Can Elon Musk Form a Super-Company?

0:04Is Elon Musk going to make SpaceX, Tesla and XAI a super company? Motley Fool Money starts now.

0:25Everybody needs money. That's why they call it money. The best things in life are free. But you can give them to the birds and bees. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I'm Travis Hoyam, joined by Lou Whiteman and Emily Flippen. Guys, there's a lot going on in the market. We're going to get to earnings, and especially tech earnings, which really kicked off this week. But I want to start with the discussion around SpaceX and XAI potentially merging ahead of SpaceX's likely IPO in 2026. Lou, this is something that we've seen before. Elon Musk merged SolarCity with Tesla.

1:07You could argue that that was probably not a great merger, although it did work out ultimately for shareholders in the long run. But the solar business kind of didn't become what we thought it would be. This looks a little bit similar, but where does your head go when you see another one of these huge Elon Musk companies potentially merging with each other? First of all, to be fair, if I squint, I can sort of see the current energy business in Tesla, which is the only part that's really growing, coming out of the solar city. So, I guess maybe we give them credit for that in hindsight. But yeah, I know what you mean.

1:38When I look at this, I look at it in the context of these reports that OpenAI and Anthropic are rushing to an IPO. There's a beauty pageant going on right now, Travis. Everybody, all of these huge capital-intensive companies want to tap equity markets at the same time. Trillions of dollars, that's a lot of capacity. So, they're all trying to look as pretty as possible, as attractive as possible relative to the competition. If you combine SpaceX with XAI and all the potential of AI, I think, arguably, that is something that will capture the imaginations and make it easier to sell. Backdrop here is that these more established tech giants, maybe we'll talk about them later, Alphabet, Amazon, they have revenue.

2:24They are meta. They are fueling their AI spend with their revenue. We joked about this last fall, but for these guys that don't have that, the best time to have gone public was yesterday. And it always has been. They need to do this as soon as possible. to the extent that you can combine a whole bunch of things that have captured investor intention or captured imagination and put them into one package. I think that helps sell the IPO. And I think that's what really is at the heart of this. Emily, is there a story at least that all of these Elon Musk related companies kind of talk to each other and work together?

3:06So they might as well just kind of be one massive conglomerate. Well, if you're Elon Musk, that's certainly the narrative you're trying to sell. And there really is a positive way to view the investments that Musk and team are making between these companies, right? Which is that SpaceX, XAI, and Tesla, which, by the way, just invested another two-ish billion dollars in XAI, kind of worked together narratively to create some sort of... I'm sure that was an arm's length transaction. Yeah, I'm sure it was an arm's length. Of course, aren't they all between Musk? But no, there is some sort of flywheel, right?

3:36between the hardware, the distribution, the connectivity, the interference, whatever it may be between the businesses that feeds demand for one another. But I think more realistically, in my opinion, this is really just going back to what business is funding another. And you could argue that it's a little bit of a money grab ahead of an IPO to justify its valuation. The more opaque a narrative is for, say, SpaceX, if there is a merger between XAI and SpaceX going into SpaceX's IPO, the more optionality that's built into the business, the harder it is to value that company. So maybe the more likely it is that they are able to generate revenue.

4:09But realistically speaking, I don't actually see any actual mergers happening here. Because to your point, Travis, those typically get a lot of recourse from investors. Those typically need to be arm's length transactions. They have a lot of third parties that start to get involved. Whereas what we're seeing right now is just kind of an exchange of resources and capital between the businesses. That is a lot easier to do if you're somebody like Elon Musk who has a financial interest in all these companies, it's a lot easier to just move money and resources around as they're doing right now, using Tesla almost as a cash cow to some extent to help fund these other companies in the interim.

4:45And that really delays the need for an IPO. So while I agree with Lou's take that the IPO for whether it be OpenAI or SpaceX or others, maybe the best time to do it was yesterday because the market valuations right now obviously are still relatively strong, at the same time, they have a lot of access to capital. There's a lot of people, including Tesla shareholders to some extent, that are willing to help fund operations in the interim. The cash crunch hasn't hit for these companies yet. So, a couple points here. For one, I think if you're Elon and you would like them to be together, like kind of talk with the SolarCity, the best time to do that is pre-IPO, right?

5:21You can kind of control it right now. So, I think if there is hopes that they're all together, you might as well do it ahead of things. And also, as far as what investors invest in, they have never invested in Tesla based on just the current car lineup. It has always been basically an investment in Elon's ability to do great things. So, to some extent, it almost doesn't matter what the product is or what the collection of assets is. It is the idea that you give Elon the resources, he will create value. So at the end of the day, maybe, you know, I'm talking against this, but maybe you don't need this shiny collection, but maybe putting them all together and just saying, Elon, here's a pile of money and a lot of resources.

6:05What can you do with it? I think that is sort of what the market wants to buy. So, you know, give it to them. Emily, one of the things that we're seeing in the backlog or the remaining performance obligations for a lot of these companies is that there's a ton of demand for AI resources. But at the same time, most of these private companies are not yet profitable. I think XAI falls into that. They own X, which is the old Twitter. Are they at a point where they need to get to public markets? And I guess the argument would be the same with SpaceX. They both kind of need to get to public markets to be able to access that capital.

6:43And my question for you is, if you're an investor, are you interested in those IPOs where the story is, hey, we're going to make something huge in the future, but we are burning a ton of money. And right now, there's not really a sustainable business model that just seems like there's so many of these companies that are going to go public. And can they all survive? That's a huge question that we probably have to ask ourselves in 2026. I actually really don't think so. I think it's actually funny to conceptually think about the idea that a company needs to go public in order to access capital. I mean, when you think about the size of SpaceX or XAI, these are huge huge, huge companies, OpenAI, you name it.

7:21These are companies, the private enterprises that have managed to fund themselves with private capital for a very long time, an unusually long time, especially given the size of their companies. And historically, we saw companies go public at much smaller valuations because they needed access to capital. Private markets have been willing to help fund these companies and billionaires to some extent, and even public companies. Like I said, Tesla is kind of a funding vehicle for Musk's other cash-losing projects, given how much capital the business has access to. I mean, these are all ways that help keep private companies private.

7:55So it's cachet that you get when you go public. And at some extent, I expect that the private market funding does run out. But that's why these companies are not running to the IPO market. That's why when we talk about a SpaceX IPO, we heard about this in 2025. We're not talking about 2026 for a potential IPO. We're probably looking at 2027 at the earliest. It is not a desperate attempt. The private market funding year has not run out. If it does, I promise you these companies are going public tomorrow. Lou, what does all of this mean for Tesla? Because that is the publicly traded company today.

8:27So, here is at least just a warning or something I think Tesla shareholders should consider. As I said before, a lot of the investment in Tesla is an investment in Elon. It's not so much an investment in, I want to be in an automaker. If there are two publicly traded stocks that are both you can invest in Elon, one of them is a car and energy company and one is a space and AI company, you can see the imagination pulling away from Tesla or at the very least in all the stock prices is the number of buyers and the number of sellers. If there's more options, less demand for one stock, I think it could cause some issue to Tesla's valuation.

9:12I mean, I'm not going to short it based on this. As Emily said, we're still a long way away. But I am curious of a world where people have options if they want to bet on Elon, how much of that, like 100 % of that going to Tesla versus just some percentage of that, what that would do to Tesla shares. If nothing else, I would love to see what the financials look like for the SpaceX XAI business, because there's a lot going on under the hood there. Obviously, a lot of mindshare, but are they burning a ton of cash? Where's the revenue coming from? Those are disclosures I think would be at least very interesting for us to cover.

9:45When we come back, we are going to talk about tech earnings. You're listening to Motley Fool Money.

9:56Welcome back to Motley Fool Money. Earnings season has begun, especially in big tech. Meta and Microsoft are two of the big companies that reported this week. And they're heading in opposite directions, Emily. I think this was fascinating. What did you take from Meta and Microsoft? Because investors liked what they saw from Meta, not so much from Microsoft. In the case of the different reactions, I think that has to do with different levels of expectations for both of these companies heading into earnings. But to be honest, I really can't rationalize the market's reaction, especially to things like CapEx spend.

10:26I want to shake the market. If the market was a living entity and say, what did you want? Did you want CapEx or did you want no CapEx? Because I promise you, if Microsoft or any other tech giant had come out and said, hey, we're cutting expenditures, that would have sent the market into a panic. I said on the show before that I think big tech earnings are much more of a leading indicator as to whether or not we're in a quote AI bubble than NVIDIA earnings, for instance, because they're the ones actually building out and buying the chips that are driving a lot of this demand. So, the fact that Microsoft is still planning on spending so heavily here is a conceptually good sign that the people at the top still see value in return on investment and their AI-related initiatives, right?

11:08That's what's been propping up the market. So, conceptually, if you are Mr. Market, I'm shaking you metaphorically right now, what did you want? You wanted this. But I understand the market's reaction to Microsoft's in terms of the share price because longer term, the analysts that I talked to here at our company, they always have the question about when you spend this much money on CapEx and you're a software company, stop looking like a software company. You start looking more like an industrial company. Yeah, they're becoming utilities. It's fascinating. Yeah. And when we're cheering this much money, then we're going to start valuing you respectively.

11:43You don't generate as much cashflow. The free cashflow there is going to be muted. So the question then becomes how long, how protracted is this cap-back cycle. It has to stop at some point, but I do kind of feel like it's a catch-22 because the moment the spending stops, the market rally does too. Emily, do you think that the market is looking at meta a little bit differently because there is a little bit more of a direct line to, okay, you're spending this money on AI, but we're seeing growth in engagement. You have growth in the amount that people are using these apps, but there's not only that.

12:17It's they're more engaged in ads, clicking on ads more and you're getting more money out of each one of those ads. So there's kind of a direct tie to where the financial payoff is. We could fudge whether that is a good return on investment in a traditional sense or not, but you can kind of see that tie there. Whereas Microsoft, it's a little bit fuzzier. Yeah. You've hit the nail on the head there, which is to say virtually a hundred percent of Meta's revenue comes from ads. So when you talk about Meta investing in AI or CapEx or whatever it may be, the only thing they care about is driving engagement to keep ad dollars on their platform.

12:53They care about advertisers, they care about spending in order to get advertisers and spending on their platforms. They need your eyes on their platforms as well. So that is a comparatively different, I shouldn't say lower bar, I wanted to say lower. It's a different bar to hurdle as opposed to Microsoft, which clearly has a lot more balls to juggle. A lot more optionality, I think, in their court as well. They're a little less of a single trick pony here. But in the case of Meta, The best thing about this company is because they do such a great job maintaining engagement, we've seen Zuckerberg over the course of the past decade or so spend billions and billions of dollars, in my opinion, really ineffectively trying to make the metaverse a reality.

13:29The metaverse, I think, is an unadulterated failure as it exists today. And that hasn't stopped the full speed ahead train that is engagement on Meta's platform. I mean, Instagram has been incredible for them. The transition to Reels and ad spending on that platform, absolutely incredible. So Meta has a lot of room to run. They can just throw stuff at the wall, the spending, and just see what sticks because they have this platform that Jill still generates such incredible levels of engagement. Yeah, that's the thing. It's like, you know, Meta has built the perfect cash printing machine. And until that goes wrong, people are just going to, you know, just go with it.

14:04I mean, with Zuck, you know what you're getting. The nice thing about the metaverse is, is Zuck told you who he was there. I am going to, I make a lot of money and I'm going to make big bets with it. So, yeah, I think, to some extent, Zuck's shareholder base isn't scared of CapEx. They've proven that through the years. As far as what's going on here, and Emily's Mr. Market, I think it's moved from the, this used to be just adrenaline to almost a fear factor contestant, where there is a mix of adrenaline and fear. All right? And they don't know what to think about AI. So at one point, I think the reason Microsoft is down is that like 45 % of their remaining performance obligations on the commercial side is tied to OpenAI.

14:47And we're getting nervous about OpenAI. I was a little bit surprised that wasn't higher, though. I mean, that's kind of what you want. No, that was mind-blowing to me. 40 %? Yeah. And again, so we're scared of OpenAI, but yet Amazon jumping in with OpenAI causes Amazon to go up. I think in general, we're at this point where we are still excited about the potential of AI, but we're getting nervous about all this spending. So collectively as a market, we are just, you know, we are of many different minds. There's just this anxious fear, but I don't want to miss out. Like the FOMO hasn't gone away, but the kind of realities of the challenges are creeping in.

15:25So I think it's just chaos. Yes, I had quarter to quarter. I just think it's getting harder and harder to read anything definitive out of this. It's just we don't know what we want from these companies right now, like Emily was saying. Emily, I think you'll love this stat. I heard this morning that Meta is going to spend more on CapEx in 2026 than they have lost in Reality Labs in the entire history of Reality Labs. Has Mark Zuckerberg earned the right to say? because one of the things from the conference call was, you know what, hey, this ROI from ads is going great, but we're going to build this other stuff that we're not going to tell you exactly what it is yet.

16:04You got to just kind of trust me. And when we're talking about$135 billion worth of CapEx spend, there is a lot of, hey, you got to just trust Zuckerberg because he supposedly knows what's going on. I hate to come in hot with the opinions here, but it is genuinely how I feel. I think Meta has done well, not because of Zuckerberg and his capital allocation decisions or his innovation, but in spite of it. I think you probably could have taken anybody and put them at the helm of Meta over the course of the past 10 years or so. And as long as they didn't do, actually, I wouldn't say, I was going to say as long as they didn't do anything too crazy, but Zuckerberg did do something a little crazy with the metaverse.

16:42Let's not forget the rebranding. I genuinely think the company was poised to succeed simply based off the platforms that they owned. And as long as they didn't mess up the flywheel machine that was Facebook and Instagram, they were going to be fine. And I don't think I give Zuckerberg or his leadership team very much, if any, benefit of the doubt when it comes to capital allocation spending, because I have seen effectively zero evidence to support the idea that they know how to spend capital effectively. So no, I mean, I think the company may perform well, to be very clear. I think meta shareholders should not be overly worried, but I don't think it's because leadership is so incredible or smart or knows how to spend money.

17:23So it's possible that he will go down as the greatest one hit wonder in the world, right? You know, I mean, he had a teased him as a metaphor. Zuckerberg came up with something. Well, maybe the greatest acquirer too, because you do have the acquired Instagram and they were acquired WhatsApp. They, those were really controversial deals at the time and they've both been phenomenal successes. Right. Yeah. But, But look, the other side, as far as the comparison, remember that free cash flow year-over-year is up 570 % over the last decade. So, there's arguably more money to spend, the comparisons to Meta.

17:56But look, if nothing else, again, this is what you get with Meta. We didn't have time to talk about it, but Apple, great quarter, but it was just kind of blah, they're doing the same thing, we don't know from here. And so, the stock is basically flat afterwards. Compare that to, you know, Meta. If nothing else, again, I think shareholders know what they're getting into here with Meta. At least, look, we make a lot of money. We're going to make big bets. If you want to take this joyride, come along. I think Zuck has the shareholder base that he needs. And, you know, it's an adventure. We will see where this story leads us.

18:35I'm excited to see what sort of artificial intelligence products they introduce in 2026. Because they're spending a lot of money. They've acquired a lot of talent, a lot of people who have built a lot of really interesting things. So there's hopefully something there, but we're not seeing under the hood quite yet. When we come back, we're going to go dumpster diving in SaaS stocks. You're listening to Motley Fool Money. I wanted to get some new girlfriends. So I went and bought a Mercedes Benz. A waste of money. 8 ,000 bucks.

19:17Welcome back to Motley Fool Money. One of the big trends in 2026 is that SaaS stocks and SaaS related stocks have been absolutely taking it on the chin. So we're going to do a little dumpster diving in the SaaS market, if you will. And I want Lou and Emily to kind of draft some SaaS stocks that they're interested in and give us an idea. All of these stocks that we're going to talk about here are down at least 30%. So to just give you an idea, some of the names, the Trade Desk, Shift 4, Netflix, Salesforce, Adobe, there's a lot of companies that are down really big over the last few months. Lou, what's on the top of your list?

19:55What would be your first pick if you're dumpster diving in SaaS stocks today? So I got to say, I think the fear about software stocks is legitimate. So, I think there's something there, which kind of makes me, I don't like a lot of them on the list you gave me. But on the list you gave me, Netflix is on there. Not a SaaS, but subscription. Netflix, I get why it's down. I think the company is telling you that this isn't the Netflix of old. I think this is a deal they have to do. I think it could be turbulent for the next few years. But I'm not going to bet against the best management team in the industry to get it right over time.

20:29So as a long-term focused investor, I'll take Netflix at these valuations and for the long haul. And I think it works out. Do you think this is one of these opportunities we're going to look back on? I just looking at the drawdowns over the last 25 years or so in 2004, 2005, down about 75%. In 2012, that was, was that the quickster days? Stock was actually down over 80%. Are we going to look back at this time as, you know what, the market was kind of overreacting and this is when you want to be aggressive on a company like Netflix? Kind of. I think the difference is they are a more mature company now.

21:08So maybe we shouldn't expect it to do like the insane, fabulous appreciation that it did from there. But it's a new world for Netflix. I still think that they are a best of breed in their category. And that's kind of what I'm looking for. So yeah, I think this is an opportunity. It might not be the same opportunity it was a decade ago. Emily, what are you picking? I think Netflix is a good draft. If I can't draft Netflix, there is one that I think is maybe overblown in terms of pessimism. And that's actually the trade desk. And that's probably raising a bit of eyebrows because the trade desk has had its fair share of headwinds.

21:48Their co-kai launch was a bit of a failure, you could argue. And they undid that. Am I remembering that correctly? It was unclear to me exactly. I think they're kind of going back to the drawing board is maybe how I would describe it. And that's fair because they lost a lot of ground to competitors in the ad tech world, both in terms of walled garden, as well as other independent competitors that have been encroaching upon their territory. And then at the same time, it seems that CEO Jeff Green maybe is maybe not handling it the same way I would handle it is how I would phrase that. Obviously, I'm not there behind the scenes, but the trade desk got a relatively recent CFO who, over the course of the past week, was actually terminated from the company.

22:31It's not exactly clear why. There wasn't a lot of language provided. The CFO is going to be staying on the board, I believe, through the remainder of his term. But it's possible that that has to do with disagreements in the management team. And this is a company that is run effectively wholly by Jeff Green, who owns the majority of the voting stake in the business. But despite all these headwinds, here's what I'll say. A rising tide lifts all boats. And we're heading into 2026, or we're into 2026. This is a midterm year. Typically, it's pretty good for ad spending. The Trade Desk is one of many companies that is well-positioned to manage the ad tech markets.

23:07With the rising industry, even if they don't have their ad tech completely figured out this year, which I don't fully expect that they will, especially given their leadership turnover, I actually think the Trade Desk, with these lowered expectations, is maybe poised for our performance. The Trade Desk's compound annual growth rate over the past decade is 39%, and the stock is down 78%. That just seems crazy. It seems like the market is pricing this as if there's major disruption. Is that sort of the way that it seems like the market is thinking right now, Emily? It certainly is. And that's because the Trade Desk was effectively the only game in town for a long time.

23:42And then they realized that while they were talking down the presence of walled gardens and how great it was to be the independent partner, for demand-side platforms. And they realize, hey, actually, maybe there is competition out there and they need to be better about their partnerships and showing how they have, I guess, in terms of the market share here, in comparison to the companies like Amazon, who is launching their own ad tech solution. So competition is substantially different today than it was, I would say, a decade ago, but even just a year ago or two years ago. All right, Lou, what is the next stock on this list of dumpster diving SaaS stocks that you're interested in?