Those who believe in Elon Musk are convinced by his vision where no one has dared 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 lab xAI, was nothing short of ambitious. The world’s richest man announced that the new company would “extend the light of consciousness to the stars”. Back on Earth, however, it’s becoming harder to see how Mr. Musk’s numbers add up.
Elon Musk announced on February 2 that he would merge SpaceX with his artificial-intelligence lab xAI (Bloomberg).The transaction values the new entity at $1.25trn; SpaceX’s investors will be entitled to 80%, with the rest going to the owners of xAI (Mr. Musk is the controlling shareholder of both). The rationale behind the tie-up is that the companies will work together to launch a fleet of data centers in space, which will give xAIa a major advantage in the race to develop cutting-edge models while equipping SpaceX with a new line of business. More immediately, combining the two could fuel interest in a public listing expected this summer.
By combining SpaceX and XAI, however, Mr. Musk is seeding a money-spinning space champion with a loss-making AI laggard. At the same time, he is rebuilding 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 as transformative as some expect, these bold gambles may just pay off. If not, Mr. Musk’s business empire could be in jeopardy.
Start with the mega-merger. SpaceX is a gem. In 2025 it launched about 4,000 satellites into space, about 85% of the global total for the year (see Chart 1). It can send objects into orbit much more cheaply than any competitor. Starlink, a satellite-broadband service that is its primary source of revenue, has about 9 million subscribers worldwide, according to Deutsche Bank, more than triple the number two years ago. The company also has lucrative government contracts. In all, it is said to generate $16bn in revenue and around $8bn in operating profit (before depreciation and amortisation) in 2025.
It’s a different picture in xAI. The AI lab made on the order of $500m in revenue from its Grok models last year; OpenAI, creator of ChatGPT, brought in about $13bn. X, the social-media platform with which xAI merged last year, likely brought in an additional $3 billion in sales. Even so, the entire business is hemorrhaging cash at a rate of about $1 billion per month as it invests heavily in data centers.
The company also brings other problems with it. X is under investigation in the European Union and Britain for possible breaches of data regulations and for the Christmas launch of an image generator that was widely used to create nude deepfakes, allegedly of children; Its offices in Paris were raided by French authorities on 3 February. Mr Musk denied the company had done anything wrong. If the court finds otherwise, the EU could fine up to 6% of its global revenue, while Britain could fine up to 10%.
Then there are its various debts. Last year xAI borrowed $5 billion to fund its data-center binge. Along with Valor Equity Partners, a long-time backer of Mr. Musk’s venture, it also set up an off-balance-sheet vehicle to finance about $3.5 billion in debt to buy more AI chips. Last year’s merger with X left another $12 billion or so in debt from Mr. Musk’s purchase of the social network from AI Labs. SpaceX, for its part, is on the hook to cover $2 billion in interest owed to 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 continues to operate at a loss and SpaceX is investing heavily in its new “Starship” launch system, which is behind schedule.
Looking for stardustA shot of equity from a public listing will help simplify the understanding. The combined company reportedly plans to raise $50 billion at a valuation of at least $1.5 trillion. That’s a high amount even by Mr. Musk’s standards. Tesla is valued at $1.5trn, but generated $95bn in sales last year—almost five times more than SpaceX and xAI combined. Some fuddy-duddy institutional investors will balk at the price tag. Others will be put off by association with Grok. But they will not be Mr. Musk’s target audience. His pitch will no doubt feature data centers in space as preludes to factories on the moon and cities on Mars. Retail investors will lap it up.
Mr. Musk wants to merge SpaceX with xAI Shows how committed he is to dominating the AI industry. It’s personal: He hates Sam Altman, the boss of OpenAI, which Mr. Musk co-founded and is now suing to abandon its original nonprofit structure. Mr Altman is also eyeing a huge list this year.
In theory, using SpaceX to build an orbital data center could help Mr. Musk get an edge over his rivals. Mr. Altman has sought to acquire, team up or build a space company to rival SpaceX and has long pondered the benefits of space-based data centers. Google, a search giant whose Gemini model competes with both ChatGPT and Grok, plans to send an experimental satellite with its in-house AI chip into orbit in 2027.
Mr Musk is keen to get a head start. On January 30 SpaceX submitted a request to the Federal Communications Commission, an American regulator, to deploy 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 power would be in space, using the solar energy unabated by the atmosphere. Starlink satellites can then relay the data back to Earth.
A lot remains to be proven. Sir Peter Beck, founder of SpaceX’s smaller rival Rocket Lab, said the key question is which is cheaper: the cost of electricity on Earth, where energy is scarce, or the cost of launching a launch into space, where energy is plentiful? For now, the latter are banned. In a study last year, Google researchers said that the cost per kilogram of launch is unlikely to drop to the same level as the cost of running a terrestrial data center for at least a decade. Before that xAI would require a significant increase in computing power.
There are also several technical hurdles. Orbital data centers would require large radiators to cool, and cosmic rays could damage the equipment. Chris Kemp, founder of Astra, another rocket company, notes that AI chips quickly become obsolete and need replacement. “You have to refresh your satellites every few years, which compounds the problem,” he says.
Tesla, which has suffered a cash crunch over the past few years, could be enlisted for help. On January 28th the car maker announced that it had invested $2 billion in xAI. The two companies are increasingly sharing software, data and chips. Some speculate that Tesla could even be folded into the rest of Mr. Musk’s empire, though doing so would be complicated by the fact that he does not own a controlling stake in the company and as its chief executive recently secured a pay deal worth up to $1 trillion that could make the merger questionable.
Nevertheless, Mr Musk is taking his carmaker straight into the AI hype-cycle. It will soon stop making its Model S, its first mass-produced electric car, and the Model X, its gull-winged SUV. The two models together accounted for just 2% of Tesla’s vehicle production in 2025. Also telling was that the factory space currently dedicated to them will be repurposed to build Tesla’s humanoid robot Optimus. Mr Musk has set a target of earning 1m a year from them by the end of 2027. At the same time, Tesla is investing heavily in developing 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 freed from a handful of test areas and available to half of America’s population.
sub-optimalIn reality, it will take years for self-driving taxis and humanoid robots to become cash-generating businesses. In the meantime, they will need huge investments just as Tesla’s core business is winding down. Vehicle sales fell 9% in 2025, the second straight year of decline (see Chart 2). In Europe they plunged by a quarter. Mr. Musk’s political antics have turned off some buyers. The deeper issue, however, is competition from electric vehicles, both from legacy automakers and Chinese newcomers. Tesla’s remaining lineup, starved of investment, will continue to become less attractive.
Like SpaceX, then, Mr. Musk is gambling on Tesla’s future AI, and his belief that he can leverage his existing businesses to dominate the technology. Many skeptics have scoffed at his lofty ambitions before. But Mr. Musk never put that much on the line.
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