Those who believe in Elon Musk are convinced by both his vision of going where no one has dared to go before and his ability to pay for it – what some call the “Elon backstop.” Mr Musk’s announcement on February 2 that he would merge SpaceX, which builds rockets and sells satellite broadband, with his artificial-intelligence laboratory, XAI, was nothing short of ambition. The world’s richest man declared that the new company would “raise the light of consciousness to the stars”. However, coming back down to earth, it is becoming increasingly difficult to see how Mr Musk’s numbers add up.
The transaction values the new entity at $1.25trn; Investors in SpaceX will be entitled to 80%, with the remainder going to the owners of xAI (Mr Musk has a controlling stake in both). The stated logic behind the alliance is that the companies will work together to launch a fleet of data centers in space, giving xAI a major advantage in the race to develop cutting-edge models while providing SpaceX with a new line of business. More immediately, the combination of the two could further increase interest in a public listing expected this summer.
However, by bringing together SpaceX and XAI, Mr Musk is equating a money-making space champion with a loss-making AI laggard. At the same time, he is transforming Tesla, the carmaker he runs, into a “physical-AI company” focused on self-driving taxis and humanoid robots. If the latest wave of AI proves to be as transformative as some hope, these bold gambles may pay off. If not, Mr Musk’s business empire could be in danger.
Start with mega-mergers. SpaceX is a jewel. It projects nearly 4,000 satellites will be launched into space in 2025, about 85% of the global total for the year (see Chart 1). It can send objects into orbit far more cheaply than any competitor. Starlink, the satellite-broadband service that is its primary source of revenue, has about 9 million customers worldwide, more than three times the number two years ago, according to Deutsche Bank. The company also has lucrative government contracts. Overall, it reportedly generated revenues of $16 billion in 2025 and operating profits (before depreciation and amortization) of approximately $8 billion.
It’s a very different picture on xAI. The AI lab generated $500 million in revenue last year from its Grok model; OpenAI, the creator of ChatGPIT, brought in about $13 billion. X, the social-media platform with which XAI merged last year, probably brought in an additional $3 billion in sales. Still, the entire business is reportedly burning cash at a rate of about $1 billion per month as it invests large sums in data centers.
The company also brings with it other problems. X is under investigation in the EU and UK for possible breaches of data rules and the launch of an image generator over Christmas, which was widely used.produce nude deepfakesWhich reportedly includes children; On 3 February its offices in Paris were raided by French authorities. Mr Musk has denied that the company has done anything wrong. If the courts find otherwise, the EU could fine it up to 6% of its global revenue, while the UK could fine it up to 10%.
Then there are its various debts. Last year xAI borrowed $5 billion to finance its data-center binge. Along with Valor Equity Partners, a longtime backer of Mr. Musk’s ventures, it has also set up an off-balance-sheet vehicle financed by about $3.5 billion of debt to buy more AI chips. The AI lab was left with $12 billion or more to borrow from Mr Musk’s purchase of the social network after it merged with Ax last year. SpaceX, for its part, is set to cover $2 billion in interest owed by EchoStar as part of a deal last year to acquire mobile spectrum from the struggling satellite company. These combined obligations will put pressure on the business at a time when xAI is incurring losses and SpaceX is investing heavily in its new “Starship” launch system, which is behind schedule.
quest for stardust
A shot of equity from public listing will help ease the burden. The merged company reportedly plans to raise $50bn at a valuation of at least $1.5 trillion. This is a huge amount even by Mr Musk’s standards. Tesla is valued at $1.5 trillion, but made $95 billion in sales last year – about five times more than the combined sales of SpaceX and XAI. Some foolish institutional investors will shy away from pricing. Others will be alienated by association with Grok. But they will not be Mr Musk’s target audience. His pitch will undoubtedly present data centers in space as a prelude to factories on the Moon and cities on Mars. Retail investors will cash in on this.
Mr Musk’s desire to merge SpaceX with XAI shows how determined he has become to dominate the AI industry. It’s personal: He hates Sam Altman, the boss of OpenAI, which Mr Musk co-founded and now suing To abandon its original non-profit structure. Mr. Altman also has his eye on a huge list this year.
In theory, using SpaceX to build an orbital data center could help Mr Musk gain an edge over his rival. Mr. Altman has reportedly sought to acquire, team up with, or create a space company to rival SpaceX, and has long thought about the benefits of space-based data centers. Google, a search giant whose Gemini model competes with both ChatGPT and Grok, plans to send a test satellite carrying its in-house AI chip into orbit in 2027.
Mr Musk is eager to move forward. On January 30, SpaceX filed a request to the Federal Communications Commission, a US regulator, to place a 1m-strong constellation of satellite-based data centers in orbit. Mr Musk argued that within two to three years, the cheapest place to provide computing capacity would be in space using solar energy that does not deplete the atmosphere. After this the Starlink satellites can send the data back to Earth.
Still, much remains to be proven. Sir Peter Beck, founder of Rocket Lab, a smaller rival of SpaceX, says the key question is what’s cheaper: the cost of electricity on Earth, where electricity is scarce, or the cost of a launch to get to space, where energy is abundant? For now, the latter are prohibitive. In a study last year, Google researchers said launch costs per kilogram were unlikely to fall to levels comparable to the costs of running terrestrial data centers for at least a decade. Even before that, xAI will require a significant increase in computing capacity.
There are many technical obstacles in this also. Orbital data centers would require large radiators to cool, and cosmic rays could damage the equipment. Chris Kemp, founder of Astra, another rocket company, says AI chips quickly become obsolete and need to be replaced. “You’d have to refresh your satellites every few years, which would just compound the problem,” he says.
Tesla, which has stopped spending cash over the past few years, could be hired to help. On January 28, the carmaker said it had invested $2 billion in xAI. The two companies are increasingly sharing software, data and chips. Some speculate that Tesla could also be folded into the rest of Mr Musk’s empire, although doing so would be complicated by the fact that he does not have a controlling stake in the company, and as its chief executive recently secured a pay deal worth up to $1 trillion that could be thrown into doubt by the merger.
Still, Mr Musk is taking his carmaker straight into the AI hype-cycle. It will soon stop manufacturing its first mass-produced electric car, the Model S, and its gull-winged SUV, the Model Both models will account for only 2% of Tesla’s vehicle production in 2025. More informative was the fact that the factory space currently dedicated to them will be reused to build Optimus, Tesla’s humanoid robot. Mr Musk aims to make 1 million of them per year by the end of 2027. Additionally, Tesla is investing heavily to develop its CyberCab, a two-seat self-driving taxi that is set to go into full production in April. Mr Musk has announced that by the end of this year his robotaxis will be free from some test areas and available to half of the US population.
Sub-Optimus
In reality, it will take many years for self-driving taxis and humanoid robots to mature into cash-generating businesses. In the meantime, they will need larger investments as Tesla’s core business is stalling. Vehicle sales fell 9% in 2025, the second straight year of decline (see Chart 2). In Europe they fell by a quarter. Some buyers have been turned off by Mr Musk’s political actions. The deeper problem, however, is the stiff competition in electric vehicles from both legacy carmakers and Chinese newcomers. The rest of Tesla’s line-up will remain less attractive in the absence of investment.
Like SpaceX, Mr Musk is betting Tesla’s future on AI, and believes he can use his existing businesses to dominate the technology. Many skeptics have previously scoffed at his grand ambitions. But Mr. Musk never put so much at stake.
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