Musk's "Century Merger": A One-Sided Blood Transfusion for xAI

Elon Musk merges SpaceX with the artificial intelligence startup xAI, claiming to build a "space data center." However, this vision will take at least two to three years to realize, and for the three-year-old xAI, the most pressing need right now is cash.

The deal was registered in Nevada on February 2, with SpaceX valuing xAI at $250 billion and itself at $1.5 trillion. According to insiders, SpaceX CFO Bret Johnsen assured about 100 investors in a conference call on Monday that this deal would not delay SpaceX's plans for an initial public offering this summer or fall. The company is seeking to raise $50 billion at a valuation of up to $1.5 trillion.

According to The Information, xAI burned approximately $9.5 billion in cash in the first nine months of 2025, with revenue of only about $210 million during the same period, far behind OpenAI and Anthropic. The company just completed a $20 billion financing round in January, and Tesla disclosed last week that it invested $2 billion in xAI. In contrast, SpaceX generated $1 billion to $2 billion in free cash flow last year.

Some SpaceX investors are not optimistic about the immediate reaction to this deal. The stock price of telecommunications company EchoStar, which holds a significant stake in SpaceX, has fallen nearly 5% since news of the transaction talks emerged last Thursday. Michael Sobel, co-founder of private equity firm Scenic Management, stated, SpaceX shareholders believe that the story the merged company tells investors needs more explanation.

A cash-burning black hole of $1 billion per month

xAI's financial situation highlights the rapid cash consumption in AI development. The company burned cash at a rate of over $1 billion per month in the first nine months of 2025, spending on high-end chips and building powerful data centers to run and train AI models. During the same period, revenue was only about $210 million, significantly lagging behind competitors.

In January, xAI completed a $20 billion financing round at a valuation of about $230 billion. In contrast, OpenAI was valued at $500 billion last October and is reportedly seeking to raise its valuation to about $750 billion in the next funding round. Anthropic signed a financing term sheet this month with a valuation of $350 billion.

Tesla disclosed last week that it sold $430 million worth of Megapack large backup batteries to xAI in 2025, accounting for about 3.4% of its total annual energy business revenue. These batteries power the data infrastructure that xAI is building around Memphis, Tennessee. Tesla also stated that it invested $2 billion in xAI as part of the latest financing round.

SpaceX's IPO ambitions face complications

Founded nearly 25 years ago, SpaceX only began generating significant cash flow last year. The company informed investors that it achieved $1 billion to $2 billion in free cash flow last year, thanks to the rapid growth of its Starlink satellite internet business Revenue grew to approximately $16 billion, with earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $8 billion.

In recent weeks, large fund management companies and investment bankers flying to Hawthorne, California to meet with SpaceX leadership have been impressed by the company's dominance in the rocket launch sector and the industry-leading advantages of Starlink. Johnsen informed investors that the company has negotiated with major investors regarding a significant portion of the $50 billion investment in the IPO.

However, the acquisition of xAI could complicate this story. xAI is not only burning cash at a rate of $1 billion per month but has also recently faced issues in AI development. According to insiders, Musk has been frustrated in recent weeks by delays in the new Grok AI model, which are similar to the challenges faced by other AI companies.

Tim Farrar, president of satellite and telecommunications research firm TMF Associates, stated, "People are currently pouring hundreds of billions into AI companies, but they may change their minds in six or 12 months. It is feasible to get money now, but it may not always be so."

"Space Data Center" Faces Strong Doubts

In a blog post announcing the deal on Monday, Musk stated that the main reason for merging SpaceX and xAI is to build a "space data center" more efficiently. He estimated that "within 2 to 3 years, the lowest cost method for generating AI computing power will be realized in space."

The potential of the space data center faces strong skepticism. However, insiders revealed that after two successful test flights of Starship last fall, Musk became more convinced about the possibility of launching orbital data centers. Starship is the largest rocket ever built by SpaceX.

Ian Cinnamon, CEO of satellite manufacturer Apex, remarked, "A year ago, no one was talking about this." He believes this potential business line is a way for SpaceX to fund sending more large rockets into space, similar to how Starlink satellites have helped drive more investment in SpaceX's smaller Falcon 9 rocket.

Brett Winton from Ark Invest stated that the merger with xAI and the space data center plan increased the risk of making Starship fully reusable. While both stages of Starship are designed for reusability, SpaceX has only demonstrated reusability on the rocket's first stage (booster) so far. "Given the launch volume they need, they really need to make the entire Starship reusable," he said.

Last week, SpaceX submitted an ambitious proposal to the Federal Communications Commission to launch up to 1 million satellites into space—far exceeding the current number—as part of a large-scale orbital data center. However, this deal adds to SpaceX's already crowded task list, as Starship still needs to fulfill NASA's multi-billion dollar lunar contract by 2028.

Rapid Action in a Relaxed Regulatory Environment

In addition to a friendly capital market, Musk also benefits from a highly favorable regulatory environment. The Trump administration is rolling back environmental, antitrust, and other regulations.

The blog post on Monday did not mention any regulatory approval requirements, and Musk hinted in the first sentence of his statement that the deal is complete. Especially important for Musk is that his business partner, former SpaceX investor and client Jared Isaacman, recently became the NASA administrator. Isaacman supports efforts to accelerate the expansion of the agency's contracts with SpaceX. At the Federal Communications Commission, Chairman Brendan Carr has been a strong supporter of SpaceX's Starlink.

The landscape of tech mergers and acquisitions has also changed dramatically. The Federal Trade Commission is now led by Andrew Ferguson, appointed by Trump, rather than Lina Khan, who is known for blocking large tech deals during Biden's tenure. In the AI sector, Musk's old friend David Sacks serves as the White House cryptocurrency and AI czar, pushing the federal government to limit regulation on AI labs.

In December last year, President Trump signed an executive order establishing a single regulatory framework for AI, weakening the power of blue states like California and New York to implement their own rules. The order states, "To win, American AI companies must innovate freely without burdensome regulations."

Although Musk has three years left in Trump's second term, he may only have a brief window of unified Republican control, with midterm elections occurring in nine months and the president's approval ratings declining.

Musk's Network of Related Transactions

Musk acts quickly and is likely supported by a group of loyal investors who have long backed his mixing of resources and merging of companies.

In 2016, Tesla acquired SolarCity for $2.6 billion, rescuing it from an impending liquidity crisis. Before the merger, Musk was a major investor in the solar business and served as the company's chairman, which was founded by his cousins.

During the leveraged buyout of Twitter (later rebranded as X) in 2022, Musk sold billions of dollars worth of Tesla shares to finance the deal. He also pulled dozens of employees, including some executives, from SpaceX, Tesla, and the tunneling company The Boring Co. to help him take over and overhaul the platform.

At Tesla, Musk has engaged in multiple related transactions with SpaceX and recently with xAI. For example, Tesla sells automotive parts and solar equipment to SpaceX, and the automaker relies on SpaceX to develop special alloys for its Cybertruck. According to Bloomberg, in July 2025, SpaceX also invested $2 billion in xAI.

Farrar stated that Musk's biggest fans and institutional investors are willing to support these intricate networks of transactions or the "Musk economy," partly because they understand the symbolic significance of keeping his entire portfolio strong. "The whole thing relies on confidence in him," Farrar said. "If any part of his empire collapses or goes bankrupt, it would weaken the whole." "

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