In a bold move to bridge space exploration and artificial intelligence, Elon Musk has orchestrated a groundbreaking merger between SpaceX and his AI company, xAI. This strategic collaboration aims to create a formidable enterprise valued at $1.25 trillion (£920 billion), positioning SpaceX at a valuation of $1 trillion and xAI at $250 billion. Anticipated to coincide with Musk’s birthday and a celestial event, a public stock offering is projected for June.
However, the transaction raises important questions about its implications for SpaceX’s shareholders and the feasibility of its ambitious technological vision.
Why is Musk Linking Rockets and AI?
For Musk, a cornerstone of this deal is the idea of relocating data centers—essential to AI functionality—beyond Earth.
Musk contends that AI companies currently rely too heavily on terrestrial data centers, which consume vast amounts of energy. His proposed alternative involves deploying around one million satellites into orbit to establish expansive, solar-powered data centers.
Professors Julie McCann and Matthew Santer from Imperial College London’s School of Convergence Science note that while solar-powered data centers could potentially serve AI companies in the future, they caution that current satellites may be limited in the computational power they can offer. A “planet-wide distributed computer composed of many satellites” would be necessary to meet Musk’s ambitious goals.
However, the successful implementation of this ambitious concept will hinge on the quality of connections among the satellites, ensuring that they can work together effectively to simulate the capabilities of current data centers on Earth.
The professors also highlight additional challenges, including exposure to solar radiation and the complexities of maintenance—something that terrestrial data centers experience regularly. The logistics of shipping components to space is intricate and costly, necessitating innovative approaches to installation and upkeep.
Musk envisions these data centers contributing 100 gigawatts of AI capacity annually—greater than the current global data center capacity, which stands at about 59GW—indicating the ambitious nature of his vision. Musk believes in the potential of merging rocket technology with AI software to create what he describes as the “most ambitious and vertically integrated innovation engine on (and off) Earth.”
As Dan Ives, an analyst at Wedbush Securities, points out, “This merger aims to establish a pathway to lower AI compute costs over the next two to three years by uniting a leading internet/space exploration company with top data center builders.”
Does xAI Need SpaceX’s Financial Support?
Musk’s AI firm, xAI, finds itself competing against rivals with substantial funding for the necessary infrastructure, such as data centers and computer chips. The company reportedly spent $13 billion last year on projects but lacks a cash-generating legacy business to support its endeavors, unlike tech giants Meta, Amazon, Microsoft, and Google.
The merger with SpaceX would provide xAI crucial access to funds and investors, according to Ross Gerber, an investor in both Tesla and SpaceX.
“Musk is running low on capital for xAI while competing against companies pouring hundreds of billions into AI investments. By merging with SpaceX, xAI can gain the financial backing of an extremely attractive prospect for investors,” he elaborates.
What Do SpaceX Shareholders Think?
SpaceX operates in a complex tech landscape, yet its business model is straightforward. The company earns revenue from launching reusable rockets, deploying satellites, and supplying the International Space Station. In addition, SpaceX offers the Starlink satellite high-speed internet service. It generated approximately $8 billion in profit from $15 billion to $16 billion in revenue last year, according to Reuters.
The integration of xAI introduces a layer of complexity to the SpaceX narrative, remarks Michael Sobel, president and co-founder of Scenic Management, which invests in private companies with a focus on AI.
Sobel, who frequently consults with SpaceX investors, adds, “Incorporating xAI, which has a significant monthly cash burn, alters the financial profile of the company. In the secondary market, a ‘simple’ approach often garners rewards, making this merger require investors to analyze how xAI’s cash burn will influence SpaceX’s valuation and IPO timeline.”
Additionally, there are concerns regarding X, the social media platform that faces continuous regulatory scrutiny and political frustrations.
Nevertheless, Sobel believes the case for the merger is compelling.
“For long-term investors, this merger secures the most advanced AI ‘brain’ for the most advanced hardware ‘body’ in existence. The potential upside is a $1.25 trillion entity that controls everything from the launchpad to the neural network,” he states.
Gerber, who supported Musk’s 2022 buyout of X when it was still known as Twitter, expresses enthusiasm for the deal but questions how SpaceX shareholders might feel.
“As a Twitter shareholder, I couldn’t be happier. I thought my investment was lost, but now it’s effectively turned into SpaceX shares. It’s fantastic for me, but if I were a SpaceX shareholder, I might be frustrated,” he notes.
What’s Next? A Tesla-SpaceX Merger?
Musk holds significant stakes in both the newly expanded SpaceX and Tesla, owning approximately 44% of SpaceX and 17% of Tesla, where he serves as CEO. Could a merger of these two powerhouses be on the horizon?
Ives suggests that there is a “growing chance” of forming a one-stop investment hub for Musk ventures, explaining, “Musk aims to exert more control over the AI ecosystem, and eventually, it could lead to a merger of SpaceX and Tesla.”
Gerber believes this is an opportune moment, as both companies currently hold a combined valuation of $1.25 trillion. “This is the time to establish a multitrillion-dollar enterprise. I know Musk, and it’s bound to happen,” he asserts.
In summary, the merger between SpaceX and xAI represents a significant step forward in Musk’s vision of integrating space technology with artificial intelligence. While the potential benefits are intriguing, the challenges involved also merit careful consideration, particularly for existing shareholders and the companies’ future trajectories. As developments unfold, only time will tell how this ambitious venture will shape the future of technology.
