Latest / Elon Musk Podcast / SpaceX IPO and orbital AI data centers

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SpaceX IPO and orbital AI data centers · Elon Musk Podcast

• 0:00
  SpaceX is putting together an underwriting syndicate of I
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  think it's 21 banks now, including Morgan Stanley and
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  Goldman Sachs. They're looking to raise up to
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  $75 billion in an initial public offering targeting evaluation
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  approaching $2 trillion. 2 trillion, I mean 75 billion for
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  the Rays just completely swallows the previous record
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  holders. You look at Saudi Aramco, they
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  raised 29 billion. Alibaba was 25.
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  The numbers are almost abstract at this level.
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  Right. They really.
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  Are and you also have this operational reality that they
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  just absorbed XAI in an all stock merger.
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  So you know, when an aerospace manufacturer absorbs an
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  artificial intelligence startup, how does the market price that
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  new entity? Well, you have to look at the
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  combined revenue engines driving it.
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  The core financials right now are built heavily on Starlink.
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  OK, They have 10 million active users, which generates over $20
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  billion in expected revenue. And then you have the launch
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  business utilizing the reusable Falcon and Starship rockets.
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  Which is really the infrastructure play.
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  Exactly. They are following this cost
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  reduction trajectory mapped out by Wright's law.
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  Yeah, pushing payload costs from, you know, thousands of
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  dollars down to less than $100 per kilogram.
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  And Wright's Law, just for context, dictates that for every
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  cumulative doubling of units produced, the cost falls by a
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  constant percentage. Right?
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  It's a concept rooted in manufacturing efficiency.
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  You build cars on a an assembly line, they get cheaper over
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  time. Applying that principle to
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  rocket reusability changes the economics of reaching low Earth
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  orbit entirely. Because you aren't throwing the
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  rocket away anymore. Yeah, the traditional model
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  involved building a bespoke rocket and just throwing it into
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  the ocean after a single use, which kept access strictly
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  limited to national governments and massive telecommunications
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  conglomerates. Reusability completely removes
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  that barrier. And that specific reduction in
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  launch costs is the foundation for the XAI merger and the
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  subsequent plan to build orbital artificial intelligence data
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  centers. They are connecting this
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  directly to the Texas Terrafab chip plant joint venture with
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  Tesla. Basically, the plan is to
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  manufacture specialized semiconductors in Texas, put
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  them in servers, and launch those servers into orbit.
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  I mean, the logic there stems from extreme power constraints
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  on the ground on Earth. Scaling artificial intelligence
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  compute requires gigawatts of electricity.
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  It's a massive draw on the grid. It strains local utility grids
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  and drains water supplies for cooling.
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  So the idea is to put the compute infrastructure in space.
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  To bypass Earth's power grid limitations entirely, you can
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  utilize unobstructed solar energy and deal with heat
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  dissipation in a vacuum. It sounds good on paper, but I
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  don't know. Yeah, well, building server
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  farms in space feels like building a data center in the
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  Mariana Trench. That's a good.
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  Way to put it, you might solve a local real estate or cooling
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  problem, but you introduce extreme physical and logistical
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  hurdles. Oh absolutely.
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  The radiation shielding alone for delicate silicon logic gates
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  in space is a massive engineering hurdle.
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  You have cosmic rays literally flipping bits in the
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  processor's. Then you have the basic
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  maintenance logistics. If a server rack fails in a
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  terrestrial data center, a technician just walks down the
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  aisle and swaps it out. Yeah, but in space.
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  If a server rack fails in low Earth orbit, the replacement
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  cost involves fueling up another rocket and launching it.
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  And paying for radiation, hardened space servers and the
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  Rockets to carry them requires an unconventional capital
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  strategy, which leads right into how the shares in this offering
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  are being distributed to you and the broader public.
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  They have this unusual allocation strategy where up to
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  30% of the shares are reserved for retail investors across
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  multiple global markets. 30%. Yeah, they even have a dedicated
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  retail investor event planned for 1500 participants.
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  A retail allocation of 30% is highly atypical.
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  Normally, retail investors might get table scraps in a public
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  offering, maybe 5 to 10% of the shares, with the vast majority
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  reserve for institutional buyers like mutual funds, pension funds
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  and sovereign wealth funds. Right, the big players.
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  Exactly. Allocating 30% relies on
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  leveraging the company's global customer base and the CE OS
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  massive public following to basically create a large block
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  of individual shareholders. And on the institutional side,
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  the mechanics are even more rigid because the NASDAQ fast
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  entry rule. Right, the indexing issue, yeah.
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  A newly listed company ranking in the Top 40 by market
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  capitalization can completely bypass the traditional seasoning
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  period. The consequence is that passive
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  funds tracking the NASDAQ 100 are forced to automatically
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  purchase the stock shortly after listing, regardless of the price
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  action on the open market. I want to look closely at that
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  mechanism because passive index funds operate on strict
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  algorithms. If a company represents a
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  certain percentage of the index's total market
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  capitalization, the fund must hold a proportional amount of
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  that company's stock to track the index accurately.
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  They do not care about the valuation.
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  They just buy. It they just execute the
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  algorithm. Right.
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  And under previous rules, there was a waiting period, sometimes
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  up to a year, before a new mega cap company was added to an
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  index. It allowed the market to
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  establish a stable price through natural supply and demand.
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  Which makes sense. But by utilizing the fast entry
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  rule, that price discovery window is severely compressed.
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  It creates A guaranteed buyer at almost any price.
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  Exactly. It operates like a mandatory
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  cover charge at a club. You show up, the bouncer decides
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  to double the price, but your friends are already inside so
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  you have an absolute mandate to pay it.
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  That's brutal for the passive funds.
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  Passive investors holding index funds are forced to pay the post
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  listing premium. It effectively transfers wealth
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  from long term index holders to active traders.
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  Because the active traders front.
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  Run it. Yeah, the active traders acquire
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  the stock at the offering price, hold it for a few days, and then
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  flip it to the passive funds at a markup, knowing the index
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  funds have no choice but to buy. So you have index funds forced
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  to buy and retail investors giving an unusually large slice
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  of the equity. That naturally points to what
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  kind of corporate control those buyers actually receive for
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  their capital. And that comes down to the dual
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  class share structure. The CEO holds around 42% of the
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  equity but retains roughly 79% of the voting power through
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  super voting Class B shares. Right.
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  A dual class structure separates economic interest from voting
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  control. Class A shares which are sold to
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  the public, typically carry one vote per share.
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  Class B shares retained by founders and insiders carry
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  multiple votes, often 10 votes per share.
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  The structure ensures that public shareholders provide the
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  majority of the capital without receiving a corresponding
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  proportional voice in the governance the company.
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  Which is why major public pension systems, including New
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  York State and CalPERS are actively reacting to this setup.
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  They're not happy about it. No.
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  They outline specific grievances regarding the governance
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  structure. One of the primary issues is a
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  provision requiring the CE OS own consent for his removal.
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  Which is virtually unheard of. Yeah, they also point to the
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  lack of independent committees for compensation and auditing,
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  alongside mandatory binding arbitration for shareholder
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  claims. Mandatory arbitration is a
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  significant mechanism for limiting legal exposure.
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  It requires shareholder disputes to be resolved in private
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  arbitration rather than through public courts.
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  Keeping it out of the public eye.
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  Exactly. That eliminates the class action
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  lawsuit structure, which is the primary tool institutional
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  investors use to seek remedies for widespread financial harm.
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  It also prevents corporate law from developing through public
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  court decisions, shielding the company from traditional
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  judicial review. And it extends to the
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  jurisdiction of the incorporation as well.
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  Under Texas law, there is a requirement to hold 3% of
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  outstanding stock to initiate a derivative action.
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  And a derivative suit, just to clarify, allows a shareholder to
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  sue a third party, usually an insider or executive, on behalf
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  of the corporation if the board of directors fails to act.
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  Right. So if we run the math on a $2
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  trillion valuation, 3% of 2 trillion is 60 billion,
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  $1,000,000. A single shareholder or a
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  coalition of shareholders would need $60 billion in stock just
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  to file a complaint on behalf of the company.
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  By setting the threshold at 3%, the law essentially limits that
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  power to only the largest institutional holders, or, in
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  this specific case, potentially only the CEO himself.
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  The pension funds argue this creates an insurmountable
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  barrier to accountability. It's a massive wall, but, you
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  know, while external buyers navigate forced index inclusion
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  and those strict governance limits, the company's own
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  workforce is facing a different crisis triggered by the sudden
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  valuation jump. Oh, the internal tax situation,
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  yeah. There was an internal share
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  vesting timeline acceleration. This created a liquidity window
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  for employees, allowing them to exercise some equity early.
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  But the leap from a lower internal valuation to the $2
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  trillion public target severely alters their alternative minimum
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  tax exposure on incentive stock options.
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  Hold on, I want to clarify how this tax liability works.
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  Sure, if the employees haven't sold the stock yet, why are they
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  being taxed? Well, incentive stock options,
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  or Isos, allow employees to buy shares at a previously set
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  discounted strike price. OK, the Internal Revenue Code
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  requires taxpayers to calculate their liability twice, once
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  under regular rules and once under the alternative minimum
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  tax rules. Under the AMT, the spread
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  between the original strike price of the option and the fair
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  market value of the stock at the time of exercise is treated as
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  taxable income. So if an engineer has the right
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  to buy the stock at $10 a share, and the public market suddenly
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  values it at $500 a share, the IRS looks at that $490.00
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  difference and taxes it as realized income right away, even
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  though it's just paper wealth. Exactly because the public
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  valuation has jumped so high, the spread is enormous.
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  The result is a massive tax bill simply for exercising the option
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  to hold the stock without selling a single share.
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  And this is compounded by the lock up period mechanics.
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  After an initial public offering, insiders and employees
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  are typically prohibited from selling their shares for a
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  specific duration, usually 90 to 180 days.
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  Yeah, they're. Frozen out.
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  If the lock up expires in the same tax year as the listing,
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  all the income realized from exercising options and the
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  vesting of restricted stock units stacks together.
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  This income stacking pushes the employees into the highest
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  possible marginal tax brackets all at once.
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  It basically functions like winning a lottery where the
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  ticket tax bankrupts the winner before the actual payout clears.
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  That's exactly what it is. They exercise their options to
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  secure their equity, immediately owe A6 figure tax liability to
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  the government, but are legally forbidden from selling any
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  shares to pay that tax bill because of the lockup period.
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  Which is a nightmare. It creates a severe cash flow
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  crisis for the individual employee and you have to wonder
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  if it traps the very engineering talent needed to build the
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  orbital infrastructure. And the combination of employee
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  lockups and high insider ownership has macroeconomic
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  consequences for how the stock trades, too.
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  Because there's nothing out there to buy.
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  Right, it leaves a remarkably small pool of shares available
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  for trading on the Open. Market Only a tiny fraction of
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  the equity, around 3 to 4%, will actually float on the public
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  market. The float represents the number
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  of shares actually available for public investors to buy and
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  sell, excluding locked up shares and closely held insider blocks.
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  Yeah. When demand is high because
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  passive index funds are forced to buy, but the supply of
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  floating shares is restricted to just three or 4% of the total
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  equity, the pricing dynamics become highly volatile.
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  And this limited float amplifies the Musk effect.
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  Because the available shares are so scarce, governance or
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  political news can swing the stock price dramatically.
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  So true. Analyst project price moves
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  roughly double what is typically seen with Tesla.
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  Any news? News Catalyst hits a highly
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  constrained supply curve. And the market processes those
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  catalysts through a specific credibility Ledger with the
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  management team. Investors automatically discount
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  management's delivery timelines by a factor of 1 1/2 to 2 1/2
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  times. Instead of factoring in the
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  delays. Yeah, the market price is in the
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  engineering success, but assumes the internal schedule is
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  perpetually optimistic. The low float means that when a
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  deadline is eventually met, or conversely, when a project is
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  officially delayed, the required repositioning by active traders
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  causes exaggerated price swings on that tiny 3% of available
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  shares. The size of the offering also
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  acts as a liquidity vacuum, pulling capital away from other
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  technology stocks as portfolio managers rebalance.
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  Oh, absolutely. If an asset manager wants to
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  hold a market weight position in a new $2 trillion company, they
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  have to free up the cash to buy it.
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  They do that by selling off billions of dollars of Apple,
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  Microsoft or NVIDIA, driving down the prices of unrelated.
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  Equities. The capital required to absorb
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  this listing has to originate from somewhere.
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  It forces a reallocation across the entire technology sector,
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  testing the depth of institutional liquidity.
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  The public offering functions as a massive stress test of whether
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  global capital markets can absorb a private infrastructure
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  project designed to extend humanity's reach beyond Earth.
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  And if orbital data centers and heavy lift rockets really do
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  become standard utilities, this listing might alter how the
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  higher market values extraterrestrial infrastructure
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  versus traditional technology companies.
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• 13:50
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