SpaceX has a big head start on the technology of reusable rockets, which drastically lowered launch costs and helped spawn a commercial space industry that is gaining momentum year by year.
As SpaceX prepares for its huge Starship rocket to enter commercial service, nothing could derail the company from its leadership position — except perhaps a truly bad decision to chain a financial anchor around SpaceX’s neck. That looks to be the case with Elon Musk’s surprise move to tuck xAI, his cash-gulping AI startup, under SpaceX.
The combination has an eye-popping value of $1.25 trillion, with SpaceX accounting for $1 trillion of that, according to a Bloomberg News report.
Ignore any talk of xAI synergies with SpaceX. They don’t exist right now. SpaceX has been doing just fine at revolutionizing the space industry all by itself — first with its Falcon 9 workhorse rocket. It enabled Musk to build the Starlink constellation of low-Earth-orbit satellites that provides mobile broadband internet for ships, planes, recreation vehicles, rural homes and battlefields in Ukraine.
It’s astounding that SpaceX has progressed so quickly from its first successful rocket flight in 2008 — after three failed attempts — to 165 missions last year, which was more than half of the global launches. Let’s be clear, SpaceX is why the US is dominating the space race with China, which is urgently developing its own reusable rockets and building a low-Earth-orbit satellite network.
SpaceX makes money charging customers by the ton to carry their payloads into space, but most of its launches last year added to its Starlink network of 9,000 satellites, which is the main reason SpaceX is profitable. Customers, including United Airlines Holdings Inc. and ocean carrier AP Moller-Maersk A/S, are flocking to Starlink because of its global coverage and much faster speeds than internet service from the traditional geosynchronous satellites that are positioned much farther from Earth.
SpaceX, which produces its own satellites, also makes money on government contracts, mainly from NASA and the Defense Department, and will likely play a key role in building out the space-based missile-defense system called Golden Dome. The reliability and lower cost of launches have made the government more dependent on SpaceX than the other way around.
Last year, SpaceX earned a profit of about $8 billion on revenue of up to $16 billion, according to a report by Reuters. A 50% profit margin is huge for a hardware maker. The company’s broadband business has 9 million subscribers, Reuters said. SpaceX just bought up a bunch of wireless spectrum to offer satellite connections directly to mobile phones. Commercial and government space activity will only increase, providing SpaceX an exceptionally bright future.
Unless Musk raids the company’s cash to finance his AI startup, that is. This is already happening after SpaceX agreed to pump $2 billion into xAI, which is burning cash at a clip of $1 billion a month, according to Bloomberg News. The spending isn’t easing up any time soon as xAI competes with other deep-pocketed tech companies and startups to acquire computer chips and build data centers to house them.
While SpaceX has a couple of distant competitors, including Jeff Bezos’ Blue Origin and Eutelsat Communications SACA, xAI faces intense competition from marquee names like Alphabet Inc., Microsoft Corp., Meta Platforms Inc. and Nvidia Corp. as well as nimble startups such as Anthropic and OpenAI, which Musk helped start and is now battling in court. It’s way too early and risky to pick winners and losers, just as it’s difficult to forecast how much AI capacity the world truly needs and how the technology will evolve.
The bottom line is that xAI needs cash and Musk is looking at SpaceX as an ATM. This is déjà vu all over again for Tesla Inc. investors, who in 2016 approved Musk’s move to tuck his struggling solar-panel company, SolarCity, under Tesla. That was a smallish $2 billion deal that marked the beginning of Telsa’s transformation from an EV company into a producer of battery packs, solar panels and humanoid robots.
In the end, Tesla’s diversification may prove to be a smart move as Chinese EV makers undercut competitors on price and quality. Certainly, Tesla’s valuation isn’t based on just selling vehicles.
SpaceX doesn’t need this diversification. It’s dominating the market as a pure-play space company that is only extending its lead over competitors. If data centers in space turn out to be a reality, SpaceX doesn’t need xAI to tap that market. All the AI companies will be lining up to purchase the special data center satellites that SpaceX builds and the low-cost launch capacity provided by a fully reusable Starship booster and payload spacecraft.
SpaceX is already seeking approval from the Federal Communications Commission to deploy an orbital data center constellation with up to a million satellites. The plan is to position them in a sun-synchronous orbit that would bathe them in sunshine nearly 100% of the time. The big hurdle for data centers in space, of course, is the cost. SpaceX doesn’t need xAI to solve this problem.
Tesla would have been a better fit for xAI. The Optimus humanoid robot won’t work well in factories or homes unless it has agile AI that can turn verbal or written commands into action. Perhaps xAI will solve this difficult problem and unleash the potential of mobile robots that can multitask. If SpaceX wants to send a few of them to Mars, it would be a lot cheaper and less risky to buy them from Tesla or a competitor.
Many companies make EVs, solar panels, battery packs and robots. There are only a few startup producers of reusable rockets, and none of them are as advanced as SpaceX. This huge advantage is now encumbered with unnecessary risk after Musk decided to chain xAI to SpaceX. Let’s hope that Musk’s dream of stepping foot on Mars takes priority over his immediate need to pour more cash into his AI startup.
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