As SpaceX struggles with its stock price slump, it pitches billions of dollars' worth of AI computing power to the Pentagon

SpaceX is currently in negotiations with the U.S. Department of Defense to provide data center computing power, with the contract value potentially reaching several billion dollars—deepening the close ties between Elon Musk’s company and the Pentagon.

According to The Wall Street Journal, citing sources familiar with the matter, both parties are discussing an arrangement for SpaceX to supply cloud computing capacity to the Department of Defense. The talks are still ongoing and could ultimately fall through. If sealed, this potential agreement would become one of the largest commercial collaborations between the two entities to date.

If finalized, the deal will have a direct impact on the cloud computing market landscape. Currently, Amazon, Microsoft, Google, and Oracle are the main cloud service providers for the Pentagon. SpaceX’s entrance will significantly intensify market competition, especially in the rapidly growing niche of defense AI computing power.

The negotiations have once again drawn public attention to Musk's political and business ties. The Pentagon has long relied on SpaceX for rocket launches, as well as for the operation and management of communications and missile-tracking satellites.

Some national security officials have publicly expressed concerns about the Pentagon’s overreliance on Musk’s services. Musk’s substantial political donations to Trump’s 2024 presidential campaign have also continued to raise questions about potential conflicts of interest. In response, Trump administration officials have denied such criticisms.

After the news broke, SpaceX’s stock rebounded sharply but then continued to decline, ultimately closing down 5.43% on Friday.

SpaceX Bets Big on Cloud Computing

SpaceX is now positioning its cloud computing operations as a key strategic direction.

The company has signed similar computing power supply agreements with Anthropic and Google and is planning a substantial expansion of its cloud services. In recent weeks, SpaceX employees have discussed offering AI clients computing power at prices lower than those of existing providers like CoreWeave, directly engaging in market competition.

On the infrastructure front, SpaceX recently completed the acquisition and listing of Musk’s xAI, bringing the Grok AI model and its data centers under its business umbrella.

To rapidly scale its computing capacity, SpaceX has quickly built a large data center in Memphis. According to Musk in public filings, its construction speed outpaces competitors and is also less costly.

One of the company’s strategies is to install on-site gas turbines for self-generation of electricity; however, this move has sparked a lawsuit alleging violations of environmental regulations. In addition, SpaceX has pitched to investors the concept of deploying data centers in space.

From a business perspective, renting out computing power has proven more lucrative in the short term than selling Grok AI models. Reportedly, agreements with Anthropic, Google, and startup Reflection AI could generate SpaceX annual revenues in the tens of billions of dollars.

The Pentagon’s Race for AI Computing Power

The Department of Defense is making significant investments in AI infrastructure.

The Pentagon is seeking $30 billion in funding for a new project called the “Artificial Intelligence Arsenal,” focused on acquiring advanced AI chips. The project has been detailed in the Department of Defense’s FY2027 budget request and is currently under consideration by Congress.

In terms of supplier policy, the Pentagon says it aims to reduce dependency on any single tech company. The Department of Defense recently approved multiple companies—including SpaceX, Amazon, Google, Microsoft, and Oracle—to provide AI models and related technologies in classified settings.

A dispute with Anthropic earlier this year has further heightened the department’s awareness of vendor lock-in risks. Currently, Amazon is the Pentagon’s primary computing power provider and, according to reports, is investing $50 billion to boost its service capacity for government agencies, especially the Department of Defense.