The Real Reason Musk Merged SpaceX with xAI

$9.5 billion burned in nine months. That's how much cash xAI torched through 2025, according to sources familiar with the company's finances. While Elon Musk pitched "orbital data centers" as the reason for merging SpaceX with his AI startup, the real driver is far more earthbound: cold, hard cash.

Future Vision, Present Crisis

In Monday's blog post, Musk boldly claimed that "within 2 to 3 years, the lowest cost way to generate AI compute will be in space." But right now, xAI doesn't need space—it needs money, and lots of it.

The three-year-old company is playing catch-up in a brutal race against Google, OpenAI, and Anthropic. Building the massive infrastructure required for competitive AI demands astronomical funding. While OpenAI commands a $500 billion valuation and Anthropic recently hit $350 billion, xAI's $230 billion valuation looks modest by comparison.

SpaceX, meanwhile, is pursuing what could be a record-setting IPO this year, aiming to raise up to $50 billion at a $1.5 trillion valuation. The company's Starlink satellite internet service drives much of that value, but there are only so many rocket launches available each year to expand the constellation.

Perfect Timing, Calculated Risk

Tim Farrar, president of satellite research firm TMF Associates, cuts to the heart of the strategy: "People are throwing tens of billions of dollars at AI companies right now, and in six months or 12 months time, they might have changed their mind about it. Getting the money is feasible now but may not be forever."

The AI investment frenzy is already showing signs of fatigue. While xAI closed a $20 billion funding round in early January, the company's burn rate of over $1 billion per month means that cash won't last long without additional capital.

By folding xAI into SpaceX, Musk can capitalize on investors' insatiable appetite for AI holdings while simultaneously boosting SpaceX's IPO valuation. It's a two-for-one play that addresses both companies' capital needs.

Regulatory Winds at His Back

Notably absent from Monday's announcement: any mention of regulatory approval. Nevada public records obtained by CNBC show the deal was completed February 2nd, with Space Exploration Technologies Corp. listed as the "managing member" of X.AI Holdings.

The Trump administration has created an almost perfect regulatory environment for Musk's ambitions. Jared Isaacman, a former SpaceX investor and customer, now heads NASA. FCC Chairman Brendan Carr is a vocal Starlink supporter.

The FTC is now run by Trump appointee Andrew Ferguson rather than Lina Khan, who blocked numerous big tech deals during the Biden presidency. White House crypto and AI czar David Sacks—a longtime Musk ally—is pushing for reduced oversight of AI labs.

The Muskonomy's Tangled Web

This merger extends Musk's long history of intercompany transactions. In 2016, Tesla acquired SolarCity for $2.6 billion, rescuing the solar company from a liquidity crisis. During his 2022 Twitter takeover, he sold billions in Tesla shares to finance the deal.

The interconnections run deep. In 2025, Tesla sold $430 million worth of Megapack batteries to xAI—about 3.4% of Tesla's energy business revenue. Those batteries power xAI's data infrastructure in Memphis. Meanwhile, Tesla invested $2 billion in xAI's latest funding round, and SpaceX reportedly contributed another $2 billion.

Farrar explains why investors tolerate this "Muskonomy": "The whole thing relies on confidence in him. If any piece of his empire was to fall by the wayside or go bankrupt, then it would undermine everything."

Market Window Closing Fast

Musk may have only a narrow window to execute this strategy. While he has three years left of a second Trump administration, Republicans could lose unified control in the midterm elections just nine months away. Trump's sinking favorability numbers add urgency to the timeline.

The AI investment boom also shows signs of cooling. As venture capital firms become more selective and public markets grow skeptical of sky-high AI valuations, Musk's timing appears calculated to perfection.