Elon Musk’s combination of his rocket company SpaceX with his AI startup xAI for $1.25 trillion could provide the AI startup the necessary cash and backing it needs to stay competitive and relevant in the AI market, as it prepares to go public alongside competitors OpenAI and Anthropic.
In a blog post on Feb. 2, Musk wrote that SpaceX acquired xAI to form a “vertically integrated innovation engine on (and off) Earth, with AI rockets.” That innovation engine includes social media platform X, which was already part of xAI. Musk said his goal is to build orbital data centers, arguing that space-based AI is the “only” way to scale. An orbital data center is a space-based computing facility in low Earth orbit that stores and processes data directly in space.
The decision to combine xAI with SpaceX follows a month-long controversy with xAI’s AI chatbot, Grok, being prompted by users to undress images of women and place them in illicit positions. The controversy, which started in January, is one of many xAI has faced in recent years, despite Musk’s attempts to make the AI startup a legitimate rival to OpenAI and Anthropic.
Musk founded the AI startup in 2023, five years after officially resigning from the OpenAI board as a founding member. Musk has also sued OpenAI for allegedly abandoning its original nonprofit social mission, among other things. Since then, xAI has released multiple large language and other models, including the Grok series of general-purpose models and Aurora, a text-to-image model.
A Financial Backer
Despite xAI’s model releases, the controversies have diminished enterprises’ expectations regarding privacy and compliance. And although about 60 million people reportedly have used Grok, that’s a fraction of the couple of billions who use OpenAI’s ChatGPT and Google’s Gemini chatbots.
Therefore, one motivation for this merger is purely financial, said Nick Patience, an analyst at Futurum. With xAI burning through a billion dollars in cash a month, it needs more financial backing to stay in the AI race.
“XAI needs this SpaceX cash generation ability because SpaceX is profitable,” Patience said. “This is a cash flow story in that …. it sustains the life of xAI.”
He added that Musk’s goal of building orbital data centers to help power AI technology is a grand but speculative endeavor.
“There is a rationale if it could be done because it could solve the terrestrial constraints we have around cooling and land use,” Patience said. “But there are significant unknowns.” He added that the challenges include orbital debris, hardware maintenance, and regulatory considerations.
Those considerations make orbital data centers a long-term bet and not a short-term expectation.
“It presents a different story, a vertical integration story that no other company in the world has,” Patience said.
He added that none of the hyperscalers, including Google, Amazon, and Microsoft, can claim to — all at the same time — launch rockets, run an AI research lab, provide Starlink satellite services, and operate a social media platform. SpaceX rival Blue Origin is owned by Amazon founder Jeff Bezos and maintains numerous business arrangements with Amazon.
This “vertical integration” strategy could be helpful as Musk prepares to take the company public this summer, with a target valuation of $1.5 trillion, as the estimated valuation surpasses $1 trillion, making it the world’s most valuable private company.
Different Motivations
However, estimated valuations can be faulty, said Johna Till Johnson, CEO of analyst firm Nemertes.
“The value of a private company is … whatever the people investing in it say it is,” she said, adding that it can often fail to meet expectations when the company goes public.
Moreover, although AI technology could be helpful in space in the future, Musk’s motivation could be a way to avoid criticism that he is managing too many companies as he prepares for an IPO, Johnson said.
Furthermore, the merger could mean that xAI could either be a general-purpose AI lab that Musk uses to keep SpaceX’s satellite networks running or an AI company focused solely on space, which would be a pivot from its current role, she added.
“Unless he … is planning to take this thing and refocus it entirely from what it’s currently doing to something else … quite frankly, he’s going to maintain it as its general purpose, and therefore the only real value is that it’s one company that he’s boss of,” she said.
