The big news brought by the third-quarter financial reports is not that the performance of this “rocket” and the AI giant far exceeded the expectations that analysts had already raised, but rather that Elon Musk revealed that SpaceX and Tesla are considering a merger.
During a teleconference held on the evening of October 20th, Musk stated that both of his iconic companies had appointed "special committees" composed of independent directors to study the possibility of a merger. Musk's statement also confirmed what Wall Street has long believed: this merger is highly likely to happen. Now, given that Musk actually controls both companies and that he personally likes the idea—although, as a party with a conflict of interest, he cannot join the committee—this transaction seems almost inevitable.
The prospects for the merger of SpaceX-Tesla also received an enthusiastic response from the research teams of both companies. Under normal circumstances, if the acquirer pays a price that is excessively high relative to the price-earnings ratio, the acquirer's stock price would fall. But this time was different. Investors flocked to both companies at once, and on the day after Musk made the aforementioned remarks, Tesla rose by 3.4%, while SpaceX rose by 7.8%, with their market value increasing by $155 billion.
At first glance, SpaceX and Tesla are closely connected, and there is a significant overlap in their operations, which makes the new combination of SpaceX-Tesla seem reasonable. SpaceX has purchased the Megapack batteries from Tesla and Cybertruck, Tesla has invested $2 billion in xAI, while xAI was acquired by SpaceX in February. Both companies also jointly hold the highly anticipated Terafab chip project. Not to mention, this transaction will also fulfill Musk's long-held vision: to operate a single giant enterprise that becomes something like a Berkshire Hathaway driven by AI technology. To hand over these two innovative “magic potions” to this magician for free manipulation? There seems to be nothing objectionable about that.
However, upon closer examination of the claims regarding this transaction, especially the assumptions about how it will improve the financial situations of both companies, it becomes clear that this is an extremely risky gamble. An unprecedented miracle would have to occur in order to justify the returns for shareholders. This is the classic scenario where "what is bought is a leap of faith, what is discussed is a vision rather than numbers, and one should never go against Elon." Yet, what we are faced with are cold, hard numbers. Below, let's take a look at four common arguments circulating in the market regarding this deal, which could become the largest merger and acquisition in the history of capitalism and may also be the most widely praised to date.
SpaceX-Tesla will bring a capitalization effect to the shareholders of SpaceX.
This view holds that although the profits of SpaceX have only just begun to grow rapidly, incorporating the earnings from the sale of basic electric vehicles brought by Tesla would theoretically immediately increase the earnings per share of the former. Strictly speaking, this is mathematically valid: if the two companies were to merge now, that would be the outcome. The problem is that the increase in earnings per share of SpaceX for each GAAP would be very small, and since the baseline profits of SpaceX are growing while those of Tesla are declining, if the transaction is completed in one or two years, it would be extremely dilutive for this Starlink supplier.
When you consider what SpaceX requires in terms of investment and how much profit can be obtained in return, the most striking aspect is that this transaction is incredibly expensive.
A big question is: How much premium will SpaceX pay on top of Tesla's current stock price? JPMorgan Chase's Rajat Gupta mentioned in a report regarding a potential merger that this figure typically ranges from 30% to 35% in technology acquisitions. Therefore, we assume it to be 30%. Currently, Tesla has a market value of 1.52 trillion dollars; with a 30% premium, SpaceX would need to pay 1.98 trillion dollars. SpaceX is valued at 2.14 trillion dollars itself. In other words, this is almost an equal merger. SpaceX would need to issue shares equivalent to 92% of its current outstanding shares in order to acquire Tesla. As a result, the number of shares of SpaceX would soar from 13.1 billion to 25 billion.
SpaceX will give almost half of its future profits to the selling shareholders of Tesla. But what does it gain in return? We don't know what robots and autonomous vehicles will ultimately bring, but we do know that Tesla had a net profit of only $3.28 billion in the past four quarters. Since SpaceX incurred losses of $1.5 billion in the same period, this transaction does make sense in terms of "strengthening" the company, as acquiring Tesla will turn the merged company slightly profitable. However, SpaceX's earnings per share will only change from a slight negative to a very small positive.
What really matters is how much SpaceX has paid for these profits and these insignificant “thickening” efforts. It will exchange stocks worth $1.98 trillion for a profit of $3.28 billion. In other words, for every additional dollar in profit, it costs $600.
Worse still, the profits of Tesla have been declining, while the bottom-line profits of SpaceX are on the rise. SpaceX reversed its losses for three consecutive quarters in the third quarter, recording a net profit of $4.4 billion GAAP, which narrowed its losses over the past four quarters to $1.5 billion. In other words, the profit trend is improving significantly in the right direction. Through the merger, SpaceX will share half of these rapidly growing profits with the shareholders of Tesla, in exchange for only a meager contribution at present. From the perspective of "thickening" profits, this does not seem like a good outcome for the shareholders of SpaceX.
But overall, this will be a good deal for SpaceX, right?
Even if SpaceX does not acquire Tesla, its valuation is already astonishingly high relative to its earnings. Only by achieving remarkably substantial revenue and profit growth can it provide shareholders with a somewhat decent return. In May, New Constructs's David Trainer presented a set of projections: based on SpaceX's current valuation of $2.14 trillion, by 2035, it would need to generate approximately $300 billion in profits on sales of around $1.6 trillion to provide a competitive return. To put it mildly, this is already a very high requirement. This profit figure is almost a quarter higher than Alphabet's current profits, and Alphabet's revenue is still less than one-third of what SpaceX requires. The problem is that acquiring Tesla would only make the mountain SpaceX needs to climb even steeper, almost doubling in difficulty.
If SpaceX bears a 30% premium, the combined company's initial market value will reach 4.12 trillion dollars. (This is equal to SpaceX's current market value of 2.14 trillion dollars, plus the 1.98 trillion dollars paid for Tesla.) SpaceX's market value of 2.0 will exceed Alphabet's 4.0 trillion dollars and Microsoft's 3.9 trillion dollars, making it the third most valuable company in the United States, only behind Nvidia's 5.3 trillion dollars and Apple's 5.0 trillion dollars. According to Fortune's estimates, by 2035, SpaceX will need 550 billion dollars in profits and approximately 3 trillion dollars in revenue to ring the bell of listing. The target of 550 billion dollars is more than twice Alphabet's current profits.
Let me say it again, if Tesla could generate already high profits that are still growing rapidly, things wouldn't be so difficult. But the reality is quite the opposite. This electric vehicle manufacturer's profits are very limited, and they have dropped from $15 billion in 2023 and $5 billion in 2024 to only two-thirds of that level from just two years ago.
Tesla will help SpaceX by providing what it needs most – a large amount of cash flow – to enable it to afford the costly AI risks.
The market's attention to the financial situation of SpaceX is largely focused on its astonishing cash consumption, which is primarily used to fund its ambitions for AI, what it now refers to as "super intelligence." In the first nine months of this year, SpaceX generated $13.1 billion in cash from operating activities but incurred $48.1 billion in capital expenditures, of which $40 billion was spent on AI projects, mainly the construction of ground data centers, as well as what it sees as the cash cow of the future: the AI centers in space. As a result, its free cash flow was negative $15 billion. More importantly, Chief Financial Officer Bret Johnson revealed during the earnings call that the company plans to invest an additional $35 to $50 billion in the fourth quarter alone.
SpaceX is seeking to refinance $40 billion in debt to help fund this initiative, but even its supporters on Wall Street question how SpaceX will be able to raise such a substantial amount of capital. When its predecessor was an expert in electric vehicles, Tesla could have been of assistance. Until this year, Tesla was usually able to generate significant free cash flow. However, now that Musk has repositioned Tesla towards robotics and autonomous driving, it is also facing a similar situation on a smaller scale.
The third-quarter results just released by Tesla show that its free cash flow was negative $1.1 billion. Musk also stated that the total capital expenditure plan for this year is as high as $25 billion, which means at least another $9 billion will need to be invested in the fourth quarter. This figure exceeds more than twice the amount of cash Tesla has obtained from operating activities in the recent quarters, and it also implies that the cash shortfall in the last three months of 2026 will be much larger.
Therefore, combining SpaceX and Tesla is equivalent to merging two companies that are both in extreme financial distress. If we simply extrapolate these figures, the capital expenditures of SpaceX and Tesla after merger could approach an astonishing $50 billion in the fourth quarter, yet their revenue is far from sufficient to cover this amount. Looking ahead, incorporating Tesla will only make the new SpaceX's dire need for cash even more urgent.
Selling SpaceX to SpaceX would be a good deal for the shareholders of Tesla, right?
This point was loudly affirmed. The stock price of Tesla seems to be severely overvalued relative to its fundamentals. Based on a current market value of $1.52 trillion, Tesla has a price-earnings ratio as high as 633 times. Shareholders holding $1 in Tesla stock can only correspond to a profit of 1/6 of a cent. Moreover, the core, recurring profits of Tesla are actually lower than the disclosed figures. Excluding regulatory points sales – which Musk himself said will disappear – and the unrealized earnings from the SpaceX shares they hold, the profits would drop significantly. So why is there a phenomenon where profits continue to decline while the market value remains high? As Steve Eisman recently explained to me in a report, what supports the stock price of Tesla is the prospect of a full-price acquisition by SpaceX. Trainer said: “The SpaceX transaction is the only way to save the shareholders of Tesla.”
Therefore, if SpaceX truly acquires Tesla, the ultimate winner will be the shareholders of Tesla, which is exactly the outcome they bet on. The losers will be the current shareholders of SpaceX; they will have to give up nearly half of their company's equity in exchange for meager profits and grand promises.
