Elon Musk is leading SpaceX’s minority investors astray | Nils Pratley

The fervor among Elon Musk’s supporters sees every move he makes as further proof of his extraordinary visionary talent. Recently, SpaceX, the aerospace company he founded, has made considerable headlines by acquiring xAI, a company specializing in artificial intelligence. The valuation of this merger towers at an astonishing $1.25 trillion (£910 billion). The buzz is palpable, especially with an upcoming IPO projected for June, anticipating a record-breaking debut as the most valuable private company ever created.

Musk paints this union as a grand ambition to craft “the most ambitious, vertically-integrated innovation engine on (and off) Earth.” His vision encompasses AI, rocketry, satellite communications, and a highly advanced real-time information platform focused on free speech. As he described it, this combination heralds a new era of digital and aerospace advancement.

However, minority shareholders in SpaceX may not share this enthusiastic vision. For them, this all-stock deal seems less like a bold stride into the future and more like a desperate rescue mission for xAI, which has struggled to be profitable. Concerns about the valuation process and the lack of consultation with investors further complicate the issue.

Although Musk is often seen as the face of SpaceX, his ownership stake is about 42%. Other investors have been involved for years, including popular investment trusts in the UK, such as Scottish Mortgage and Edinburgh Worldwide, both of which count SpaceX as their largest investment. This raises the question of whether these end-investors want to tether their fortunes to xAI, particularly given its reputation as a cash-burning entity entwined with the controversy-laden platform, X. Recent events include reports of a raid by French prosecutors on X’s offices and a UK inquiry into troubling AI-generated content.

Until now, SpaceX has thrived largely due to its laser focus on launching satellites with reusable rockets and its operational success with the Starlink communication service. This focus has allowed it to dominate the space sector, leaving competitors far behind. SpaceX’s clientele includes significant organizations such as NASA and the U.S. Department of Defense.

Musk’s rationale for merging SpaceX and xAI rests on the belief that the future of AI will depend heavily on space infrastructure. He argues, “Global electricity demand for AI simply cannot be met with terrestrial solutions, even in the near term, without imposing hardship on communities and the environment.” While this perspective could hold merit, it does not automatically necessitate a merger of these two distinct entities. If xAI indeed requires the capabilities of SpaceX rockets to launch orbital data centers, these transactions could be facilitated through standard business agreements.

Though Musk has yet to disclose specifics regarding this deal, reports suggest SpaceX’s valuation stands at roughly $1 trillion while xAI is around $250 billion. These estimates may align with recent capital-raising efforts, but independent analysis may suggest SpaceX is overextending itself in this deal.

Unlike xAI, which struggles with less than $1 billion in annual revenues and faces monumental investment challenges in establishing data centers, SpaceX has proven its profitability, boasting annual revenues of $16 billion. The rocket company seemed well on its way to achieving a $1 trillion valuation on its own, especially ahead of the much-anticipated IPO.

Furthermore, since this is an all-stock merger, the financial implications vary depending on one’s position. For Musk, involved in both companies, he could potentially balance losses in rockets with gains in AI. Nonetheless, external investors with significant stakes in SpaceX, like the two UK investment trusts, may find their interests at risk.

As the excitement surrounding SpaceX’s IPO mounts, the details of this unexpected merger might be overshadowed. Musk has a remarkable ability to generate enthusiasm for his endeavors, and this rescue operation for xAI may be cloaked in the thrill of SpaceX’s expansion. While investors have previously enjoyed lucrative returns from their involvement in SpaceX, this latest strategic move raises red flags. Those investors, especially the long-term ones, may feel they are being sidelined in Musk’s latest gamble.