Tesla's Hail Mary — buy xAI

Tesla's car business is in trouble. But xAI is on fire...

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On the Pivot podcast last week, veteran tech journalist Kara Swisher astounded her rarely speechless co-host Scott Galloway by describing a clever way that Elon Musk could try to save Tesla — or at least obscure the struggles of its car business:

By merging it with his red-hot AI startup xAI.

This is an intriguing idea, one that merits deeper consideration. So here goes.

(Kara and Scott actually discussed Elon combining all of his companies, including SpaceX, but that would be more complex, and I don’t see how a rocket business or satellite Internet business would help. So I’m assuming it would just be Tesla and xAI.)

Tesla has gotten itself in a major pickle: Thanks in part to some of Elon’s behavior as the leader of DOGE, the company’s brand has been damaged, and Tesla car sales have tanked. This, in turn, has slashed the amount Tesla’s can invest in its critical future initiatives — the new car and truck models, self-driving technology, AI, robotaxis, and humanoid robots that are responsible for most of its astounding stock price.

Tesla car deliveries. Oof.

Tesla cash flow…

Tesla investors have cheered Elon’s (partial) return to the company, driving the stock up 20%+ since Tesla reported its disastrous first quarter. But the high from this news may wear off. And, when it does, Elon will need another way to preserve the company’s stratospheric market capitalization (165X P/E, as compared to — to pick a better-performing car company — Ford’s 7X P/E).

xAI, meanwhile, is on a tear. Since Elon created it as a standalone startup in 2023, its valuation has soared to a reported $120 billion, and its product — Grok — has achieved widespread usage and brand recognition. xAI is still far behind the industry leader, OpenAI (who Elon is suing), but it’s doing astoundingly well for a company that didn’t exist two years ago.

Also worth noting:

Before Elon started xAI, he was talking a lot about a third-party AI business within Tesla, called Dojo. Soon thereafter, he was musing that he didn’t own enough Tesla stock — or have enough control over Tesla’s operations — for it to be worth it for him to pursue AI within Tesla. He was also (justifiably, imho) angry that a Delaware judge blocked Tesla from paying him the ~$100 billion in compensation (depends on stock price) the company owes him for driving its stock price to the moon.

Elon never said that these factors contributed to his decision to build xAI as a standalone company, but it would be reasonable to assume that they did. Would you build your next “centicorn” business inside a company you only owned 13% of when you could build it separately and a much bigger share?

Regardless of why Elon built xAI as a standalone, Tesla’s non-Elon shareholders missed out on a colossal new opportunity, one that could ultimately be worth a lot more than Tesla’s car business.

Meanwhile, Elon-the-CEO is already stretched thin, running half-a-dozen companies when most humans can run only one. So, combining makes sense.

Meanwhile, just last month, Elon combined xAI with X (formerly Twitter). And 9 years ago, in 2016, he combined another company he helped build, SolarCity, with Tesla. So there’s a precedent for him combining things.

(The X-xAI combo, by the way, might have allowed Elon to take a personal $11 billion tax loss, which could allow him to take an $11 billion profit on the stock of one of his other companies without paying tax. Not a bad side-benefit!)

According to Ron Fleming, the co-head of the emerging companies practice at global law firm Pillsbury, combining Tesla and xAI would be easy enough.

Elon would just need the approval of both companies’ boards and shareholders.

Elon owns a reported 59% of xAI, so getting the approval of its board and shareholders would likely be pretty simple. The preferred-stock investors might require some persuading, but Elon is persuasive.

Elon also still controls the board at Tesla and has hypnotic influence over many of its shareholders. So getting a majority or two-thirds of Tesla shareholders to support the combination would probably also be easy, especially because Elon already owns 13% of the company.

There is a school of thought that today’s Tesla would be better off without Elon. I think the opposite. I think that — because so much of Tesla’s stock value depends on products and businesses it hasn’t even launched yet — Tesla is just as dependent on Elon as it has ever been. And the pop in the stock over the past week, I would suggest, supports this view.

So if some Tesla investors grumble about having their cash-generating car company combined with a smaller cash-incinerating AI company, Elon could just shrug and focus less of his time on Tesla.

After all, Elon is diversified.

Elon owns SpaceX, Starlink, xAI, Neuralink, and lots of other companies.

Tesla just owns… Tesla.

What’s in it for Tesla and Elon…

Tesla is larger, and is already public, so attorney Ron Fleming says it would would likely be easiest to have Tesla acquire xAI.

What would the benefits of the combination be?

First, Elon could gain more personal control over the combined company than he currently has over Tesla.

Using a $120 billion valuation for xAI, the reported valuation of the latest (ongoing) round of financing, and the current ~$900 billion valuation for Tesla, Elon would end up owning ~18% of the combined company.

This is still short of the 25% he has said he wants.

But…

As part of the transaction, Elon could also create a new class of stock or other mechanism that would give him a much bigger share of voting control. This would make it more difficult for small shareholders to interfere with what he wants to do.

Second, Tesla would instantly stop being a “struggling car company” and, instead, become “an AI company.” Most of the big AI startups are private, so public-market investors can’t own their stocks yet. But they can own Tesla!

Third, Tesla — and xAI — would be able to raise mountains of cash easily from public-market investors. This could be an advantage in the hyper-competitive, capital-gobbling AI space.

Fourth, Tesla owning xAI would take the pressure off Tesla’s need to turn around its car business. Right now, a handful of investors are still paying attention to things like how many cars Tesla sells and how much revenue and profit it generates from them. As we know from Tesla’s valuation, the majority of its investors already don’t care about this. And, if Tesla owned xAI, even fewer would care.

Fifth, Tesla’s stock valuation would be even more determined by Elon’s storytelling and Tesla investors’ hopes and dreams. This might allow Tesla to sustain an otherworldly valuation for longer than if its story depends only on tales of robotaxis and humanoids — businesses which may not be that profitable and in which Tesla is already way behind the global market leaders.

The big disadvantage of combining the companies, meanwhile, would be a loss of focus for xAI and Elon and other xAI investors having to share their potential future gains with other Tesla investors.

Of course, they’ll also get to share the risk — and there’s still plenty of risk in xAI.

In short, Kara Swisher’s idea is smart and intriguing. I bet Elon and his advisors are already exploring it.

Thank you for reading Regenerator! My inbox and mind are always open. hblodget@regenerator1.com.