xAI-X Merger: A Smart Bet on Musk's Expanding Empire

When Elon Musk declared that his AI startup, xAI, had taken over his social media platform, X (previously known as Twitter), in a full stock swap, it certainly turned heads. Yet, in many ways, this move was logical. xAI's chatbot, Grok, was already intricately linked with X, and the social media giant was struggling financially. Musk needed a way to transform his $44 billion Twitter acquisition from what some saw as an impulsive move into a calculated step towards achieving AGI supremacy.

This acquisition sheds light on the deeper workings of Musk's business empire: investing in any of his ventures isn't about seeking quick profits. Instead, it's about embracing the mystique surrounding Musk and buying into a narrative of success that often outstrips the actual financial figures.

Some critics label it a scheme, citing Musk's track record of grand promises and delayed deliveries. However, the market increasingly embraces narrative-driven investments, especially when they're spun by someone closely aligned with influential figures like the president.

“All of Elon’s companies today are basically one company,” Yoni Rechtman, a principal at Slow Ventures, shared with TechCrunch. “It’s all already Elon, Inc. People work across multiple companies simultaneously. They're connected through a network of capital. They conduct business with each other, and Musk manages them as a single entity. So [the xAI-X merger] just acknowledges the reality that the two businesses were never truly separate.”

Musk enthusiasts like Ron Baron, the founder of Baron Capital, believe that “every single thing [Musk] does is helping everything else he does,” as Baron put it. Musk's empire includes Tesla, SpaceX, The Boring Company, and Neuralink, with some reportedly sharing resources.

“When [Musk] bought Twitter, did he have in his mind that there’s an opportunity to have this data, a tremendous value for licensing? When he decided he wanted to go to Mars with SpaceX, did he really think initially that there’s a real opportunity here for the internet around the world, and there’s gonna be hundreds of billions of dollars of revenue opportunity? When he started off with EVs for Tesla, did he really think that this is gonna merge into self-driving, where you can make hundreds of billions of dollars a year of extra profits, and Grok […] and you’re gonna have connected cars all around the world? […] All these businesses link up. It’s the ecosystem. It’s the Elon ecosystem, and I think it’s really interesting when you look at it that way.”

Baron Capital has stakes across Musk's portfolio, illustrating the investor crossover among his various companies. Other firms like 8VC, Andreessen Horowitz, DFJ Growth, Fidelity Investments, Manhattan Venture Partners, Saudi Arabia’s PIF, Sequoia Capital, Vy Capital, and more also have investments spread throughout Musk's corporate network.

Returning to the xAI-X deal, analysts were puzzled by the valuation: X at $33 billion, more than triple its value just months prior, and xAI at $80 billion, despite the AI company's minimal revenue. However, valuations often reflect future aspirations rather than current realities, particularly with Musk's ventures.

Take Tesla, for instance. It's been valued like a tech stock despite its automotive margins, driven by the belief that it will eventually revolutionize autonomy through self-driving cars and humanoid robots.

“The reason why [Tesla’s] stock trades at 80 times earnings and the comp group trades at 25 times earnings is that people are making a bet on the long term, and it’s not about what happens to numbers this year,” Gene Munster, managing partner at Deepwater Asset Management, explained to TechCrunch. “That’s one of Elon’s superpowers, this ability to keep investors engaged for the long term.”

Munster's firm has invested in X, xAI, and Tesla, representing the kind of committed Musk supporter who stands to gain the most from a deal like xAI acquiring X, assuming Musk can deliver on integrating X's real-time data and distribution capabilities with xAI's AI prowess.

However, consolidating value also brings heightened risk.

Dan Wang, a professor at Columbia Business School whose work explores the intersection of business and society, pointed out to TechCrunch that the immediate risk for investors is the ongoing SEC lawsuit against X. The suit alleges that Musk misled investors by delaying the disclosure of his Twitter stake, allowing him to buy shares at lower prices.

Wang also highlighted other risks, including antitrust issues and user privacy concerns, especially given X's recent move to opt all users into data collection for AI training. This has already drawn scrutiny from Ireland’s DPC, which is investigating whether it violates Europe’s GDPR.

“Another kind of risk here is that there isn’t a consensus framework for how the AI market is going to be regulated, but you’re already seeing traces of this in Europe and, up until recently, in California,” Wang noted. “A lot of these frameworks have to do with how AI models are deployed in terms of distributing information […] They ascribe responsibility to the companies that are creating AI models, as well as providing access to those models.”

Rechtman also mentioned that Musk might simply lose interest in a project, as some Tesla shareholders feel he's currently more focused on the Trump campaign than his other ventures.

When confronted with these risk factors, Munster seemed unfazed, emphasizing the transformative potential of xAI and its ability to become a dominant force in AI.

“We’re betting the firm on the belief that AI is going to be more transformative than what people think,” he said. “What is the value […] of one of the four brains that the world is going to run on?”

Rechtman suggested that Musk's supporters aren't blindly loyal but rather trust in his ability to “bend capital markets to his will” in ways that allow him to undertake projects others can't.

“The people who are in these businesses have just gone long Elon, and they will continue to go long Elon,” Rechtman said. “So it’s not surprising to me that they will just continue to tell you that the emperor is wearing clothes.”

Additionally, investing in more speculative ventures like X could open doors to other opportunities within Musk's universe, Rechtman noted.

“SpaceX is a real thing, and it will never go public,” he said. “So the only way to invest in SpaceX is to get access to the tenders. And the only way to get access to the tenders is to be in Elon’s good graces.”