Musk’s SpaceX Said to Combine with xAI Ahead of Mega IPO

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1:37Carol Massar:Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead. With insight on the people, companies and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Business Week Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. Gil Loria is Managing Director, Head of Technology Research at DA Davison and Company. He joins us from Detroit. Gil, nice to have you back with us. What do you make? First of all, investors seem to like what they got from Palantir.

2:23Carol Massar:Break it down for us and what you see. Yeah, they exceeded very high expectations. Their growth accelerated from more than 60 % to more than 70%. There's no other software company even close. If you look at software companies 2 through 10, they're happy to grow somewhere between 20 and 30%, and they're usually decelerating. So what Palantir is doing is remarkable. We're running out of superlatives. It's remarkable. And it exceeds very high expectations that came in, which is what is implied by the valuation. That's why the valuation is so high on Palantir is because there's no other company like it.

3:03Yeah. I mean, the company said we are an N of one. Do you agree with that? Absolutely. Absolutely. The more work we do, and we cover 40-something other software companies, there's nobody that's even close to what Palantir can do. It's a very unique combination of skills. They have absolute ownership of their customers' data in terms of the ability to organize it in a useful way. They have an army of four deployed engineers that help companies solve problems. They have direct relationships with CEOs. They have a strong mission and sense of purpose. There's no other software company like it. And the reason that's important is that they are actually solving problems for their customers.

3:52All these companies for the last three years have been trying to figure out what can I do with AI? How can AI make my business better? And most have not really made much of a difference apart from Palantir's customers that said, Palantir, hey, I'll hand you the keys and about$40 million a year. And you help me make my mission critical systems better with AI. and they're getting results. That's why they keep growing the business, especially the commercial business at an increasingly fast rate. So it sounds arrogant to say you're a 901, but they're delivering behind that promise.

4:29Carol Massar:Got to give them props on some level. But having said that, I mean, one of the things that investors have been concerned about is that more than half of their revenues, you talk about the customer base, more than half of their revenues comes from the government. And some might say that's overexposure. How do you see it? Yeah, but that won't be for long, right? The commercial business is growing so much faster than the government. Mind you, the U.S. government business just grew 66 % year over year. It's just that the commercial grew a lot faster than that. So within a few quarters, the commercial business will be bigger than the government business in a good way because it's doubling every year now.

5:08and the government business is growing, quote unquote, just 66%. Just 66%. Can you explain some more of like, just translate for us a little bit? We were talking with Romain earlier and typically I would go to a press release to try to get information. But I don't understand what Alex Karp is saying here. He's the co-founder and CEO of Palantir. He says, quote, Palantir's rule of 40 score is now an incredible 127%. What does that mean? Oh, he's adding revenue growth with operating margin. And if you think about most companies, the term rule of 40 was coined as the tradeoff between revenue growth and profitability.

5:52And most software companies hover somewhere around that. If they're growing 10%, they have 30 % profitability, that's 40. If they're growing 30 % and have 10 % operating margins, that's 40. So that's the yardstick that the industry has created for itself. And this is the yardstick that Dr. Karp likes to measure because it shows how much farther ahead the Palantir is ahead of any software company. Again, the second highest company is probably half their rate. So they are growing faster than any software company at a higher margin than any software company. They are more profitable than even the largest software companies, Microsoft, Adobe, Oracle, Salesforce.

6:35they're more profitable than those companies and they're growing three or four times faster than those companies. So I think that's what Dr. Carp enjoys pointing out to everybody else.

6:47Carol Massar:Is this one quarter or is there enough there that says to you that commercial revenue growing 137 % year over year, that that is something that's a significant shift and something that we can assume will continue or that's what's got to be grilled, you know, with the C-suite on the call? Well, we think it'll continue, but realistically speaking, we thought 20 % would continue and then 30 % and then 40 % and then 50 % and then 60%. And here we are, they're growing 70%. So we think, you know, we'd expect that to continue, but it may actually even be higher next quarter. Again, this is when you deliver results at the level they deliver to their customers, customer acquisition becomes a no-brainer.

7:31because one CEO and CFO tell another CEO, CFO, you know what, we just handed the keys to Palantir and they made our business better. And that seems to be working really well right now. So it looks like they should be able to grow at least that fast for the rest of the year. Is there political risk long term with this company? This was seen last year as part of the Trump trade. And certainly the DNA of this company shares elements with this Trump administration, certain people moving back and forth, certain people in power, certainly. And no question that, you know, this this administration supports the work that Palantir is doing.

8:14What happens when or if this administration changes? That is a risk, because to your point, there's an ideological alignment. I would say that it's probably not about personalities because the personalities have changed a lot year to date in terms of who's involved in the administration. Mr. Musk is out of the administration, for instance. But the company, again, I talked about a very clear mission. They believe their mission is to help defend Western civilization. That resonates very well. That's very ideologically aligned with this administration. But to your point, we may have a different president three years from now who may have different ideology and may see Palantir as linked to this administration.

8:57And that would be a risk three years from now if there was to be a change in the U.S. government.

9:04Carol Massar:Hey, listen, one of the things, and forgive me, I'm going to spring this on you. You are head of technology research, so forgive me if this isn't, you know, one of the companies that you cover, but I'm sure you have some thoughts. He's a software guy. He is. we did get a story that broke across the Bloomberg that Elon does plan to merge SpaceX with XAI. That's according to people familiar with the matter. And this has been, you know, kind of hovering around, I feel like, late last week and then, of course, this morning. So I'm just curious. It's a deal that could encompass Elon's ambitions to dominate AI and SpaceX exploration.

9:41Carol Massar:Do you have any thoughts on this? I have a lot of thoughts on it. So we always looked at it as Elon Inc. Elon has different commercial entities right now, but a really unified set of principles and goals that he is pursuing. And at some points, it made more sense for him for Tesla to be public and for other companies not to be public. The capital demands of the XAI business are very substantial. Let's not forget, he needs to build data centers as fast as Google and Meta and Amazon and Microsoft are doing. And he doesn't have the cash flow that those companies have. So he needs more capital. SpaceX right now is a much better situation to raise capital.

10:26So is Tesla. I would think of the end game as having one Elon Inc. So XAI and SpaceX merging would actually lay the groundwork for him to merge that into Tesla as well. because, again, the goals are the same goals. We want to send Optimus robots to Mars so our Neuralinks can control them and we can do the searches on Grok. That's Elon's plan. Right now, it's several commercial entities, but long-term, he has the one vision.

10:58Carol Massar:Yeah. And it makes more sense for him to just fold that into one entity, the entity that can get him the capital to pursue those opportunities. Which really kind of fits into a conversation we had with Ross Gerber earlier. He had put out something on, of Gerber Kawasaki, owns these companies, the private Elon entities, as well as the public. But he said X was out of money. He just said this on X, by the way. Yeah, he said this on X. And he said, X was out of money, merged with XAI. XAI was out of money, merged with SpaceX. SpaceX out of money, merged with Tesla. When they're all out of money, and then it's like dot, dot, dot.

11:31Carol Massar:But it's interesting how you say that SpaceX, we constantly talk about the value in this company, right? And Tesla, increasingly, everyone's saying, well, the value will be in the future, whether it's robotics or autonomous driving and autonomous systems, if you will. And so how you're saying Tesla's where the value, excuse me, SpaceX is the value so you can raise money off of it and then eventually fold it all into one, into that Elon Musk. That's what this is, in your view. That's what it looks like to us. Again, for him, commercial entities are just a way to get to the goal. And he'll keep them as separate as long as that's the best way to pursue the goals.

12:12But right now, SpaceX is the most valuable property in the sense that there's nobody that does what they do. And there isn't going to be anybody that does what they do for decades. So that creates a tremendous amount of economic value that he can raise capital with. And on the Tesla side, the stock is still very well priced, considering, again, the car business. You just talked about this earlier. The car business is a declining business. Yes. We're done with that business. Now we're doing self-driving and we're doing robots. And again, it's the same thing. All this information that he's capturing through self-driving won't just make a great business, will also help Optimus robots function in the world because they'll have those billions and billions of hours of video to analyze in order to help those robots function in the real world.

13:03So, again, a business where he's at least multiple years ahead of anybody else, at least in the West, at least outside of China. So there's a capability to raise capital there. He's just going to go where he can raise capital to stay competitive in AI. Because again, that still feeds into Optimus robot functioning in the world because the Optimus robot will need the best AI model in order to do that. It's all one thing to him.

13:29Carol Massar:Gil, sit tight for a second. This is fascinating. And hopefully our Ed Ludlow has been listening as well, who covers Tesla and Elon closely. Gil, don't go anywhere. Ed Ludlow, of course, co-host of Bloomberg Tech on Bloomberg Television. And I hope you have been listening. I'm just curious, this story by you and Lauren, that Elon does plan to merge SpaceX with XAI, according to folks familiar. Get us up to speed on the latest. Yeah, so our understanding is two memos went out. One from Elon Musk to staff at SpaceX and I think at XAI as well. And it basically explains that the merger or combination is happening and that the rationale is, you know, virtual integration.

14:11This is something that's kind of been hiding in plain sight, right? And the three of us have discussed quite a lot in the last week. But the idea, you know, SpaceX provides the launch capacity and together the two companies design satellite form factor data centers, very focused on inference. And so, you know, the models that XAI is developing can be run in space. And, you know, maybe if we had time today or later in the month, we can talk about the technicalities of why space-based data centers are supposed to work. Then separately, Brett Johnson, who is the CFO of SpaceX, has sent a memo out explaining that the combined entity of SpaceX and XAI has this valuation of$1.25 trillion, which the math kind of maps, right?

15:01Because SpaceX's last valuation on the 10 was$800 billion and XAI's last on its primary was$230 billion. And the only thing to add to get you up to speed, I guess, is that my understanding from sources and throughout this whole process is that this IPO is still going in June. Ed, should we think about Tesla joining the likes of SpaceX and XAI? this is the hypothesis right that that in the in the end in the long run that that it becomes a conglomerate in elon inc what we reported at the end of last week was that there were two distinct scenarios being considered a combination between public tesla and private spacex and then a completely different and alternative scenario of spacex and xai and obviously this has moved quite quickly, SpaceX and XAI, you know, based on the reporting of the last 30 minutes, it's happened.

16:00It's done. My understanding, though, is that there are a lot of concerns, particularly from some of the bigger SpaceX investors on SpaceX combining with a company that's losing a billion dollars a month and has a very large pile of debt on its balance sheet, and that those investors saw the economics of the Tesla tie-up being much more sensible. But then, you know, the thing is, right, the unanswered question was, well, hold on, if SpaceX were to merge or reverse merge or whatever the final transaction would be with Tesla, then there wouldn't be an IPO, right? So, the whole point on the IPO is that, you know, even now this XAI combination's done, they're going to need tens of billions of dollars literally just to buy the GPUs.

16:53Because the GPUs that go into space data centers, as abstract as that sounds, are the same as those that go into a data center on Earth. And they're going to cost a lot of money.

17:01Carol Massar:So Gil, I'd love to sit tight for a second. Gil Laurie, I want to bring you back into this. Head of tech research and managing director over at DA Davison. So Gil, Ed made the point that SpaceX investors might not be so happy The XAI losing a billion dollars a month, pile of debt on its balance sheet. So how do you see this? Do you still see a SpaceX IPO or know that they ultimately just fold Tesla in? It changes the dynamics of what this company is, too, or fundamentals. Yeah, it could be a matter of sequencing. I want to add a couple of things here. Elon Musk controls these entities, and he set the price.

17:42So that valuation we just talked about for XAI is a price that he set. when he merged X and XAI. The SpaceX investors may feel like that's too high of a valuation, especially considering they're losing a billion dollars a month, and therefore they'd be getting the raw end of the deal. These are things Mr. Musk controls. He can give a better deal to SpaceX shareholders, especially if the goal is ultimately to IPO this, which is very still, it is still very much possible, is to IPO the joint entity. He can just adjust the relative valuations. Again, he's in control. He can adjust the relative valuations to make it so SpaceX shareholders don't feel quite as bad about it, and then position the overall financials in a way that would still make for an attractive IPO.

18:33And then again, he can still merge two public entities together. He's done that in the past too. Remember, there was a SolarCity before there was Tesla and SolarCity. Yeah. Right. There was a SolarCity as an independent family affair also. He merged those two. Yeah. So it's just one path towards colonizing Mars. Gil, good place to end it on. Carol, how's that for a guy who doesn't cover Tesla? Oh my God. That's pretty awesome. Gil Luria. So great. Managing Director and Head of Technology Research at DA Davison and a company joining us from Portland. Gil, thanks a lot. He's a software guy, but obviously watching what's happening over at Elon Inc.

19:10and XAI closely.

19:11Carol Massar:Ed Ludlow still with us. Ed, come on in on what you just heard and any other thoughts that you want to share with the Bloomberg audience. Yeah. I mean, again, what we're reporting is our best understanding from sources and the comms that we've seen, right? And it is that SpaceX and XAI are combining and that the valuation is$1.25 trillion of that private company. And my understanding and Lauren's understanding and those other reporters that have been on this for the last few days is we're still headed towards a significant IPO at the midpoint or later in this year. The one thing I would say is, you know, Max Chaskin and I wrote about this in some detail in the August edition.

19:55August seems a long time ago, but the August edition of Business Week. You know, Musk knows that the combination of all of his companies is going to face a serious hurdle, regulatory hurdle you know on antitrust and review but at the end of the day you know they the mission statements of those companies are now much more closely aligned and what he calls amazing abundance um but yeah you know i don't know how much of this is a surprise yeah what

20:28Carol Massar:maybe this is a stupid question but i'll just go there go there carol so what why on antitrust What is the concern? Well, the main thing, I suppose, is that they occupy the entirety of one single market, which would be data centers in space, for example. I think one thing we're going to, again, I go back to some of the other concern, that this is not sort of a plan that is universally adored by all the people that are invested in Elon Musk's various companies. And the one thing I would say is that Elon Musk does not hold the majority of SpaceX, financially speaking, but he does have completely outsized voting power due to the multi-class share structure.

21:14And so in the first instance, you know, this is this is being done. But I think it's just a very simple term that having every single branch of the Elon Musk universe under one holding company is going to be difficult to do. And generally speaking, you know, there's an acknowledgement in the market that that's the case. Hey, Ed, one thing that we've been hearing over and over again since last week is that Tesla's car business is in decline. And now there's this view, hey, don't look at the cars. Don't look at the number of cars that we're selling. Look at the areas of growth for our business. Do you agree that that's the right area that people should look to?

21:51Well, that was, yeah, it was certainly the reaction of the market from Tesla's earnings last week, right? You know, the car business, we knew about the sort of deliveries picture because they come out ahead of earnings. And investors largely looked past that to this next phase that Elon Musk was talking about. The main issue is that, you know, tied to Elon Musk's compensation package is still the mandatory goal of 20 million EVs to consumers a year.

22:24Carol Massar:Oh, OK. Yeah. So he still has to sell them. It's not like he just stopped doing it. But they can be robo-taxies. So it's about... Well, yes. Was there a couple metrics to it, like market value and so on and so forth? Like, does he have to get all of these metrics in order to get that pay package? I was thinking about that too. Yeah. It's why, even in the context of what we reported about the idea of a Tesla and SpaceX combination, the compensation package is worth studying. Those goals that the board sets for Elon Musk aren't either or. It's not this one, but not this one. It's all of them. You know, they're all mandatory and correspond to one another.

23:01So, you know, Tim is right that RoboTaxi is a part of it. One of the goals was to build the RoboTaxi fleet to a certain size. The other was to hit a certain number of subscriptions for full self-driving. But still, it's the requirement to sell 20 million consumer EVs. And so, you know, what we learned about through the capital expenditures commitment that Tesla has It's just where it's emphasizing. And clearly, you know, the consumer car is not their biggest point of emphasis right now going forward.

23:32Carol Massar:We know you're not feeling well. We so appreciate it. You sound good. Yeah, we are so appreciative of getting your voice on this and all of the reporting that you've been doing, even when you're not feeling well. Ed Ludlow, thank you. Thank you. Feel better. They told us to expect change. They warned us about the transition. But honestly, they forgot the best part. This is the chapter where we finally focus on us. LifeMD delivers expert menopause and midlife care right from your home. From hormone health to holistic wellness, LifeMD helps you feel your best for the best years of your life. LifeMD, it's just getting good.

24:08Carol Massar:Visit LifeMD.com slash goodlife. Hello, hello. I'm Malcolm Gladwell, host of the podcast Smart Talks with IBM. I recently sat down with IBM's chairman and CEO, Arvind Krishna, and I asked him, how can companies use AI to its fullest potential to create smarter business? My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side. For example? If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind. If anybody is not using AI to make their developers who write software 30 % more productive today, with the goal of being 70 % more productive.