Why SpaceX bought xAI: Data centers in space aren't the only reason

Elon Musk, the world's richest man, just combined his companies SpaceX and xAI, creating the most valuable privately-owned company in the world.

The reason? In a statement posted on SpaceX's website after the news broke on Monday, Musk said that the electricity demand for AI was too much and, in the long term, AI data centers will need to operate in space. Days before SpaceX acquired xAI (creating a company valued at an estimated $1.25 trillion), the company had already submitted filings to the Federal Communications Commission (FCC) seeking permission to launch satellites that would operate as AI data centers in space.

But, is that really why SpaceX bought xAI?

While Musk may genuinely want to build AI data centers that orbit the Earth, some experts are skeptical that's the real reason for the merger. Tim Farris, the president of satellite and telecom industry research firm TMF Associates, called Musk's space data center plan "a Rorschach test for potential SpaceX investors, just like Optimus does for Tesla investors," in a post on the group's website.

"Both allow for near term demonstrations that look impressive but aren’t meaningfully revenue-generating, while allowing Musk to make long term projections of 'infinite' revenues that can be (nearly) infinitely postponed," Farris writes.

As experts point out, a merger allows the companies to pool their resources to help with their bottom line.

SpaceX is reportedly planning an IPO later this year, which could raise up to $60 billion at a $1.5 trillion valuation. 

Starlink, Musk's satellite internet service under the SpaceX umbrella, is the main revenue driver for the company. However, Farris points out that there are only so many rockets available to launch more satellites into space. 

If SpaceX is not spending on Starlink, what should SpaceX do with those billions? Musk's AI company xAI, on the other hand, needs money badly. Bloomberg recently reported that xAI, along with its AI chatbot Grok, is burning $1 billion every month as the AI arms race with OpenAI, Google, and Meta heats up.

But, as Farris mentions to CNBC, xAI provides SpaceX with a bonus as well. Despite xAI's money problem, AI is a hot investment trend right now, and potential investors looking to get involved could be wooed by the prospect of investing in Musk's AI company via a SpaceX IPO. This may be more of a draw for some investors, as SpaceX itself has consistently missed its revenue projections.

So, Musk might be saying AI data centers in space are the reason for the acquisition, but the deal could also give both SpaceX and xAI a boost.