Why not combine SpaceX and Tesla?

SpaceX’s credit risk might be soaring as it prepares to borrow another $40 billion for Nvidia chips, but that’s not the main focus right now. The buzz is all about the potential merger between SpaceX and Tesla!

How compelling you find this merger likely hinges on your belief in Elon Musk’s vision of reaching Mars or, as he put it during this week’s earnings call, “spreading the light of consciousness.” A well-informed gamer knows we currently lack the technology—or even the foundational knowledge—to sustain human life in space, which means we’ll need robots. However, the communication lag between Earth and distant planets complicates remote control of these robots. This is where the idea of autonomous AI-driven robots comes into play, allowing them to operate with minimal oversight.

If you buy into Musk’s narrative, the tech in question is being developed through Tesla’s self-driving cars, SpaceX’s large language models, and Tesla’s humanoid robots—all of which rely on data centers from SpaceX. Recent earnings reports from both companies have just dropped. On the flip side, if you see Mars as just a narrative Musk uses to justify his public antics, the merger could be more about consolidating power and finances.

Musk recently stated that “there’s a lot of merit to combining” SpaceX and Tesla, citing potential gains from collaborating on superintelligence software. However, SpaceX’s current business isn’t primarily focused on AI—sorry, superintelligence. In its Q3 earnings, SpaceX reported $7.56 billion in revenue from its AI division, with the “SI solutions & infrastructure revenues” category—likely encompassing Grok, Cursor, and the neocloud business—soaring to $7 billion, more than triple last quarter’s figures. Some of this surge can be attributed to Cursor, which added $608 million in revenue, while much of the rest likely came from compute rentals to companies like Anthropic and Google, with Grok contributing less, according to an analyst.

At first glance, this revenue might seem comparable to Anthropic, which reported $16.3 billion in the first half of the year from its frontier models. However, SpaceX’s AI business resembles CoreWeave more than Anthropic. While the press release mentioned “increased Grok adoption across enterprise customers and consumers,” it didn’t break down those numbers from bare-metal revenue. If Musk had something to brag about, he likely would have.

As for Tesla, which released its Q3 results recently, the earnings were disappointing—marking a second consecutive quarter of declining profits. This downturn seems to stem from Musk’s apparent shift away from traditional cars, focusing instead on robots and self-driving taxis. There was also a flashy demo of a Roadster hopping car, but that won’t hit production for a couple of years and comes with a hefty price tag, with no guarantees on delivery. Musk didn’t elaborate on the merger during Tesla’s call.

SpaceX and Tesla already have some collaborations; for instance, SpaceX purchased $131 million worth of low-selling Cybertrucks from Tesla and has previously held Tesla bonds. More importantly, they’ve announced two AI projects together: Terafab and Macrohard.

Terafab is Musk’s chip-making venture in Texas, aimed at supplying chips for his needs, with Intel somewhat involved in the tech development. Macrohard, on the other hand, is an AI project that allows users to simulate existing Microsoft software. Typing that name makes one wish for an asteroid to hit, so it’s probably for the best that we haven’t heard much about it since its announcement in March.

SpaceX’s S-1 from May indicated that Terafab and Macrohard are still in the early stages, meaning many details about their collaboration, including financial terms and intellectual property rights, remain unresolved. Intel’s CEO recently reaffirmed the company’s commitment to the partnership, but there’s no obligation to stay involved with Terafab, and the S-1 suggests a definitive agreement may never materialize. Intel’s Thomas Hannaford didn’t respond to inquiries about any signed agreements.

During this week’s call with SpaceX investors, Musk claimed Terafab would reach volume production in the latter half of 2028, with the first test chip expected in May or June 2027. However, Musk has a history of setting timelines that his companies often miss. When an analyst asked if Musk had ordered the necessary machines for cutting-edge equipment, he didn’t provide an answer.

Companies often have more going on behind the scenes than they publicly disclose, so the S-1 filing isn’t the final word. However, neither Macrohard nor Terafab was mentioned in the latest 10Q.

Musk is likely to emphasize the Moon, Mars, and beyond, appealing to a significant portion of his fan base. Yet, there are also some mundane financial reasons shareholders might be interested.

Imagine you’re a wealthy Tesla shareholder who believes in Musk but notices his erratic focus. He’s constantly active on social media, often stirring controversy, and his attention seems to shift between rockets, Dogecoin, Grok, and cars. You might realize he’s been less focused on cars lately.

Given his apparent focus on AI, you might spot some significant conflicts of interest. Musk’s companies all require the same scarce Nvidia chips for their AI projects. However, merging the companies could lead to the creation of a top-tier general-purpose AI. What then? “If you build the best general-purpose AI model, maybe it can drive the cars, operate the robots, upload brains, and serve up right-wing takes on social media,” as one observer noted.

There’s also a massive AI infrastructure buildout underway, and simply mentioning “Nvidia” can attract substantial investment. A merger would consolidate all AI projects, along with cars, rockets, and satellites. “Give us $100 billion to build data centers in space, but if we don’t, you can reclaim our car factories and data centers on Earth” could be a compelling pitch to investors.

Musk has a track record—though not always successful—of building physical infrastructure, which might make him a better bet for constructing data centers than some Bitcoin miners who pivoted. “If Elon builds at the rate he discussed, he’ll have plenty of extra capacity to sell,” says an analyst.

From this perspective, it seems logical for SpaceX and Tesla to merge. It’s baffling they’re separate entities when one person oversees two massive AI companies with overlapping interests. Merging could streamline operations, allowing Musk to focus on maximizing overall value for the combined AI complex and its shareholders. If resources should be allocated to robots, they go there; if data centers need attention, that’s where they go. Shareholders have come this far; surely they trust Musk to make those calls. Right now, focusing on robots benefits Tesla but harms SpaceX, and vice versa. There’s a straightforward solution.

Of course, it’s not that simple. The specifics of the deal are crucial; many assume it would be a stock-for-stock merger. “I assume SpaceX would be the acquirer, partly due to its larger market cap but mainly because of Musk’s greater control there,” one expert noted. The regulatory landscape also plays a role. The argument for merging due to AI could also present antitrust concerns against it.

Currently, the regulatory environment is relatively lax, partly due to Musk’s influence. With the current president having two years left in office, there’s a sense of urgency to announce a deal by mid-2027 to ensure it closes during this administration.

Musk wields more control at SpaceX than at Tesla, holding over 50% of the voting power through special supervoting shares. He serves as CEO, CTO, and chairman, limiting shareholders’ ability to challenge his authority. At Tesla, however, he only holds about 20% of the vote. In a stock-for-stock merger where SpaceX acquires Tesla, Musk would gain voting control over the entire operation. “This is the only way he can achieve that,” a legal expert explained.

Both companies are based in Texas, making it challenging for shareholders to sue. “The chances of a shareholder successfully suing either Tesla or SpaceX are extremely low due to Texas’s numerous barriers to litigation,” the expert added. So that risk is mitigated.

Setting aside the more complex issues of national security for SpaceX and antitrust concerns, federal securities laws primarily focus on disclosure. As long as everything is accurately disclosed to shareholders before the vote, that’s the main requirement. At the state level, there could be issues related to fiduciary duty and conflicts of interest, but mergers like Paramount and CBS have happened before, so it’s not impossible.

What does Musk stand to gain from this merger? Control, which he has historically coveted. It could also potentially add $110 billion to his net worth. More intriguingly, the merger could impact Musk’s substantial Tesla compensation package. If there’s a legal change of control—like SpaceX acquiring Tesla—the operational milestones tied to Musk’s massive pay package could vanish.

What matters then is Tesla’s valuation. If SpaceX pays $2 trillion or more, Musk stands to gain significantly. At that valuation, he could receive $6 billion in shares and accelerated vesting from his 2018 pay package, which would otherwise vest in 2028. The change of control would also allow him to sell those shares sooner.

Is this beneficial for SpaceX? Assuming a $2 trillion valuation, it would essentially be a merger of equals, leading to significant dilution for current SpaceX shareholders. Moreover, Tesla’s business is stagnating, and its AI ambitions are costly. “It’s likely that combined, SpaceX and Tesla will spend close to $50 billion on capital expenditures in Q4, and their businesses won’t come close to covering that,” an analyst noted.

So, from a numbers perspective, it might not be great for SpaceX. However, Musk’s ventures aren’t solely about the numbers; they hinge on belief in his vision. That’s what the Tesla valuation versus traditional automakers was about in the first place. So, why not merge them and see what unfolds? Those who are buying into Musk’s vision likely know exactly what they’re signing up for.