XAI-X Merger: A Win for Elon Musk's Vision?

Elon Musk’s xAI Acquisition of X: A Strategic Play or Narrative-Driven Investment?

The announcement that Elon Musk’s artificial intelligence company, xAI, had acquired his social media platform, X, in an all-stock transaction, initially sparked considerable surprise. However, upon closer examination, the move appeared logical. Grok, xAI’s chatbot, was already significantly integrated within X, and the social media company was experiencing financial difficulties. Musk required a method to reframe his $44 billion acquisition of Twitter as a calculated maneuver for achieving dominance in Artificial General Intelligence (AGI).

The Power of Narrative in Musk’s Empire

This deal also reveals a fundamental aspect of how Musk’s business empire functions. Investment in any of his ventures isn’t solely about immediate financial returns. It represents an investment in the aura surrounding Musk himself and an acceptance of a success story that often surpasses concrete financial data.

Some observers characterize this as a potentially misleading practice, citing Musk’s history of ambitious promises that haven’t always materialized. Nevertheless, the market is demonstrating increasing acceptance – even a welcoming attitude – towards investments driven by compelling narratives, especially when supported by a figure with close ties to influential leaders.

One Company, Many Names

Yoni Rechtman, a principal at Slow Ventures, articulated this interconnectedness, stating, “All of Elon’s companies today are basically one company.” Rechtman explained that personnel frequently work across multiple companies simultaneously, sharing capital connections and engaging in business with one another. Musk effectively manages them as a single entity, making the xAI-X merger a formalization of an existing reality.

Investors like Ron Baron, founder of Baron Capital, believe that “every single thing [Musk] does is helping everything else he does.” This synergy extends to other Musk-controlled businesses, including Tesla, SpaceX, The Boring Company, and Neuralink, which reportedly share resources.

Valuation Beyond Current Metrics

The xAI-X deal prompted debate regarding the valuation of X at $33 billion – more than three times its recent valuation – and xAI at $80 billion, despite the AI company’s limited current revenue. However, valuations frequently extend beyond present-day realities. They incorporate investor expectations, a factor particularly prominent in Musk’s ventures.

Consider Tesla as an example. The electric vehicle manufacturer has consistently been treated as a technology stock, despite typical automotive industry profit margins. This is largely based on the expectation that Tesla will eventually achieve groundbreaking autonomous driving capabilities and develop humanoid robots.

Long-Term Vision and Investor Engagement

Gene Munster, managing partner at Deepwater Asset Management, emphasized this point, stating, “The reason why [Tesla’s] stock trades at 80 times earnings… is that people are making a bet on the long term.” He identified this ability to maintain investor engagement over extended periods as one of Musk’s key strengths.

Munster’s firm has invested in X, xAI, and Tesla, representing the type of comprehensive Musk supporter poised to benefit from a deal like xAI acquiring X, provided Musk can successfully integrate X’s real-time data and distribution network with xAI’s infrastructure and AI expertise.

Risks and Regulatory Scrutiny

However, consolidated value inevitably introduces increased risk. Dan Wang, a professor at Columbia Business School, highlighted the ongoing lawsuit between X and the Securities and Exchange Commission (SEC) as a significant immediate risk factor for investors.

The SEC alleges that Musk misled investors by delaying the disclosure of his prior investments in Twitter, potentially allowing him to purchase additional shares at artificially reduced prices. Wang also cited concerns regarding anticompetition and user privacy, particularly X’s recent decision to automatically enroll all users in data collection for AI model training, which has drawn scrutiny from Ireland’s DPC under GDPR regulations.

Evolving AI Regulations

“Another kind of risk here is that there isn’t a consensus framework for how the AI market is going to be regulated,” Wang explained. He noted emerging regulations in Europe and, previously, in California, which focus on the responsible deployment of AI models and assign accountability to both creators and providers.

The Potential for Shifting Priorities

Rechtman also cautioned that Musk might simply lose interest in a project. He suggested that some Tesla shareholders currently feel this way, observing that Musk’s primary focus has recently shifted to the Trump campaign, potentially sidelining other ventures.

Betting on the Future of AI

Munster, when questioned about these risks, appeared unconcerned, suggesting their relative insignificance compared to the potential of xAI to become a leading force in the AI landscape. He stated, “We’re betting the firm on the belief that AI is going to be more transformative than what people think.”

Going Long on Elon

Rechtman characterized Musk’s supporters not as blindly loyal, but as trusting in his unique ability to “bend capital markets to his will,” enabling him to achieve what others cannot. “The people who are in these businesses have just gone long Elon, and they will continue to go long Elon,” he said.

Access to Exclusive Opportunities

Furthermore, investing in Musk’s more speculative ventures, like X, can potentially unlock access to further investment opportunities within the Musk ecosystem. Rechtman noted that SpaceX, a highly successful company, is unlikely to become publicly traded, making access to its tenders dependent on maintaining a positive relationship with Musk.