SpaceX’s $1.25 Trillion AI Bet

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1:51Today's number? 3.5 million. That's how many Epstein-Files were released by the Department of Justice last week. Mentioned in the files was Elon Musk, who apparently did not go to the island, but he did try before being politely rejected. We're not sure what's worse. Money market's mad. If money is evil, then that building is hell. The show goes on! The folks in there are questions so soon! Welcome to Prof. G Markets. I'm Ed Elson. It is February 4th. Let's check in on yesterday's market vitals. The major indices declined amid a broad tech sell-off. Software companies weighed down the market after Anthropic released an automation tool for legal work.

2:40The tech drawdown hit Bitcoin as well, dragging it to its lowest level since November 2024. Meanwhile, Disney shares slid again after the company named Josh DeMauro, chairman of the Experiences division, as its next CEO. By the way, Rich Greenfield predicted that on our episode yesterday. and Netflix shares fell as the Senate antitrust hearing on the Warner Brothers deal kicked off. A couple of stocks bucked the downward trend. Walmart rose as much as 3 % and joined the$1 trillion market cap club and Palantir gained more than 6 % after reporting record revenues and profits for the past quarter.

3:17Outside of the stock market, gold and silver paired some of their losses And finally, oil rose after the US shot down an Iranian drone headed towards an aircraft carrier in the Arabian Sea. Okay, what else is happening? Elon Musk's empire is consolidating. SpaceX has acquired XAI, creating a combined entity worth$1.25 trillion. That makes it the most valuable private company in history. Musk is calling it, quote, the most ambitious, vertically integrated innovation engine on and off Earth. And the logic behind the deal is bold. It is a bet on space-based data centers, which Musk believes are, quote, obviously the only way to scale AI.

4:05The All Stock deal comes just a week after Musk announced that SpaceX will go public later this year. OK, here to discuss the deal. We are speaking with one of the reporters who actually broke this story, Ed Ludlow, co-host of Bloomberg Technology on Bloomberg Television. Ed, thank you for joining us on Profit Your Markets. Yeah, thank you for having me. And big story. Big story. So I guess just tell us the basics. You were the one who broke this. SpaceX and XAI merging together. What do we know so far? Yeah, it's an all stock transaction that values the kind of entire entity at$1.25 trillion.

4:46The SpaceX bit$1 trillion. The XAI bit$250 billion. But there's like some structural things that are important, which is the XAI basically operates as a subsidiary of SpaceX, which is important because SpaceX is subject to ITAR rules, right? Rules that govern the use of technology and defense applications. And so, like, my understanding and our understanding and our reporting is that, you know, even though they're now combined, XAI kind of continues to operate independently as its own company. How does this change things for the IPO? Because obviously SpaceX is going to be the biggest IPO of the year, one of the biggest of all time.

5:24Does this change things there? Yeah. Isn't that the$1.5 trillion or more question? Right. Our reporting and our understanding is that the work continues for SpaceX and now the combined entity to do an IPO. In the summer, we had reported it would be at the midpoint of this year. And while out there from the sell side, from lots of people that follow these companies closely, there are still questions about whether it happens. the ultimate rationale behind this right is uh data centers in space and at the time that we broke the story on why spacex would go public um and and its motivations for needing to raise tens of billions of dollars it was quite simple that there is an ambition in place for for space-based data center infrastructure but somebody's got to buy the gpus right that's that's the kind of fixed cost.

6:21And based on our reporting in the days around this, all of that is still holding true. So this data centers in space thing, which, yes, that is what they've said. He wrote, the idea is space-based AI. That's the only way to scale. So could you just break down what that is? That is literally, let's take these data centers that exist on the ground, and instead of having them on the ground, we're going to have them in orbit in space because there's not enough space in the ground? I mean, why do we need to put data centers in space? To Elon Musk's mind, literally, you know, pardon the pun, there's more space in space.

7:01The simple way that Musk explains it is that right now, the limiting factor for scaling AI on Earth is energy, right? You know, there's a great burden on grids across North America and other countries and other jurisdictions. Water consumption is an issue, impact on communities, and literal space to build the data centers. If you put a data center in the form of a satellite and put it into orbit, the energy question is solved by solar to the mind of those advocating for this. You have to handle cooling and space as a vacuum and to the mind of the engineers working on it, that's easily solved. And you have plenty of real estate, let's call it, in space to build on.

7:44And that is the vision that Elon Musk is pitching here. um it's it's a horrible term when you're when you're a financial news journalist but but what we're talking about basically is vertical integration deeper vertical integration right starship provides the rocket that carries these satellites into orbit and deploys them they are data centers to all intents and purposes xai has trained the models but also those models need to be run inference which you guys know that that is all outlined in in the public comms that SpaceX and XAI put out there, but also the internal comms that we've reported on around this too.

8:18As I am somewhat of a Elon Musk skeptic, and as the Musk skeptic, my view when I see this is he's saying that the idea is that we got to put these data centers in space. How do we do it? Don't ask too many questions. The idea is we'll get there. We'll figure it out. At the same time, XAI is a company that is competing with the likes of OpenAI and Anthropic, these companies that are burning through billions of dollars in cash and are having to raise billions of dollars in cash. And XAI is itself burning, I believe, a billion dollars a month. And so when I see this, my initial reaction is, this is the saving grace of XAI.

9:01If things aren't looking difficult over at the AI company, well then why not just roll it up into the bigger company, which perhaps has more cash to play with to invest in the AI models and training? Is that too cynical? What do you think of that perspective? There are lots of investors and people in the markets that are skeptical about the financial rationale for this arrangement, combining private XAI with private SpaceX. And what we had also reported last week is that Elon Musk had looked at two distinct scenarios. One scenario involved SpaceX combining with Tesla, which is, of course, a public company.

9:43Bloomberg has reported that XAI is burning a billion dollars of cash per month. And on a quarter basis, you know, you can put that in aggregate. It also has a large debt burden, which is now on the balance sheet of SpaceX, technically. Those that would push back against those concerns would say, well, we also learned quite a bit about SpaceX's financials. Revenue is growing with Starlink now a majority contributor as opposed to launch being a majority contributor. and on an EBIT basis at least it is profitable and so they're not concerned about SpaceX needing to service the XAI debt or account for the losses at the XAI unit but again you know the public commentary from SpaceX and from Musk is that this is about deep vertical integration it makes the use of the talents and resources of both companies to the maximum effect which is AI development whether that's here on earth or up in space.

10:38So Ed, I know you've been looking at this for a long time, reporting on it, observing what's happening. And you know, your job is to be objective on both sides. I would love to know what you think the real motivation is, because it seems like there are two things at odds here. There's the financial picture, you bring up the amount of cash they're burning, you bring up the debt picture at XAI, which is, you know, a question. And then there's the deep vertical integration pitch, which is coming from SpaceX. And they're probably saying, no, it's not about the financials. It's because there are synergies here on the business side.

11:11What do you think? What is the true strongest primary motivator for Elon Musk to merge these two things together? Yeah. And none of this is that big a surprise. It's kind of consistent with what we've called Elon Inc., right? Elon Musk has many ventures. They've always had historically close engineering and financial ties, right? There have been engineers that have worked on materials at Tesla and worked at SpaceX. You know, some of the results of SpaceX's more recent success, like the heat shielding on Starship, you know, a lot of Tesla engineers touch those hands. A lot of Tesla engineers were the reason that XAI could build its data centers in Tennessee so quickly.

11:56You know, this kind of intercompany cooperation is not new. The financial part is also not that new right xai has been a buyer of tesla's energy products from tesla's earnings recently the company disclosed a two billion dollar equity investment in xai it's all kind of linked last august we we did this as the cover of business suite magazine you know that that you know six months into the the trump administration's term in office um what was it that elon musk was trying to get out of being in and around the white house working with doge it was that a lot of the priorities that he had for his different companies were kind of aligned all around ai you know and and having proximity to that administration allowed him to try and influence things that would help those those priorities but yeah it is ai at the end of the day tesla is hard pivoted away from cars it now needs you know to develop the software part of ai for autonomous driving and the Optimus humanoid robot program.

12:58XAI, per the regulatory filing in the week, it's not just a financial investment that Tesla's made. They have a framework to now share and work on the technology. So fast forward, the future is that all of these companies kind of work in parallel. What will the space data centers actually be doing? Inference in space, right running inference on optimus or running inference on on models that are underpinning something else be it the the robo taxi network it's kind of been hiding in plain sight a little bit do you think ultimately they all merge with tesla i mean the way you describe it elon inc it's a good point they're all kind of collaborating it seems as though maybe the ultimate goal is yeah just roll it all up into one company how likely do you think that is yeah our reporting is still that like this SpaceX XAI combined entity is going to do an IPO later this year.

13:51But actually loads and loads of people's immediate reaction to the news was, okay, Tesla must be next, you know, fold Tesla in in some way. People just think that that is the logical step to make. When we did the August edition of Business Week, you know, it was well reported. And in conversation with all of these sources in close proximity to the companies and Elon Musk, there is a perception, a realization that if you took these massive companies and tried to fold them into one conglomerate in any environment, that would be tricky. Regulators would look at it for one reason or another. The mechanics of it would be difficult.

14:31And again, I go back just to the reporting about the two options that we believe were looked at, SpaceX plus Tesla or SpaceX plus XAI. And in the first instance, they went with SpaceX plus XAI, But there were a body of SpaceX investors, you know, with a meaningful footprint on the cap table that looked at it. And to them, the Tesla combination made a lot more sense than the XAI one did, not just because of the sort of financial health of such a transaction, but because what they were working on, you know, at scale, manufacturing, vertical integration of those more analogous industries. So to those investors, it was completely obvious.

15:10Really fascinating. Ed Ludlow, co-host of Bloomberg Technology on Bloomberg Television. Ed, thank you very much for joining us. Thank you for having me. After the break, Oracle takes a plunge. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.

15:41A lot of us have spent a lot of the last week watching videos of what's happening on the streets of Minneapolis and understanding what it is that we're seeing, but also what's real and what isn't and what's AI and who is taking these videos and how we're supposed to understand the source feels harder than ever. So this week on The Verge Cast, we're talking about what's happening in Minneapolis, how information moves in an AI age, and what it means to make sense of it all. All that, plus what's new with the new TikTok, why everything feels like it's falling apart on TikTok, and more on The Verge Cast, wherever you get podcasts.

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17:34We're back with Prof G Markets. Oracle has set investors on edge. On Sunday night, the company announced plans to raise up to$50 billion to fund its cloud infrastructure. It launched the first part of that financing on Monday with a$25 billion bond sale that actually drew record demand. But enthusiasm quickly turned to concern as questions resurfaced about a related matter, specifically NVIDIA's investment in OpenAI. As a reminder, back in September, NVIDIA announced it planned to invest up to$100 billion in OpenAI. However, CEO Jensen Huang recently clarified that that figure was, quote, never a commitment.

18:14And it appears that the investment has stalled. That poses a serious risk for Oracle, as roughly half of its$625 billion in future revenues are made up of spending commitments from OpenAI. So the question is now louder than ever. Will OpenAI be able to pay up? In total, Oracle stock has fallen roughly 10 % since Sunday night. Here to walk us through the situation at Oracle, we're speaking with Gil Luria, head of technology research at DA Davidson. Gil, thank you for joining us. Thanks for having me. So there are a lot of moving parts here. Oracle says that they're going to raise $50 billion worth of debt and equity.

19:01They go out and they raise the debt successfully, but the stock is sliding down around 10 % in the past couple of days, and it seems to all have to do with OpenAI. Can you just give us the play-by-play? What on earth is going on with Oracle right now? You're exactly right. There's just a lot of moving pieces, especially the last couple of days. So let's just start with the fact that all of software is down a lot. and more than all of Oracle's cash flow comes from its software business. Let's not forget that. Oracle is mostly, almost entirely, a company that sells database software, enterprise resource planning software.

19:45That's where they get more than all their profits. And right now, the market feels like software is just a bad idea in general. So that's been happening at once. And then you have the fact that they're raising capital and then they said that this is all the capital they're going to need this year. That's good. The fact that we're able to do at least part of the debt, we're not sure they're done, but at least part of the debt, that's good. Then you start getting into some of the other challenges. One is, that's it for this year, but for them to be able to build the capacity that they promised OpenAI, they're going to have to do this again next year and probably again the year after that.

20:24Meaning we raise another$50 billion next year and the year after that. What's happened is if you look closely at this debt issuance, it was not cheap. The rating agencies gave their secure debt, the senior secure debt, a triple B minus rating, which is to say just above junk bond status. This is a 50-year-old company that is now issuing debt almost at junk bond rates. So that's not good. They won't have any cash to pay that debt down. They're going to have negative cash flow this year. So a year from now, when they need to go back to the debt markets, that's going to be junk bonds. So even higher yield, higher interest expense.

21:08To add insult to injury, there's also the equity offering. They're doing what's called an at-the-market offering. That means that instead of doing a full issuance overnight, they're going to sell a little bit of stock every day. And our back of the envelope method, I can walk you through it, is that that's probably 10 weeks of them selling 10 % of the daily active trading volume every trading day. So that's going to keep putting pressure on the stock possibly for the next 10 weeks. So those are some of the puts and takes here in what is a very dynamic, complicated situation. And where does OpenAI fit into all of this?

21:51because, you know, there was reporting that OpenAI had this deal with NVIDIA that maybe isn't as secure as people once thought. And then Oracle puts out this really fascinating statement. They say, quote, the NVIDIA OpenAI deal has zero impact on our financial relationship with OpenAI. We remain highly confident in OpenAI's ability to raise funds and meet its commitments. And then that statement goes viral. And everyone's kind of laughing and pointing fingers at the statement and at Oracle right now. So talk a little bit about how OpenAI fits into this slightly ugly picture for Oracle. Yeah, well, then there's all that.

22:34And that tweet was also unfortunate. That would do protest too much, right? And this is what a corporate account should be tweeting. I would take a look at that and I'm not sure what the instructions were but we've talked about the fact that Oracle is raising all this capital to build data centers for OpenAI Oracle has to raise a lot of capital to build data centers for OpenAI for OpenAI to be able to pay for this compute capacity they need to raise a lot of capital as well and in fact, if you think about where Oracle stands in line it's important to see how much open AI can raise. If they can't raise enough, Oracle's not getting paid.

23:19Because Oracle's probably third or fourth in line in terms of who open AI is going to get paid, who open AI is going to pay when they raise the capital. If open AI doesn't raise enough capital, only Microsoft gets paid. Maybe Amazon. Oracle has to hope that open AI raises$100 billion or more to be able to afford its grand ambitions which include this open AI capacity. So one company raising debt at almost junk ratings in order to build capacity for a startup, a money-losing startup, that's still struggling to raise capital so that it can pay for it. We've talked about this. This is bubblicious behavior.

23:58This is not okay. This is unhealthy behavior. It may still work out because this AI stuff is great, but it's very, very risky type of situation for really for both companies. And it's really fascinating how it all kind of ties back to NVIDIA because it was all about NVIDIA investing the money into OpenAI. And then that's the money they're going to use to pay Oracle. But there was this fascinating interview with Jensen Huang, which I would love to get your reactions to. He was asked about this$100 billion commitment deal that was talked about with OpenAI. He was asked about what's going to happen with that.

24:38And this is what he said. There was never a commitment. They invited us to invest up to$100 billion. And of course, we were very happy and honored that they invited us. But we will invest one step at a time. It seems that he's kind of frustrated in that video that people are saying that, oh, you're going to invest$100 billion. And he said, no, that's not what's happening. I would just love to get your reactions to how he sounded and also what he said. Yeah, there's a lot of things going on there, too. So, first of all, that$100 billion that was talked about a while ago, that was really just a framework for what I would call a rebate.

25:22NVIDIA agreed with OpenAI for every gigawatt of capacity that you get out there, we'll invest$10 billion at your current valuation, which at the time was$500 billion. OpenAI hasn't even deployed a gigawatt yet. So they haven't gotten that first$10 billion. So that was a framework. And I understand that Jensen's saying that. By the way, the conversation now is for NVIDIA to actually invest tens of billions of dollars actually at this level, not as a rebate. As is the discussion from Microsoft and Amazon and to also invest in OpenAI. So, again, it is quite possible that OpenAI raised this capital, but there's a lot of noise.

26:02In the last couple of days, there were news items about NVIDIA being frustrated with OpenAI spreading itself too thin in terms of the businesses it's deploying, in terms of the chips that it's buying. So, there was frustration in NVIDIA. And coincidentally or not, there was a link from OpenAI that they're frustrated with NVIDIA's chip performance. So a little bit of childish conflict here, but at some point, the adults are in the room. NVIDIA has a very significant interest that OpenAI does well, right? Remember, if there's no OpenAI, there's no Anthropic, everybody's using Google TPUs. So NVIDIA needs OpenAI to do well and it has the capital to invest, as does Microsoft, as does Amazon.

26:46So it is likely that those three will fund the continued expansion of OpenAI at least this year. But if you can imagine, if NVIDIA invested OpenAI, there are strings attached. There's no more discussion of other chips and there certainly will not be communication out of OpenAI about NVIDIA chips not performing. So that's where we're at. A little bit of middle school drama, but at the end of the day, there's a lot of incentives going around to make sure that the investment continues. The debt picture that you described at Oracle in concert with the capital problem over at OpenAI and the fact that they need more money to spend on these commitments than they actually have, it's all very concerning.

27:29It's just like very flashing bright red signs when you hear that. But we were, you know, a couple of years ago when Oracle started to position itself as a real AI player, we were quite bullish on the company and that actually, you know, paid dividends going forward. But it's now getting to the point where there are so many red flags here. Do you think that this is just a company that investors probably shouldn't touch at this point? Are we getting into a territory that is genuinely dangerous if you're buying Oracle, or is it safer than I'm portraying? It is risky. Let me just put it in context.