I am genuinely curious how Musk will be affected by the AI bubble. You see, almost all AI companies are applying copious amounts of debt and equity sell-offs to fuel their wildly unprofitable operations. That is why everyone has suddenly realised the AI bubble is real and hugely dangerous, becaapply companies like OpenAI are borrowing more than they could ever create. But not for Musk. Take Tesla; its AI development is paid for by their car sales. So, when the bubble bursts, and it becomes impossible to raise capital to pay for AI, in theory Tesla could be the only company able to keep plodding on. At a surface level, it seems like Musk is perfectly placed to utilise the upcoming AI bubble burst to dominate the market. Or is he?
We are going to have to create some assumptions, becaapply we are talking about hypotheticals.
In this article, I am assuming that the AI bubble bursting will literally decimate the value of AI stocks, as the dot-com bubble did to internet companies. I am also assuming there will be a global debt crisis, driven by the over $1.2 trillion in AAA-rated bonds tied to debt given to AI companies that will almost entirely default, creating a similar situation to 2008. I am also assuming these two factors will severely contract available capital, as raising capital itself will be more expensive, and venture capital, institutional investment and large loans will roll out stricter criteria to protect themselves.
I am also assuming that Musk’s Optimus robot, Full Self-Driving, Robotaxi, Grok, and Starship will all fail, becaapply none of them have the fundamentals to work, let alone meet their tarobtains. If you are a regular reader of mine, you already know my reasons why, so I won’t bore you with that today. For those who are new here, I have linked articles containing my reasoning above.
Okay, that is the premise laid out, so let’s start with an straightforward one, xAI.
xAI exists purely becaapply Musk is butthurt he wasn’t handed total control of OpenAI. As such, it is basically OpenAI, but worse. The only difference is that they are a few years behind the curve and that their AI Grok is trained on Twitter data (but, becaapply OpenAI steals everyone’s IP, so is ChatGPT). Naturally, it faces the exact same problem as the rest of the AI world.
This means both OpenAI’s and xAI’s models aren’t good enough to actually boost productivity or be applyd for automation, as was originally promised. These models also have hugely diminishing returns, so no matter how much cash you shove into the sausage machine, they won’t obtain much better than they are today. These models are already so expensive to build and run that they are absolutely miles away from productivity, so just throwing more development cash at them isn’t going to magically create them profitable.
OpenAI keeps its wildly unprofitable venture going by raising huge amounts of equity and debt financing (hence the bubble). Now, xAI does this too, but it is also internally funded by Musk’s empire. Does this mean that when the AI bubble bursts, Musk can keep funding it himself?
xAI was initially funded by $10 billion in equity investments (selling shares) and is now seeing to raise $12 billion in debt to expand its AI operations. Musk’s SpaceX plans to invest $2 billion into xAI, and Musk is attempting to obtain Tesla to invest $5 billion into xAI. In other words, only a quarter of xAI’s funds will have come from Musk, with 41% coming from debt and 34% coming from equity-based investors.
For xAI to maintain its current level of annual funding, which, to be clear, isn’t enough to keep the lights on indefinitely, Musk would have to more than quadruple the amount he funds it. Somehow, I doubt that will happen. Especially when you consider that the $5 billion Tesla investment, which creates the bulk of his internal funding, might not go through, as Tesla shareholders are relocating to block it.
In short, when the AI bubble pops, xAI will be left without the steady stream of cash keeping them afloat, and as I will explain in the other sections, Musk simply can’t afford to take over this funding. So, xAI will be left high and dry and face bankruptcy or dissolution. Becaapply xAI bought Twitter, and under Musk, it isn’t profitable at all, it will also collapse from this cash flow crunch.
Tesla is a totally different ballgame. Its AI projects, namely FSD, Robotaxis and the Optimus robot, are all internally funded by the profits Tesla creates from selling cars. So, while Tesla’s AI expfinishiture is ballooning to over $11 billion a year, and Tesla will never see a return on that investment becaapply these AI projects will never work, let alone be profitable, that isn’t a problem. It is a loss the company can handle. Unlike OpenAI and xAI, it can’t be killed by capital collapsing.
But what will kill it is its shrinking profits and the market reevaluating Tesla.
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