITDA, adjusted operating income and its margins, they did improve in the quarter. adjusted losses fell. And I think this is a business that is likely to be a lot larger in five years. But even with those improvements and the growth, it's far less clear how much of that growth is going to flow through to investors. This isn't a software company, right? It's an infrastructure business with a technology overlay. And building all of the data centers that it needs to meet demand is coming at a massive cost. And we're going to see a lot of that cost to the balance sheet.

Starting point is 00:03:02 just for some context. We got the updated full-year guidance. So actually, one of the reasons the stock is down is the guidance was a little bit lighter for the fourth quarter in the full year than investors were expecting. But management's calling for about $5 billion in revenue for the full year. That's double. That's more than double last year. But it's going to spend $13 billion on CAPEX projects, and it's going to pay about $1.5 billion billion in interest expense. So 25% of its revenue is going to go right back out the door just to service debt. at the same time, it's been really acquisitive.

Starting point is 00:03:36 Since it went public this spring, it's already announced four acquisitions. That's a lot of money flowing out the door that investors need to see deliver both continued growth and also help defend margins. And here's the thing, the CAPEX that we're going to see this year, it's going to have to fund a lot more. And the thing is, the way the business works, you have to fund the CAPX before the data centers generate revenue. So probably over time, the math should start becoming less unfavorable.

Starting point is 00:04:02 But the risk here is we see this ravenous appetite for new AI infrastructure. If that becomes sated, the momentum stops before CoreWeave gets its business to scale. Now, the other part, too, is, let's be honest, moats are ephemeral, if existent at all in technology. So Coreweave's technical advantages today are helping it win big sales, but can it maintain them in the next contract cycle with its customers? If not, it's going to be impossible to have any pricing power, and what ultimately I think is going to be a commodity, and that's just selling compute cycles if you can't show customers a reason to pay up. Oh, a hot take there, Jason. Motes are ephemeral. Keith, do you agree? There's no real moat here for Corweave? Yeah, I mean, I actually do agree with what Jason said. I will say this, though. The company posted really phenomenal Q3 results. The numbers look great. But as Jason mentioned, the guidance was a little lower. lower than expected, and that's what has caused this stock to sell off. But I think it's important

Starting point is 00:05:03 to dig into a little bit of why that happened, why that guidance wasn't quite as high as what analysts were looking for. And one of the main reasons was that CoreWeaves, one of their third-party data center developers, was simply running behind on a major project, so they weren't able to recognize the revenue like they wanted to. But I do think this underscore something investors need to be aware of with this stock. Corweaves' fortunes hinge on several things over which the company simply doesn't have much control, including the contractors it uses power availability. Right now, that's not a big issue for the company. But down the road, that could become a huge issue, just the availability of getting power to run these data centers.

Starting point is 00:05:46 Well, if it's a big issue for CoreWeave, it's definitely a big issue for a company that we're also going to be talking about today, Keith. And that's perhaps the most well-known quantum computing stock that also reported yesterday evening that shares of reggae. Getti computing, they were down mildly after mixed results. And, you know, it seems like both Corweave and quantum stocks get a bad rap. Does this quarter prove that it's well earned, or are there's opportunities here yet for prudent investors? Well, Emily, you're exactly right. Raghetti is definitely among the most widely followed up-and-coming quantum computing stocks, but up-and-coming often means not there yet. And that's the case with Raghetti, but not so much

Starting point is 00:06:26 with Corleave. Raghetti reported Q3 revenue of only, get this, $1.9 million. That's pocket change for Corwee. Corwieve spent a whopping $1.9 billion on CapEx alone in Q3. Also, Raghetti's revenue declined around 18% year over year in its latest quarter. That's not great. Meanwhile, Corlewee's revenue nearly doubled. So these companies are very different. But to be fair, quantum computing is in a much earlier stage than AI hyper-scaling. Raghetti has some great potential, especially if it can deliver on its goals to deliver 150-plus cubic quantum computer near the end of next year and a 1,000-plus cubit system by the end of 2027. But it's important to remember, there are other quantum computing companies out there that have ambitious plans too. IonQ, D-Wave Quantum, the ticker there's QBTS,

Starting point is 00:07:21 and Quantum Computing Incorporated, a very aptly named, by the way, a ticket there, QU. Those are three other smaller players that are making waves. The thing that I keep coming back to is that the first semiconductor came out of a Bell Labs laboratory back in the 1940s, right? How early are we on quantum? And is it going to be one of these working out of a garage startups a la Apple or HP that's really going to be the winner? We have some giants in the tech world, some real whales in the tech ocean like Alphabet

Starting point is 00:07:50 and IBM, and even Nvidia that's made its share of scene investments. quantum computing, is that where investors should really be looking? Yeah, Jason, you make a great point. I think it's possible that any of the stocks I've mentioned, Raghetti, IonQ, D-Wave, or quantum computing incorporated, they could be big winners if their quantum computing efforts pay off. But the least risky way to invest in quantum computing, in my opinion, anyway, is to buy shares of one of those tech giants that have major quantum computing initiatives going on. Alphabet with this Google Quantum AI unit is a great, great pick. Microsoft is a great pick, I think. These are the kind of stocks, I think, that investors

Starting point is 00:08:30 who aren't huge risk takers, but they want to potentially profit from this quantum computing boom, should really take a hard look at. It goes back to one of David Gardner's core aspects of Rule Breaker investing. That's to invest in the top dog and first mover in an important emerging industry. And it's not just the first mover. It's the top dog as well. So oftentimes in these important and emerging industries, you have companies that are first to the scene, but they're not the companies that end up being the lasting top dog, so to speak. So it's important to get both. Up next, we're picking a part of space stock that's hitting a speedbug due to the government shutdown. Stick with us. These days, I'm all about quality over quantity, especially in my closet. If it's not

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Starting point is 00:09:49 think quality cashmere would be. Stop waiting to build the wardrobe you actually want. Right now, go to Quince.com slash Motley for free shipping and 365 day returns. That's a full year to wear it and love it. And you will. Now available in Canada, too. Don't keep settling for clothes that don't last. Go to QINCE.com slash Motley for free shipping and 365 day returns. Quince.com slash Motley. Welcome back to Motley full money. Keith, now I can't speak for you, but when I hear about space stocks, I actually cringe a little bit. See, I'm a little bit of a space nerd, not really in any technical sense, but in the sense that if someone offered to send me to space and I could never return, I would actually take them up on it. And also in the sense that I perhaps bought Virgin

Starting point is 00:10:31 Galactic when it went public, and I'm still sitting on 99% losses in that investment. So when I hear that Rocket Lab, which is a company looking to master satellites and payload launches, is up a bit after a really stellar third quarter earnings reports. I still cannot motivate myself to get excited. Why should I be giving this industry a second chance? Well, first of all, Emily, I'll say you're more adventurous than I am. I would be willing to go up into space, but I want to come back. All right. Okay, so I'll do it. Hey, but, you know, Rocket Lab seems to be a great example of how one niche within an industry can be successful while other parts of the industry struggle. Instead of focusing on getting humans into space, as say Virgin Galactic does, Rocket Lab specializes in, as you mentioned, getting satellites and other payloads into space. And that's turning out to be a really smart. move. The numbers speak for themselves with Rocket Lab. The company reported record revenue in Q3 of $155 million. That was up around 48% year over year. Now, Rocket Lab is still unprofitable, but its bottom line is improving. It improved significantly from the prior year period.

Starting point is 00:11:38 The other thing is the company's gross margin is looking better. Rocket Labs reported a gross margin of 37% in Q3. That was a record high for the company. I think the main reason to get excited about Rocket Lab is that its prospects are significantly looking up. No pun intended there. The company's backlogs on an all-time high. They have 49 launches under contract. What's especially noteworthy to me is that one-third, over-one third of those deals, 17 of them, were signed in the third quarter alone. Yeah, that's right. And a lot of the opportunities in space are increasingly from private companies, but the U.S. federal government and other governments are still big players and big spenders here. And I think increasingly we may see that with more partnerships with private companies.

Starting point is 00:12:22 What's going on there for Rocket Lab? Yeah, Jason, you and Emily and I talked on the podcast just a couple of weeks ago about the impact of the federal government shutdown. Rocket Lab has definitely been affected by this ordeal. For example, awards for around 54 of the space development agencies, tranche three tracking layer have been delayed by the government shutdown. And that tranche three tracking layer, by the way, is a constellation of satellites that are designed to track and provide warning about missile threats. On a similar note, Rocket Lab could be a potential winner when contracts are awarded for the Golden Dome missile defense system. Rocket Lab has also made some progress beyond just its electron small launch system. That's the bulk of its business right now.

Starting point is 00:13:03 The Haste Hypersonic platform has also launched multiple missions. And I think the next big thing that's so exciting to me is they just opened up their test site for Neutron. That's their reusable medium lift platform. they say they're still on track to deliver and launch the first neutron early next year, and that's starting to push into an area that SpaceX has really kind of dominated so far. Yeah, I mean, that all sounds interesting, guys, but I'll circle back when they offer to send me to space, you know. Coming up next, we're evaluating if AST Space Mobile is right that you don't necessarily need

Starting point is 00:13:38 to send people to space to be a winning space stock. Stick with us. In a world full of noise, long-term thinking stands out. On the Capital Ideas podcast, Capital Group leaders explore the decisions that matter most in investing, leadership, and life. It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90 years. Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc. Welcome back to Motley Full Money. As we wrap up today's show, let's discuss a lesser-known space stock that is AST Space Mobile. Now, I think I understand why AST Space Mobile is more thinly traded

Starting point is 00:14:14 despite its size. They're really not doing the flashy thing of space launches, but they are still building a satellite-based cellular network, which for some of the people in living, more remote areas probably think is pretty cool. Jason, when investors think of satellite cell networks, they probably think of stuff like Starlink. But after earnings last night, it seems that Space Mobile is doing something pretty unique here. Why should this be on somebody's watch list? So Starlink is doing a little bit of the same thing that Space Mobile, but Space Mobile is really focused on being a partner for existing terrestrial mobile network operators, MNOs. Vircus versus what we've seen from Starlink with a lot of the proprietary handsets and other

Starting point is 00:14:56 equipment. It ended the quarter with 50 cell provider partners globally. And now the sheer distance between the satellite and the user means it's not going to work for every need. There's still going to be some latency. They've developed some technology to help address that. And they're working really hard to build a differentiated business offering. They can help cell service providers provide better coverage and potentially with a lot less of these standalone terrestrial cell nodes that they need for 5G. And it's starting to get to an inflection point.

Starting point is 00:15:28 We're seeing that shift from buildout to commercialization kick in. Now, it only reported just under 15 million in revenue in the third quarter, but it landed $1 billion in contracted revenue commitment. That's a big step towards bringing money in the door. Keith, AST SpaceMobil's deal with Verizon announced last month provided a major catalyst for the stock, but is that just the latest industry of contracts for the company, right? Yeah, you're exactly right. The Verizon contract was huge for AST.

Starting point is 00:15:55 But, Emily, if you look at a map of the world, this company has deals with telecommunications companies nearly everywhere. The notable exceptions are Russia and China, but pretty much everywhere else on the face of the earth, with, AST has deals. The list of AST SpaceMobil's partners is impressive. In addition to Verizon in the U.S. AST has teamed up with AT&T. Internationally, there's Spanish telecom giant telephonica, Vodafone, which serves Europe, Africa, and Asia. There's the African mobile network operator Afrocell, Japan's RecutinMobil, Saudi Arabian telecom company, SEC. That's just the tip of the iceberg. In total, AST has over 50 mobile network partners with a combined subscriber base of almost

Starting point is 00:16:33 3 billion. Yeah, that's the thing that I think is the most compelling to me is that while a lot of other companies are doing the hard stuff of getting stuff into space, they just want to get cell signals into space and back, right? They want to be able to address a real pain point that cell providers are dealing with. And those customers are going to need a lot more capacity. Going forward, the company expects to launch a satellite every one to two months. And by the end of next year, have between 45 and 60 satellites deployed. Good news is it has the resources to keep that going.

Starting point is 00:17:03 with over $3 billion in liquidity, and talks about the growing cash flows that are starting to accelerate to pay for it. About $15 million in revenue last quarter, they think they're going to finish the fourth quarter with maybe as much as $75 million in revenue in the second half of the year. So we're starting to see some build. They have to ramp those revenue quickly. The company spent $100 million in operating expenses last quarter. So I don't want to call 26 a make-or-break year, but in some ways, it may be. Well, I fully came into this podcast with quantum stocks and space stocks and core. We fully expecting to just be ready to dismiss out of pocket the stocks we're talking about. I will say, though, with Space Mobile, that is one that I'm looking forward to digging into a bit more,

Starting point is 00:17:48 because I really think there might be a there, even with 2026, to your words, Jason, potentially being a major break year. Keith and Jason, thank you both so much for joining today. Thanks, Emily. Thanks, Emily. As always, people in the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for Oregon. So don't buy yourself stocks based solely on what you hear.

Starting point is 00:18:07 All personal finance content follows the Motley Fool editorial standards and it's not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Jason Hall, Keith Spites and the entire Motleyful Money team, I'm Emily Flippen. We'll see you tomorrow.

Motley Fool Money - Quantum Computing… In Space!

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