Musk’s “Century-Defining Merger”: A Unilateral Capital Infusion into xAI

By Zhao Ying

Source: WallStreetCN

Elon Musk has merged SpaceX with AI startup xAI, declaring his intention to build a “space-based data center.” Yet this vision is at least two to three years away from realization—and for xAI, founded just three years ago, the most urgent need today is cash.

The deal was registered in Nevada on February 2, valuing xAI at $250 billion and SpaceX at $1.5 trillion. According to sources, SpaceX CFO Bret Johnsen assured approximately 100 investors on a Monday conference call that the transaction would not delay SpaceX’s planned initial public offering (IPO) 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 roughly $9.5 billion in cash during the first nine months of 2025, while generating only about $210 million in revenue—falling far behind OpenAI and Anthropic. The company closed a $20 billion funding round in January. Last week, Tesla disclosed a $2 billion investment in xAI. By contrast, SpaceX generated $1–2 billion in free cash flow last year.

Some SpaceX investors reacted negatively to the deal. EchoStar, a telecommunications company holding a large stake in SpaceX, saw its stock price drop nearly 5% since news of the negotiations broke last Thursday. Michael Sobel, co-founder of private equity firm Scenic Management, said SpaceX shareholders believe the post-merger narrative presented to investors will require further explanation.

A $1-Billion-Per-Month Cash Black Hole

xAI’s financial situation underscores the staggering capital intensity of AI development. Over the first nine months of 2025, the company burned through more than $1 billion per month—spending heavily on high-end chips and building powerful data centers to run and train AI models. Its revenue during the same period totaled only about $210 million, trailing competitors by a wide margin.

In January, xAI raised $20 billion at a valuation of approximately $230 billion. By comparison, OpenAI’s valuation stood at $500 billion last October and is reportedly aiming to lift it to around $750 billion in its next funding round. Anthropic signed a term sheet this month valuing the company at $350 billion.

Last week, Tesla disclosed that in 2025 it sold $430 million worth of Megapack large-scale backup batteries to xAI—accounting for roughly 3.4% of Tesla’s full-year energy business revenue. These batteries power xAI’s data infrastructure under construction near Memphis, Tennessee. Tesla also stated that, as part of xAI’s latest funding round, it invested $2 billion in the AI startup.

SpaceX’s IPO Ambitions Get Complicated

Founded nearly 25 years ago, SpaceX only began generating substantial cash flow last year. The company told investors it achieved $1–2 billion in free cash flow, driven by rapid growth in its Starlink satellite internet business. Revenue rose to approximately $16 billion, with EBITDA around $8 billion.

In recent weeks, major fund managers and investment bankers who traveled to Hawthorne, California, to meet with SpaceX leadership were impressed by the company’s dominance in rocket launches and Starlink’s industry-leading advantages. Johnsen told investors the company had already negotiated with key investors to commit the bulk of the $50 billion targeted in its IPO.

But acquiring xAI could complicate that story. Not only does xAI burn $1 billion per month, but it has recently faced AI development challenges. Sources say Musk has grown frustrated in recent weeks over delays in the new Grok AI model—a problem shared across the AI industry.

Tim Farrar, president of satellite and telecom research firm TMF Associates, said: “People are now pouring hundreds of billions of dollars into AI companies—but six or twelve months from now, they may change their minds. Raising money now is feasible, but it may not remain so forever.”

“Space-Based Data Center” Faces Strong Skepticism

In a blog post announcing the deal on Monday, Musk stated the primary rationale for merging SpaceX and xAI is to more efficiently build a “space-based data center.” He estimated that “within two to three years, space will become the lowest-cost way to deliver generative AI compute.”

The potential of space-based data centers faces strong skepticism. Yet sources say Musk grew more convinced of the feasibility of launching orbital data centers after Starship—the largest rocket SpaceX has ever built—successfully completed two test flights last fall.

Ian Cinnamon, CEO of satellite manufacturer Apex, said: “A year ago, no one was talking about this.” He believes this potential business line represents one way SpaceX could finance more frequent launches of its massive rockets—just as Starlink satellites helped drive greater investment in SpaceX’s smaller Falcon 9 rocket.

Brett Winton of ARK Invest noted that the xAI merger and space data center plan heighten the risk of achieving full reusability for Starship. Although both stages of Starship are designed for reuse, SpaceX has demonstrated reusability only on the first stage (booster) so far. “Given the launch cadence they’ll need, they truly must make the entire Starship reusable,” he said.

Last week, SpaceX filed an ambitious proposal with the Federal Communications Commission (FCC) to deploy up to one million satellites into orbit—as part of a massive orbital data center. But the deal adds yet another item to SpaceX’s already crowded mission list, including NASA’s multibillion-dollar lunar landing contract, which Starship must fulfill before 2028.

Rapid Action Amid a Permissive Regulatory Environment

Beyond favorable capital markets, Musk also benefits from an unusually permissive regulatory environment. The Trump administration is rolling back environmental, antitrust, and other regulations.

Musk’s Monday blog post made no mention of regulatory approvals, and his opening sentence implied the deal was already complete. Particularly important for Musk is that Jared Isaacman—a longtime business partner, former SpaceX investor, and customer—recently became NASA Administrator. Isaacman supports accelerating the expansion of NASA’s contracts with SpaceX. At the FCC, Chairman Brendan Carr has been a vocal advocate for SpaceX’s Starlink service.

The tech M&A landscape has also shifted dramatically. The Federal Trade Commission (FTC) is now led by Andrew Ferguson—appointed by Trump—rather than Lina Khan, who gained prominence under Biden for blocking major tech deals. In the AI domain, Musk’s longtime friend David Sacks serves as the White House’s “crypto and AI czar,” pushing federal efforts to limit regulation of AI labs.

In December last year, President Trump signed an executive order establishing a unified federal AI regulatory framework, weakening the ability of blue states like California and New York to impose their own rules. The order declared: “To win, U.S. AI companies must innovate freely without burdensome regulation.”

Although Musk still has three years remaining in a potential second Trump administration, he likely faces only a brief window of unified Republican control—the midterm elections are nine months away, and the president’s approval rating is declining.

Musk’s Web of Related-Party Transactions

Musk moves quickly—and may enjoy backing from a loyal group of investors long accustomed to supporting his resource-sharing and corporate consolidation strategies.

In 2016, Tesla acquired SolarCity for $2.6 billion, rescuing the solar business from an imminent liquidity crisis. Before the merger, Musk was SolarCity’s largest investor and chairman; the company had been founded by his cousins.

During the 2022 leveraged buyout of Twitter (later renamed X), Musk sold billions of dollars’ worth of Tesla shares to finance the deal. He also pulled dozens of employees—including several executives—from SpaceX, Tesla, and tunneling firm The Boring Company to help him take over and comprehensively overhaul the platform.

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

Farrar said Musk’s biggest fans and institutional investors are willing to support this intricate web of transactions—or what some call the “Musk economy”—partly because they recognize the symbolic importance of maintaining strength across his entire portfolio. “The whole thing depends on confidence in him,” Farrar said. “If any part of his empire falters or goes bankrupt, it weakens the whole.”