The vision of the 'Space Data Center' will take at least two to three years to materialize, while xAI is in urgent need of cash at present. xAI burned approximately $9.5 billion in cash during the first nine months of 2025, with revenue during the same period amounting to only about $210 million, significantly lagging behind OpenAI and Anthropic. Analysts warn that if any part of Musk’s business empire collapses or goes bankrupt, it will weaken the whole.
Elon Musk has merged SpaceX with the artificial intelligence startup xAI, claiming the goal of building a 'space data center.' However, this vision will take at least two to three years to materialize. For xAI, which was founded just three years ago, the most pressing need at present is singular: cash.
The transaction was registered in Nevada on February 2. SpaceX valued xAI at $250 billion and itself at $1.5 trillion. According to people familiar with the matter, SpaceX Chief Financial Officer Bret Johnsen promised during a conference call with approximately 100 investors on Monday that this deal would not delay SpaceX’s planned initial public offering (IPO) in the summer or fall of this year. The company is seeking to raise $50 billion at a valuation of up to $1.5 trillion.
According to The Information, xAI burned about $9.5 billion in cash during the first nine months of 2025, while generating only about $210 million in revenue during the same period—far behind OpenAI and Anthropic. The company completed a $20 billion funding round in January, and Tesla disclosed last week that it had invested $2 billion in xAI. By comparison, SpaceX generated $1 billion to $2 billion in free cash flow last year.
Some SpaceX investors have reacted pessimistically to the deal. StarHub, a telecommunications company holding a significant stake in SpaceX, has seen its share price drop nearly 5% since news of the negotiations emerged last Thursday. $EchoStar (SATS.US)$ Michael Sobel, co-founder of private equity firm Scenic Management, stated that SpaceX shareholders believe the story presented by the merged entity to investors requires further clarification.
A $1 billion-per-month financial black hole
xAI's financial condition highlights the rapid pace at which AI development consumes capital. The company burned cash at a rate exceeding $1 billion per month during the first nine months of 2025, spending heavily on high-end chips and constructing robust data centers to run and train AI models. During the same period, its revenue was only about $210 million, lagging far behind its competitors.
In January this year, xAI completed a $20 billion funding round at a valuation of approximately $230 billion. In contrast, OpenAI was valued at $500 billion in October last year and is reportedly aiming for a valuation of around $750 billion in its next funding round. Anthropic signed a term sheet this month for financing at a $350 billion valuation.
Tesla disclosed last week that in 2025 it sold Megapack large-scale backup batteries worth $430 million to xAI, accounting for about 3.4% of its annual energy business revenue. These batteries power xAI’s data infrastructure being built around Memphis, Tennessee. Tesla also stated that it invested $2 billion in xAI as part of the latter's latest funding round.
Complications arise for SpaceX's IPO ambitions
SpaceX, founded nearly 25 years ago, only began generating significant cash flow last year. The company told investors that it achieved $1 billion to $2 billion in free cash flow last year, driven by the rapid growth of its Starlink satellite internet business. Revenue grew to approximately $16 billion, with earnings before interest, taxes, depreciation, and amortization reaching about $8 billion.
In recent weeks, large fund management companies and investment bankers who flew to Hawthorne, California, to meet with SpaceX's leadership were impressed by the company’s dominant position in the rocket launch sector and Starlink’s industry-leading advantages. Johnsen told investors that the company had negotiated with key investors regarding their participation in a significant portion of a $50 billion IPO.
However, the acquisition of xAI could complicate this narrative. Not only is xAI burning through cash at a rate of $1 billion per month, but it has also recently faced challenges in AI development. According to sources familiar with the matter, Musk has expressed frustration in recent weeks over delays in the new Grok AI model, issues that are not dissimilar to those faced by other AI companies.
“People are pouring tens of billions into AI companies now, but they may change their minds in six or twelve months. It’s smart to get the money now while it’s available, but it might not last forever,” said Tim Farrar, president of TMF Associates, a research firm focused on the satellite and telecommunications industries.
The concept of a 'space data center' faces strong skepticism.
In a blog post announcing the deal on Monday, Musk cited the more efficient construction of a 'space data center' as the primary reason for merging SpaceX and xAI. He estimated that 'within two to three years, the lowest-cost way to generate AI computing power will be achieved in space.'
The potential of space data centers has faced strong skepticism. However, according to people familiar with the matter, after two successful test launches of Starship last fall, Musk became more determined about the possibility of launching orbital data centers. Starship is the largest rocket SpaceX has ever developed.
“A year ago, no one was talking about this,” said Ian Cinnamon, CEO of satellite manufacturer Apex. He views this potential business line as a way for SpaceX to fund sending larger rockets into space, much like how Starlink satellites have helped drive greater investment in SpaceX’s smaller Falcon 9 rockets.
Brett Winton of Ark Invest stated that the xAI merger and the space data center plan increase the stakes for making Starship fully reusable. While both stages of Starship are designed for repeated launches, SpaceX has so far only demonstrated reusability in the rocket’s first stage (the booster). “Given the volume of launches they need, they really need to make the full Starship reusable,” he said.
Last week, SpaceX outlined an ambitious plan to the Federal Communications Commission to send up to 1 million satellites into space — a figure far exceeding current numbers — as part of a large-scale orbital data center project. However, this deal adds to SpaceX’s already crowded agenda, with Starship still needing to fulfill NASA’s multi-billion-dollar lunar landing contract by 2028.
Swift action amidst a relaxed regulatory environment
In addition to the friendly capital markets, Musk has also benefited from an extremely favorable regulatory environment. The Trump administration is rolling back regulations related to the environment, antitrust, and other areas.
No mention of any regulatory approval requirements appeared in the blog post on Monday, with Musk hinting in the first sentence of the statement that the deal was already completed. Particularly important for Musk is that his business partner, former SpaceX investor and client Jared Isaacman, has recently taken over as the head of NASA. Isaacman supports initiatives to expedite and expand the agency's contracts with SpaceX. At the Federal Communications Commission, Chairman Brendan Carr has been a vocal supporter of SpaceX's Starlink project.
The landscape of technology mergers and acquisitions has also undergone significant changes. The Federal Trade Commission is now led by Andrew Ferguson, appointed by Trump, rather than Lina Khan, who was known for blocking major tech deals during Biden's term. In the AI sector, Musk's old friend David Sacks serves as the White House Czar for Cryptocurrency and AI, pushing for federal restrictions on the regulation of AI labs.
In December last year, President Trump signed an executive order establishing a single regulatory framework for AI, weakening the power of blue states like California and New York to implement their own rules. The order stated: 'To win, American AI companies must be free to innovate without burdensome regulations.'
Although Musk still has three years left in Trump’s second term, he may only have a brief window of unified Republican control, as midterm elections are just nine months away and the president’s approval ratings are declining.
Musk's Related-Party Transactions Landscape
Musk moves quickly and may enjoy the backing of a group of loyal investors who have long supported his strategy of resource pooling and corporate consolidation.
In 2016, Tesla acquired SolarCity for $2.6 billion, rescuing it from an impending liquidity crisis. Prior to the merger, Musk was a major investor in the solar business and served as chairman of the company, which was founded by his cousins.
During the 2022 leveraged buyout of Twitter (later rebranded as X), Musk sold billions of dollars worth of Tesla shares to finance the transaction. He also transferred dozens of employees, and even some executives, from SpaceX, Tesla, and tunneling enterprise The Boring Co. to assist him in taking over and overhauling the platform.
At Tesla, Musk has engaged in numerous related-party transactions with SpaceX and more recently with xAI. For example, Tesla sells automotive components and solar equipment to SpaceX, and the automaker also relies on SpaceX for developing special alloys for its Cybertruck. According to Bloomberg, in July 2025, SpaceX also invested $2 billion in xAI.
Farrar stated that Musk's biggest fans and institutional investors are willing to support these intricate networks of transactions or the "Musk Economy," partly because they understand the symbolic importance of maintaining the strength of his entire portfolio. "The whole thing hinges on confidence in him," Farrar said. "If any part of his empire were to collapse or go bankrupt, it would undermine the whole."
Editor/Rice