Elon Musk's decision to merge his artificial intelligence startup xAI into SpaceX is creating underlying risks for the undisputed leader in the aerospace sector. An analysis by Bloomberg columnist Thomas Black suggests that although SpaceX has built a formidable lead and dramatically reduced launch costs through its reusable rocket technology, treating the company as a "cash cow" for xAI could divert it from its established leadership position and saddle it with a heavy financial burden.
According to a Bloomberg report, this potential merger carries a staggering valuation of $1.25 trillion, with SpaceX contributing $1 trillion of that total. However, market perspectives indicate there is currently no substantive synergy between the two entities. SpaceX has already agreed to inject $2 billion into xAI, but this is merely the beginning, as xAI is currently burning through approximately $1 billion per month. With the startup competing against well-funded tech giants for chips and data center resources, there are no signs of this expenditure slowing down in the near term.
This strategy marks a significant shift in SpaceX's risk exposure. As a pure-play aerospace company, SpaceX, with its Starlink network and high volume of launch missions, achieves profit margins around 50%, operating at the peak of its profitability. In stark contrast, xAI faces intense competition from tech behemoths like Alphabet Inc., Microsoft, Meta Platforms, and NVIDIA, as well as agile startups like Anthropic and OpenAI, making the final outcome of this race highly uncertain.
Analysis suggests that with the Starship rocket preparing to enter commercial service, little can challenge SpaceX's leadership unless Musk makes a grave strategic error that places a financial straitjacket on the company. Unfortunately, incorporating this cash-intensive AI business appears to be precisely such a high-risk move, treating SpaceX as a financing vehicle.
SpaceX's dominance in the aerospace sector is undeniable. Its progress since its first successful rocket launch in 2008 has been astonishing. Last year, SpaceX completed 165 missions, accounting for more than half of all global launch activities. This has also positioned the United States in a dominant role in its space race with China.
The company's profit model is clear and robust. Beyond charging clients for launch services by tonnage, SpaceX's primary profit driver is the Starlink network, which boasts 9,000 satellites. Customers, including United Airlines Holdings Inc. and shipping giant A.P. Moller-Maersk A/S, are flocking to Starlink because it provides global internet coverage with speeds far exceeding traditional geostationary satellites. According to a Reuters report, SpaceX generated approximately $8 billion in profit from $16 billion in revenue last year—a 50% margin that is exceptionally strong for a hardware manufacturer.
Furthermore, SpaceX holds a significant position in government contracts, with major clients including NASA and the Department of Defense. Due to its reliability and low-cost advantages, the government's reliance on SpaceX is deepening. With the company's recent acquisition of substantial wireless spectrum to provide direct satellite-to-cellphone services, the outlook for its commercial and government space activities is bright, negating any need for risk diversification through unrelated ventures.
However, Musk's move to utilize SpaceX's cash reserves to fund his AI startup is disrupting this equilibrium. As reported by Bloomberg, xAI is in a state of extreme cash need, consuming roughly $1 billion per month.
While SpaceX faces only distant competitors in the aerospace field, such as Jeff Bezos's Blue Origin and Eutelsat Communications SACA, xAI operates in an intensely crowded and expensive arena. Predicting the world's actual AI computing needs and how the technology will evolve is fraught with risk.
This scenario feels familiar to investors. In 2016, Tesla investors approved Musk's merger of the struggling SolarCity into Tesla. Although that $2 billion deal ultimately paved the way for Tesla's expansion into batteries and robotics—a diversification that may prove wise amidst a global electric vehicle price war—it does not mean the same logic applies to SpaceX.
At present, SpaceX has no inherent need for xAI. As a pure-play space company, it is continuously extending its lead over competitors. Even if "space-based data centers" become a reality, SpaceX would not need to own xAI to develop this market. On the contrary, all AI companies would likely queue up to purchase specialized data center satellites built by SpaceX and utilize the low-cost launch services provided by Starship.
SpaceX is already seeking approval from the Federal Communications Commission to deploy a constellation of orbital data centers comprising up to 1 million satellites. Although space-based data centers face significant cost hurdles, solving these challenges does not depend on acquiring xAI.
From a business synergy perspective, Tesla would have been a more logical home for xAI. For the Optimus humanoid robot to function effectively in factories or homes, it must rely on agile AI to translate commands into actions. If xAI could solve this problem, it would unlock immense potential for mobile robotics. Should SpaceX require robots for future Mars missions, it could simply purchase them from Tesla or its competitors—a cheaper and lower-risk approach than internal development.
Currently, there are few startups in the reusable rocket sector, and none operate at SpaceX's level of advancement. Musk's decision to tie xAI to SpaceX essentially adds unnecessary risk to this massive competitive advantage. For investors, the preferred outcome would be for Musk's dream of reaching Mars to take precedence over his short-term desire to continuously fund an AI startup.
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