What a SpaceX-xAI merger could mean for Tesla stock

Take Monday. The idea that Elon Musk’s artificial-intelligence company, xAI, and his rocket company, SpaceX, could merge ahead of a potential mid-year initial public offering of SpaceX stock is gaining steam. There have been several reports about Musk weighing the idea. Neither SpaceX nor xAI responded to a request for comment. The idea isn’t as far-fetched as some might think. SpaceX is planning to raise capital to expand its AI ambitions, including building data-center capacity. It recently filed an application with the Federal Communications Commission to build a “space cloud" of up to one million satellites. That’s roughly 100 times the scale of SpaceX’s existing space-based broadband product, Starlink. The idea is to use the power of the sun and the cold vacuum of space to free AI computing from its terrestrial bonds such as electricity supply and cooling. So if SpaceX is morphing into an AI company, why not merge it with xAI, which has been valued at roughly $200 billion in recent funding rounds, while SpaceX is reported to be seeking an IPO valuation as high as $1.5 trillion? That would value SpaceX at roughly 60 times estimated 2026 sales. xAI isn’t likely profitable yet and carries its own lofty price-to-sales multiple based on recent funding rounds. Using similar valuation frameworks makes the merger math easier to envision, even if it remains aggressive. Then there is Tesla, which is also positioning itself as an AI company. Tesla’s fourth-quarter earnings call focused heavily on AI-linked opportunities, including robotaxis and humanoid robots. A SpaceX-xAI merger would drive the convergence narrative for bullish Tesla investors who would like to see all of Musk’s AI companies under one roof. Tesla disclosed a xAI during its fourth-quarter earnings call. There is one problem with full convergence, according to Future Fund Active ETF co-founder Gary Black: valuation mismatch. Tesla trades for about 200 times estimated 2026 earnings, while Black estimates SpaceX trades closer to 400 times earnings at its current $800 billion valuation. “The math is pretty straightforward," says Black. Tesla would need to issue roughly 35% more shares to combine the two companies at existing valuations. “Many existing Tesla institutional shareholders would balk at the uncertainty of 25% profits coming from space travel/communications and sell their [Tesla] shares." To be sure, many Tesla investors already view both SpaceX and Tesla as emerging AI companies. Still, a full merger may be premature. That might not matter to Musk. Even without Tesla directly involved, an xAI-SpaceX tie-up could keep Tesla investors dreaming about deeper AI convergence across Musk’s empire. Tesla stock was down 1.3% in midday trading, while the S&P 500 and Dow Jones Industrial Average were up 0.7% and 1%, respectively. Weak Chinese vehicle-sales data might be weighing on investor sentiment. Tesla still makes most of its money from its legacy car business. Write to Al Root at allen.root@dowjones.com