SpaceX and Tesla discuss merger, valuation about $3.5 trillion

SpaceX has delivered results that can no longer be summed up simply as a "rocket company": in the third quarter, SpaceX revenue was $14.6 billion, up 161% year over year, with net profit of $4.4 billion, more than double the average analyst estimate.

On the earnings call, Musk confirmed that SpaceX and Tesla have each established special committees composed of independent directors to discuss a possible merger. The combined valuation of the two companies is about $3.5 trillion.

Musk first said he was "tap-dancing in a minefield." A few seconds later he still gave an answer: a merger has "many benefits." Gene Munster of Deepwater Asset Management later counted that Musk said this roughly three times.

This has moved a long-discussed idea into a formal evaluation stage: Bloomberg noted that Tesla has a market value of about $1.5 trillion and SpaceX about $2 trillion, for a combined $3.5 trillion.

Whether they will merge should no longer be the question. In an October 14 report, Barclays argued that the likelihood of a merger "is increasingly becoming the consensus expectation." The shareholder registers overlap heavily: SpaceX buys Tesla's Cybertruck, and also buys utility-scale energy storage batteries through xAI. At the All-In Summit in September this year, Musk was asked why the two companies should be separate, and he replied: "With cooperation on so many levels, who can imagine what action would be taken under such close cooperation."

After the news emerged, SpaceX rose about 8% after hours, while Tesla rose only about 1.8%—the acquirer gained more than the target. This difference reflects the starkly different calculations of the two sets of shareholders, and also signals that there is still a long game to play before the deal is formally completed.

SpaceX's AI business is already too big to be treated as a side business

SpaceX's third-quarter revenue structure explains why merger discussions have heated up at this time. Revenue from the artificial intelligence and computing power business was $7.56 billion, up more than ninefold from the same period last year, and for the first time exceeded the connectivity business that includes Starlink; quarterly operating profit swung from a loss of $1.7 billion in the same period last year to a profit of $431 million. The connectivity business had revenue of $5.25 billion, up 69% year over year, and still contributes more profit, but its growth rate is clearly slower than that of the AI business. By contrast, the traditional launch business of designing, manufacturing and operating rockets and spacecraft had revenue of $1.77 billion, up only 6%.

The other side of growth is spending. In the third quarter, SpaceX capital expenditure was close to $19.6 billion, of which about $16.4 billion was for the AI and computing power business. In the first nine months, the company's operating cash flow was about $13.1 billion, and spending on property, plant and equipment was about $48.1 billion. Looking only at quarterly net profit of $4.4 billion, it is easy to underestimate the true scale of funding required to build computing facilities. According to reports, SpaceX is in talks to borrow $40 billion to purchase Nvidia chips. CFO Bret Johnsen said the company will continue to take on debt, "there are several available debt pools under discussion," and gave guidance of total revenue of up to $37 billion in the first quarter of next year.

SpaceX is already a major computing power and infrastructure supplier to companies such as Anthropic and Alphabet, and in August it also acquired the code editing tool Cursor. A company whose revenue structure is most heavily weighted toward AI and which is borrowing heavily to buy chips can no longer be adequately defined as a "rocket company."

The synergy logic is clear, but an equity merger is not necessarily the only path

The list of cooperation Musk cited covers superintelligent software, chip design, Terafab, robotics, orbital data centers and connectivity services. These projects keep running into the same set of resources: chips, energy, manufacturing capacity, and capital capable of continuously paying for construction costs. "Simplifying decision-making" is one of the top motivations for a merger—many cross-company projects require two boards and two groups of shareholders to approve separately.

Terafab is the most concrete node among them. According to Barclays' estimates, Tesla plans to first build a research facility of about $3 billion in Austin, followed by a production plant of about $16.8 billion, and the two companies will likely fund it jointly. The chips produced there will supply Tesla's self-driving cars and Optimus robots, as well as SpaceX's AI and orbital data centers. Musk has previously made clear that Terafab decisions require approval from each of the two boards, "it may take a while," with the goal of mass production by the end of 2028.

The new Roadster unveiled on October 15 is equipped with cold gas thrusters developed by SpaceX, enabling maneuvers such as reversing up a slope and turning in the air. Gene Munster's assessment of that launch event was "an engineering flex," and he said Musk "can't wait" to merge.

However, deep business cooperation does not directly prove that equity must be merged. The core question the special committees need to answer is whether the incremental value created by cooperation is enough to offset transaction costs, regulatory friction and integration risks.

The narrative that "Tesla is transfusing blood to SpaceX" is not supported by the numbers

Among the merger rumors, one intuitive claim is that SpaceX is building AI infrastructure on a large scale, and Tesla can provide cash flow. This claim grasps the fact that SpaceX's capital expenditure is huge, but overestimates the funds Tesla currently has available to deploy.

According to Bloomberg consensus estimates, Tesla's free cash flow in 2030 will be about $12 billion, while SpaceX is expected to consume about $17 billion by then—the two are moving in opposite directions. The nearer-term numbers are no more encouraging: Tesla's free cash flow in the second quarter was negative $1.1 billion; analysts forecast a mean free cash flow of negative $4.5 billion in the third quarter and about negative $9.7 billion for all of 2026. Meanwhile, as of the end of September, SpaceX held about $51.3 billion in cash and $38.6 billion in marketable securities, so its funding position is not lacking.

A merger will not create a single extra dollar of cash out of thin air; what it may change is the financing method and the authority over capital allocation—which projects the combined company builds centrally, which costs are shared across different businesses, and how much capital investors are willing to provide for this entire set of plans.

For Musk, unified resource allocation may be more efficient; for Tesla shareholders, the question is how the value created by the automotive, energy storage and robotics businesses will be allocated to SpaceX's computing power, satellite and space projects. If the transaction terms cannot make this clear, "synergy" will instead become a concern about runaway capital expenditure.

The control structure may be the most critical element in the deal design

Analysts generally believe that beyond economic interests, this transaction has another layer of logic—control.

Barclays estimates that Musk holds about 48% of SpaceX's economic interest and controls about 82% of the voting power through Class B shares with 10 votes per share; he holds about 20% of Tesla, equivalent to nearly 17% of the voting power. If SpaceX acquires Tesla through a share exchange at its current valuation, he would hold about 37% of the economic interest and control about 56% of the voting power in the combined company. RBC's figures differ slightly, holding that Musk controls 85% of SpaceX's voting power, but the direction is the same: the transaction would replicate the structure of "less than 40% economic interest but a majority of voting power" at a company on the scale of $3.5 trillion.

Musk has publicly said he wants to hold about 25% of Tesla's equity, which he considers enough to maintain influence over the AI and robotics strategy, and there is still a gap. This transaction could use SpaceX's dual-class share structure to fill that gap.

This directly affects the difficulty of negotiations. Musk himself has acknowledged a conflict of interest and cannot participate in the special committee's discussions. The committee must not only assess business synergies but also determine the respective valuations, the exchange ratio, any possible premium, and how much economic interest and voting power each class of shareholders will have after the merger.

The real holder of the veto is Washington

Reuters lists geopolitics and regulation as the "biggest challenges" to the merger: SpaceX is a major contractor for the U.S. military, intelligence agencies and NASA, and Starshield has already been used for battlefield communications. Both Musk and Trump deny placing restrictions on it, but the military sensitivity of this system is beyond doubt.

Therefore, the review dimensions for the merger will expand from antitrust to national security. Antitrust review, approval by both sides' shareholders and boards, and foreign investment review—if any of these three procedures gets stuck, the shape of the transaction will change. This type of transaction has no precedent in business history, and there is no ready-made regulatory template.

The market gives an answer, but pricing needs to be refined

After the special committee news was confirmed, SpaceX rose as much as about 8.6% after hours, while Tesla rose only about 1.8%. SPCX traded at $161.18 in premarket at one point, about 9% above the closing price.

Chad Anderson of Space Capital offered one narrative: the combined company would be the only enterprise with a complete "physical AI stack," from chip manufacturing to orbital data centers to ground-based autonomous devices, and no competitor has a corresponding complete system. His firm was an early investor in SpaceX.

RBC gives Tesla a target price of $480, implying less than 30% upside from the closing price of around $368. For Tesla shareholders, the calculation is not hard to make: exchange a certain automotive cycle for a long-term option on an AI computing company. But whether this exchange is worthwhile depends on the exchange ratio and the post-merger capital allocation plan, and neither document currently exists.

It is worth noting that SPCX, the acquisition currency, listed in June this year at a price of $135, opened at $150 on the first day, and four months later the stock price has basically returned to its starting point. Using a recently listed stock as acquisition consideration means its pricing benchmark still relies mainly on investment bank models, and the secondary market has not yet been fully tested through repeated trading. If only the vision continues to heat up while the transaction terms are long absent, the stock price reaction can hardly substitute for substantive review of the exchange ratio and the capital plan.

Four things to watch most closely right now

First, the composition and independence of the special committee. Both companies say the committee will be composed of independent directors, but who the members are, whether an independent financial adviser is hired, and whether the adviser issues a fairness opinion will determine whether shareholders see this plan as "Musk's intention" or "the board's judgment."

Second, how the December 3 annual shareholder meeting will be used. Tesla has set its 2026 annual shareholder meeting for December 3. Based on the information disclosed so far, this annual meeting cannot be regarded as a scheduled merger vote. Announcing the intention to transact before the annual meeting makes it easier to organize opposing votes; announcing it separately means a longer regulatory window and more variables. Barclays' analysis says that if the announcement is chosen for late October or early November, it would actually be harder for shareholders to vote in favor at the annual meeting—the opposite of the intuition to "cook the rice before the window closes."

Next, the terms and timing of that $40 billion borrowing. If these funds land before the merger is finalized, it means SpaceX intends to lock in computing capital expenditure before the transaction is completed, and the significance of the merger to SpaceX would lean more toward supplementing cash flow rather than co-investing.

Finally, Terafab and the actual numbers in Tesla's earnings report. If any link slows down—land for the Texas facility, environmental review, or equipment orders—the target of mass production by the end of 2028 will be pushed back. Tesla's third-quarter earnings report will simultaneously present capital expenditure, free cash flow, and management's latest statements on Terafab, robotics and computing investment—if cash burn continues to expand, shareholders' demands for post-merger capital discipline will only grow.

What Musk wants to advance may be a company that can coordinate on its own from chip and energy supply to computing power and connectivity networks, and then to robotics applications. How big this game is can already be seen from SpaceX's revenue structure and investment scale. Whether it can benefit shareholders must wait for the special committee to produce a price, governance arrangements and verifiable synergy gains. What should be watched most closely right now is the cash flow in Tesla's earnings report and the next formal transaction documents from the two companies. Risk disclosure and disclaimer

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