In a SpaceX-Tesla Merger, Tesla Shareholders Might Be the Junior Partner

Elon Musk is the chief executive officer of both Tesla (NASDAQ: TSLA) and Space Exploration Technologies (NASDAQ: SPCX), but that doesn't mean the two companies are equals. If they eventually merge, Tesla shareholders might discover they're not holding the stronger hand, even though Tesla has been publicly traded much longer than SpaceX.

Both companies have formed independent committees to explore a potential merger, raising the possibility of creating a technology giant worth roughly $3.5 trillion. Musk has endorsed the idea, although he isn't participating in negotiations because of his ownership interests in both businesses.

There's plenty of logic in combining the companies, particularly since both are pouring billions of dollars into artificial intelligence (AI). But here's an interesting wrinkle: Tesla generates nearly twice as much revenue as SpaceX, yet SpaceX commands the higher market valuation.

That difference could have enormous implications for Tesla shareholders.

Image source: The Motley Fool.

SpaceX is growing much faster than Tesla

Tesla reported third-quarter revenue of $28.1 billion, essentially unchanged from a year ago. Its automotive revenue declined 3% to $20.6 billion, while energy generation and storage revenue dropped nearly 16%.

Profitability wasn't much better. Tesla's operating income fell 56% to $718 million, and its operating margin narrowed to 2.6% from 5.8% a year earlier.

Meanwhile, SpaceX is delivering some extraordinary growth. The rocket and satellite company reported third-quarter revenue of $14.6 billion, up a whopping 161% from a year earlier. Net income reached $4.4 billion, reversing a $1.1 billion loss in the year-ago quarter. Tesla, meanwhile, recorded only $787 million in net income in accordance with generally accepted accounting principles (GAAP), despite having more revenue.

SpaceX's AI business, which Musk now calls Super Intelligence, generated about $7.6 billion in revenue during the latest quarter, making AI infrastructure the company's largest business by revenue.

SpaceX is valued at roughly $2 trillion, about $500 billion more than Tesla, despite generating only 52% as much quarterly revenue.

Wall Street is clearly assigning a substantial premium to SpaceX's growth prospects.

What would Tesla shareholders actually get?

Here's where a potential merger gets particularly interesting. Using the companies' approximate market values, SpaceX would represent about 57% of a combined $3.5 trillion business, while Tesla would account for the remaining 43%.

Those percentages aren't proposed merger terms. They're simply what the current valuations suggest before accounting for any acquisition premium, changes in share prices, or negotiated adjustments. But they illustrate a problem for Tesla investors.

In a stock-for-stock transaction, shareholders typically receive ownership in the combined company based on an agreed exchange ratio. If SpaceX's higher valuation determines the terms, Tesla shareholders could end up owning less than half of the merged business. That's despite Tesla producing nearly twice the quarterly revenue.

Of course, revenue alone doesn't determine what a company is worth. Investors also pay for profitability, growth prospects, and the potential to generate future cash flows.

SpaceX has a compelling argument on those fronts, particularly after its latest earnings report. However, its AI expansion also requires enormous amounts of money. Capital expenditures (capex) reached $19.6 billion in the third quarter, and the company expects to spend even more as it builds additional computing infrastructure.

A merger could give SpaceX access to Tesla's cash resources while bringing the two companies' AI operations under one roof. For Tesla shareholders, however, that means potentially helping finance SpaceX's aggressive expansion while accepting a minority stake in the combined company.

The premium matters more than the merger

There are legitimate reasons to combine Tesla and SpaceX. Tesla is developing autonomous vehicles, humanoid robots, and AI systems capable of interacting with the physical world. SpaceX provides computing infrastructure, satellite connectivity, and launch capabilities. Bringing those operations together could eliminate some duplication and make it easier to coordinate investments.

Tesla shareholders already own a company that's spending heavily on technologies that have yet to produce meaningful profits. Its automotive business still pays most of the bills while Musk pursues opportunities in robotics and autonomous transportation. A merger wouldn't eliminate those challenges, but it would add SpaceX's substantial capital requirements to the equation.

There's also the question of how much Tesla shareholders should be willing to pay for SpaceX's growth. The space company is producing outstanding revenue gains, but its $2 trillion valuation already reflects enormous expectations for its AI business.

Tesla already owns a small stake -- less than 1% -- of SpaceX due to a $2 billion investment originally intended for xAI that was converted into SpaceX shares after the two companies merged in February. Tesla valued that investment at about $2.9 billion at the end of September.

That existing stake would have to be accounted for in any merger agreement. Tesla shareholders already have some exposure to SpaceX's growth even before a potential combination.

Tesla shareholders need to pay attention

No merger agreement has been announced, and the independent committees could ultimately decide that keeping the companies separate makes more sense. If negotiations produce a deal, Tesla shareholders shouldn't assume they will be the dominant partner simply because Tesla is the more established business with greater revenue.

Musk may see a merger as a way to bring his businesses together. Tesla shareholders need to make sure they're getting a fair deal in the process.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.