D (4:13)

Yeah, thank you for having me. And big story, big story.

C (4:17)

So I guess just tell us the basics. You were the one who, who broke this. SpaceX and Xai merging together. What do we know so far?

D (4:27)

Yeah, it's an all stock transaction that values the kind of entire entity at $1.25 trillion. The SpaceX bit, 1 trillion, the XAI bit, $250 billion. But there's some structural things that are important which is that XAI basically operates as a subsidiary of SpaceX, which is important because SpaceX is subject to ITAR rules, right? Rules that govern the use of technology and defense applications. And so my understanding and our understanding and our reporting is that they're now combined. XAI kind of continues to operate independently as its own company.

C (5:04)

How does this change things for the IPO? Because obviously SpaceX is going to be the biggest IPO of the year, one of the biggest of all time. Does this change things there?

D (5:15)

Yeah, isn't that the, the $1.5 trillion or more question? Right. You know, our reporting and our understanding is that the work continues for SpaceX and now the combined entity to do an IPO in the summer reported it would be at the midpoint of this year. And while out there from the sell side from lots of people that follow these companies closely, there are still questions about whether it Happens. The ultimate rationale behind this is data centers in space. And at the time that we broke the story on why SpaceX would go public and its motivations for needing to raise tens of billions of dollars, it was quite simple that there is an ambition in place for space based infrastructure, but somebody's got to buy the GPUs. Right. That's the kind of fixed cost and based on our reporting and the days around this, all of that is still holding true.

C (6:15)

So this data centers in space thing, which. Yes, that is what they've said he wrote. The idea is space based AI, that's the only way to scale. So could you just break down what that is? That is literally, let's take these data centers that exist on the ground and instead of having them on the ground, we're going to have them in orbit in space. Because there's not enough space in the ground. Yeah, I mean, why do we need to put data centers in space?

D (6:42)

To Elon Musk's mind, literally, you know, pardon the pun, there's more space in space. You know, the simple way that Musk explains it is that right now the limiting factor for scaling AI on Earth is energy. Right. You know, there's a great burden on grids across North America and other countries and other jurisdictions. Water consumption is an issue, impact on communities and literal space to build the data centers. If you put a data center in the form of a satellite and put it into orbit, the energy question is solved by solar. To the mind of those advocating for this, you have to handle cooling and space is a vacuum. And into the mind of the engineers working on it, that's easily solved. And you have plenty of real estate, let's call it in space, to build on. And that is the vision that Elon Musk is pitching here. It's a horrible term when you're, when you're a financial news journalist, but, but what we're talking about basically is vertical integration. Deeper vertical integration. Right. Starship provides the rocket that carries these satellites into orbit and deploys them. They are data centers to all intents and purposes. X AI has trained the models, but also those models need to be run inference, which you guys know, that is all outlined in the public comms that SpaceX and Xia put out there, but also the internal comms that we've reported on around this too.

C (8:07)

I am somewhat of a Elon Musk skeptic. And as the Musk skeptic, my view when I see this is he's saying that the idea is that we got to put these data centers in space. How do we do it? Don't ask too many questions. The ideas we'll get there, we'll figure it out. At the same time, XAI is a company that is competing with the likes of OpenAI and Anthropic. These companies that are burning through billions of dollars in cash and they're having to raise billions of dollars in cash. And XAI is itself burning, I believe, a billion dollars a month. And so when I see this, my initial reaction is this is the saving grace of xai. If things aren't are looking difficult over at the AI company, well then why not just roll it up into the bigger company which perhaps has more cash to play with, to invest in, in the AI models and training. Is that too cynical? What do you think of that perspective?

D (9:07)

There are lots of investors and people in the markets that are skeptical about the financial rationale for this arrangement. Combining private xai with private SpaceX. And what we had also reported last week is that Elon Musk had looked at two distinct scenarios. One scenario involved SpaceX combining with Tesla, which is of course a public company. Bloomberg has reported that XAI is burning a billion dollars of cash per month and on a per quarter basis you can put that in aggregate. It also has a large debt burden which is now on the balance sheet of SpaceX. Technically, those that would push back against those concerns would say, well, we also learned quite a bit about SpaceX's financials. Revenue is growing with Starlink now a majority contributor as opposed to Launch being a majority contributor. And on an EBIT basis at least, it is profitable. And so they're not concerned about SpaceX needing to service the XAI debt or account for the losses at the XAI unit. But again, the, the public commentary from SpaceX and from Musk is that this is about deep vertical integration. It makes the use of the talents and resources of both companies to the maximum effect, which is AI development, whether that's here on Earth or up in space.

C (10:26)

So Ed, I know you've been looking at this for a long time, reporting on it, observing what's happening, and your job is to be objective on both sides. I would love to know what you think the real motivation is, because it seems like there are two things at odds here. There's the financial picture. You bring up the amount of cash they're burning, you bring up the debt picture at xai, which is a question. And then there's the deep vertical integration pitch which is coming from SpaceX and they're probably Saying, no, it's not about the financials. It's because there are synergies here on the business side. What do you think? What is the true strongest primary motivator for Elon Musk to merge these two things together?

D (11:07)

Yeah, none of this is that big a surprise. You know, it's kind of consistent with, with what we've called Elon Inc. Right. You know, Elon Musk has many ventures. They've always had historically close engineering and financial ties. Right. There have been engineers that have worked on materials at Tesla and worked at SpaceX.

C (11:28)

Right.

D (11:29)

You know, some of the results of SpaceX's more recent success, like the heat shielding on Starship. You know, a lot of Tesla engineers touch those hands. A lot of Tesla engineers were the reason that XAI could build its data centers in Tennessee so quickly. You know, this kind of intercompany cooperation is, is not new. The financial part is also not that new. Right. XAI has been a buyer of Tesla's energy products. From Tesla's earnings recently, the company disclosed a $2 billion equity investment in XAI. It's all kind of linked to. Last August we did this is the COVID of BusinessWeek magazine. Six months into the Trump administration's term in office. What was it that Elon Musk was trying to get out of being in and around the White House working with Doge? And it was that a lot of the priorities that he had for his different companies were kind of aligned all around AI. And having proximity to that administration allowed him to try and influence things that would help those priorities. But yeah, it is AI. At the end of the day, Tesla has hard pivoted away from cars. It now needs to develop the software part of AI for autonomous driving and the Optimus humanoid robot program. Xai, per the regulatory filing in the week, it's not just a financial investment that Tesla's made. They have a framework to now share and work on the technology. So fast forward the future is that all of these companies kind of work in parallel. What will the space data centers actually be doing? Inference in space. Right. Running inference on Optimus or running inference on models that are underpinning something else, be it the robotaxi network. It's kind of been hiding in plain sight a little bit.

C (13:17)

Do you think ultimately they all merge with Tesla? I mean, the way you describe it, Elon Inc. It's a good point. They're all kind of collaborating. It seems as though maybe the ultimate goal is, yeah, just roll it all up into one company. How likely do you think that is.

D (13:32)

Yeah, our reporting is still that like this SpaceX AI combined entity is going to do an IPO later this year. But actually loads and loads of people's immediate reaction to the news was, okay, Tesla must be next, you know, fold Tesla in, in some way. People just think that that is the logical step to make. When we did the August Ed week, it was well reported and in conversation with all of these sources in close proximity to the companies and Elon Musk, there is a perception, a realization that if you took these massive companies and tried to fold them into one conglomerate in any environment, that would be tricky, regulators would look at it for one reason or another. The mechanics of it would be difficult. And again, I go back just to the reporting about the two options that we believe were looked at, SpaceX plus Tesla or SpaceX plus Xai. And in the first instance they went with SpaceX plus Xai. But there were a body of SpaceX investors with a meaningful footprint on the cap table that looked at it. And to them the Tesla combination made a lot more sense than the XAI one did. Not just because of the sort of financial health of such a transaction, but because what they were working on, you know, at scale manufacturing, vertical integration of those more analogous industries. So that to those investors it was completely obvious, really fascinating.

C (14:58)

Ed Ludlow, co host of Bloomberg Technology on Bloomberg Television. Ed, thank you very much for joining us.

D (15:04)

Thank you for having me.

C (15:08)

After the break, Oracle takes a plunge. And for even more markets insights, you can subscribe to my weekly newsletter. Simply put@edwardelson.substack.com.

E (15:25)

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D (17:36)

We heard.

C (17:37)

You nine years of bring back the.

B (17:39)

Snack wrap and you've won. But maybe you should have asked for more. Say hello to the Hot Honey snack wrap.

C (17:47)

Now you've really won. Go to McDonald's and get it while you can. We're back with profty markets. Oracle has set investors on edge. On Sunday night, the company announced plans to raise up to $50 billion to fund its cloud infrastructure. It launched the first part of financing on Monday with a $25 billion bond sale that actually drew record demand. But enthusiasm quickly turned to concern as questions resurfaced about a related matter, specifically Nvidia's investment in OpenAI. As a reminder, back in September, Nvidia announced it planned to invest up to $100 billion in OpenAI. However, CEO Jensen Huang recently clarified that that figure was, quote, never a commitment and it appears that the investment has stalled. That poses risk for Oracle, as roughly half of its $625 billion in future revenues are made up of spending commitments from OpenAI. So the question is now louder than ever, will OpenAI be able to pay up? In total, Oracle stock has fallen roughly 10% since Sunday night. Here to walk us through the situation at Oracle, we're speaking with Gil Luria, head of Technology research at DA Davidson. Gil, thank you for joining us.

B (19:11)

Thanks for having Me.

C (19:12)

So there are a lot of moving parts here. Oracle says that they're going to raise $50 billion worth of debt and equity. They go out and they raise the debt successfully, but the stock is sliding down around 10% in the past couple of days and it seems to all have to do with OpenAI. Can you just give us the play by play, what on earth is going on with Oracle right now?

B (19:43)

You're exactly right. There's just a lot of moving pieces, especially the last couple of days. So let's just start with the fact that all of software is down a lot and more than all of Oracle's cash flow comes from its software business. Let's not forget that Oracle is mostly, almost entirely a company that sells database software, enterprise resource planning software. That's where they get more than all their profits. And right now the market feels like software is just a bad idea in general. So that's been happening at once. And then you have the fact that they're raising capital and then they said that this is all the capital they're going to need this year. That's good. The fact they were able to do at least part of the debt, we're not sure they're done, but at least part of the debt, that's good. Then you start getting into some of the other challenges. One is that's it for this year. But for them to be able to build the capacity that they promised OpenAI, they're gonna have to do this again next year and probably again the year after that. Meaning raise another $50 billion next year and the year after that. What's happened is if you look closely at this debt issuance, it was not cheap. The rating agencies gave their secured debt, the senior secured debt, a triple B minus rating, which is to say just above junk bond status. This is a 50 year old company that is now issuing debt, almost a junk bond rate. So that's not good. They won't have any cash to pay that debt down. They're going to have negative cash flow this year. So a year from now when they need to go back to the debt markets, that's going to be junk bonds. So even higher yield, higher interest expense. To add insult to injury, there's also the equity offering. They're doing what's called an at the market offering. That means that instead of doing a full issuance overnight, they're going to sell a little bit of stock every day. And our back of the envelope method, I can walk you through it, is that that's probably 10 weeks of them selling 10% of the daily active trading volume every trading day. So that's going to keep putting pressure on the stock, possibly for the next 10 weeks. So those are some of the puts and takes here in what is a very dynamic, complicated situation.

C (22:09)

And where does OpenAI fit into all of this? Because there was reporting that OpenAI had this deal with Nvidia that maybe isn't as secure as people once thought. And then Oracle puts out this really fascinating statement. They say, quote, the Nvidia OpenAI deal has zero impact on our financial relationship with OpenAI. We remain highly confident in OpenAI's ability to raise funds and meet its commitments. And then that statement goes viral and everyone's kind of laughing and pointing fingers at, at the statement and at Oracle right now. So talk a little bit about how OpenAI fits into this slightly ugly picture for Oracle.

B (22:53)

Yeah, well then there's all that. And that tweet was also unfortunate. Thou do protest too much. Right? And this is what a corporate account should be tweeting. I would take a look at that and I'm not sure what the instructions were, but we've talked about the fact that Oracle is raising all this capital to build data centers for OpenAI. Oracle has to raise a lot of capital to build data centers for OpenAI. For OpenAI to be able to pay for this compute capacity, they need to raise a lot of capital as well.

C (23:29)

Yes.

B (23:29)

And in fact, if you think about where Oracle stands in line, it's important to see how much OpenAI can raise. If they can't raise enough, Oracle's not getting paid because Oracle's probably third or fourth in line in terms of who OpenAI is going to get paid, who OpenAI is going to pay when they raise the capital. If OpenAI doesn't raise enough capital, only Microsoft gets paid. Maybe Amazon. Oracle has to hope that OpenAI raises $100 billion or more to be able to afford its grand ambitions, which include this OpenAI capacity. So one company raising debt at almost junk ratings in order to build capacity for a startup, a money losing startup that's still struggling to raise capital so that can pay for it. We've talked about this. This is bubblicious behavior. This is not okay. This is unhealthy behavior. It may still work out because this AI stuff is great, but it's very, very risky type of situation for really for both companies.

C (24:32)

And it's really fascinating how it all kind of ties back to Nvidia, because it was all about Nvidia investing the money into OpenAI, and then that's the money they're going to use to pay Oracle. But there was this fascinating interview with Jensen Huang, which I would love to get your reactions to. He was asked about this $100 billion commitment deal that was talked about with OpenAI. He was asked about what's going to happen with that, and this is what he said.

B (25:01)

There was never a commitment.

A (25:02)

They invited us to invest up to $100 million.

B (25:08)

And of course, we were very happy and honored that they invited us, but we will invest one step at a time.

C (25:16)

It seems that he's kind of frustrated in that video that people are saying that, oh, you're going to invest $100 billion, and he's saying, no, that's not what's happening. I would just love to get your reactions to how he sounded and also what he said.

B (25:33)

Yeah, there's a lot of things going on there, too. So, first of all, that hundred million dollars that was talked about a while ago, that was really just a framework for what I would call a rebate. Nvidia agreed with OpenAI. For every gigawatt of capacity that you get out there, we'll invest $10 billion at your current valuation, which at the time was $500 billion. OpenAI hasn't even deployed a gigawatt yet, so they haven't gotten that first $10 billion. So that was a framework. And I understand that Jensen saying that, by the way, the conversation now is for Nvidia to actually invest tens of billions of dollars actually at this level, not as a rebate, as is the discussion from Microsoft and Amazon, to also invest in OpenAI. So, again, it is quite possible that OpenAI raised this capital. But there's a lot of noise. In the last couple of days, there were news items about Nvidia being frustrated with OpenAI spreading itself too thin in terms of the businesses it's deploying, in terms of the chips that it's buying. So there was frustration, Nvidia, and coincidentally or not, there was a leak from OpenAI that they're frustrated with Nvidia's chip performance. So a little bit of childish conflict here, but at some point, the adults are in the room. Nvidia has a very significant interest that OpenAI does well. Right. Remember, if there's no OpenAI, there's no anthropic. Everybody's using Google TPUs. So Nvidia needs OpenAI to do well, and it has the capital to invest, as does Microsoft, as does Amazon. So it is likely that those three will fund the continued expansion of OpenAI at least this year. But you can imagine if Nvidia invested OpenAI, there are strings attached, there's no more discussion of other chips, and there certainly will not be communication out of OpenAI about Nvidia chips not performing. So that's where we're at a little bit of middle school drama, but at the end of the day, there's a lot of incentives going around to make sure that the investment continues.

C (27:35)

The debt picture that you described at Oracle in concert with the capital problem over at OpenAI and the fact that they need more money to spend on these commitments than they actually have, it's all very concerning. It's just like very flashing, bright red signs when you hear that. A couple of years ago when Oracle started to position itself as a real AI player, we were quite bullish on the company and that actually paid dividends going forward. But it's now getting to the point where there are so many red flags here. Do you think that this is just a company that investors probably shouldn't touch at this point? Are we getting into a territory that is genuinely dangerous if you're buying Oracle, or is it safer than I'm portraying?

B (28:27)

It is risky. And let me just put it in context. Oracle is still trading at 20 times forward earnings on what looks like low teens growth next year Salesforce is going to grow low teens growth. Next year it's trading at 16 times. Adobe is going to grow low teens next year is trading at 12 times. So Oracle by. Again, given where we are on software, Oracle is not cheap by any stretch of the imagination. They have good business. The baseline database business does generate a lot of cash. The baseline Oracle cloud business was okay. It was growing fast. Not very profitably growing fast. The AI part of the business, the AI compute part of the business appears to be such low margin that it's not even clear that they should be investing in it. And yet again, to your point, they just borrowed a lot and they're issuing at least 5% of their shares in order to fund this, which again may grow their revenue a lot, but may not add any profit anytime soon. Certainly not any cash flow anytime soon. So very risky, especially compared to much better software companies that are trading at a lower multiple right now.

C (29:38)

Okay, Gil Luria, head of technology research at DA Davidson. Thank you so much, Gil. Lots of crazy stuff happening in tech world. I really appreciate you taking us through it.

B (29:48)

Thank you.

C (29:53)

So, lots of AI drama this week. And at the center of it all, again, its OpenAI. Through multiple reports, we now know that those $100 billion that Nvidia was going to commit to OpenAI, whatever that means, that is now quote on ice. But what might be even more interesting is the extent to which Oracle has been implicated in all of this. And even more interesting than that is perhaps what Oracle said about it. This was the public statement from the official Oracle account on X, which I said to Gil. They said, quote, the Nvidia OpenAI deal has zero impact on our financial relationship with OpenAI. We remain highly confident in OpenAI's ability to raise funds and meet its commitments. There are several things that are striking about this. Number one, why is a large corporation commenting on a third party deal with which they are not involved? That is kind of strange. Number two, why do they feel the need to say anything about it? And number three, why bring more attention to this deal than it already has? These are all the questions that everyone's asking themselves is the question that I'm asking myself. But I'm only asking them because Oracle posted about this. If Oracle hadn't said anything, then perhaps we wouldn't be asking these questions. But they did. And so now we are. And the answer to those questions is quite obvious. They're saying these things because they are worried about them. When they say this has no impact on our relationship with OpenAI, that's how you know it does have an impact on their relationship with OpenAI. When they say they're highly confident that OpenAI will meet its commitments, that's how you know they're not highly confident that OpenAI will meet its commitments. This is Public Relations 101. This is what is known as the Streisand effect. And that is whenever you try to suppress or downplay an issue that you don't want lots of people talking about, all that happens when you do that is it makes people talk about it even more. And this is the perfect example. That statement, that Press release received 5 million views on X. To put that into perspective, that is more than double the primetime viewership of Fox News. I know people were not saying it was a good statement. It wasn't going viral for that reason. People said it was a bad statement. They were trolling Oracle. They were saying how embarrassing it was. And crucially, in the hours after that statement was published, Oracle stock fell 6%. So this should be a learning moment in public relations. I think companies need to remember that business is now more popular than ever as a form of entertainment. It is a sport now, it is a series. You, Oracle, are now part of the show. And so what that means is when you screw up like they did, the stakes are a lot higher because everyone is watching. Everyone is interested in how this plays out. Now, I don't know who made the call to post that statement. It seems to have come from someone potentially higher up in the company. But if you're running a half a trillion dollar company, which Oracle is, you need to be better. The language needs to be way less defensive. It needs to deal with these concerns a lot more delicately than it did. And most importantly, someone should have asked, do we really need to post this? And the answer should have been no. Maybe 10 years ago people wouldn't have noticed this, but the year is 2026. We are in a digital era. We live in an age of virality. The costs of these mistakes are higher and in this case, it cost them roughly $25 billion in market cap. It is quite simple. You've got to be smarter. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss, edited by Joel Patterson and engineered by Benjamin Spencer. Our research team is Dan Shalon, Isabela Kinsel, Kristen o' Donoghue and Mia Silverio. Thank you for listening to Profit Markets from Profetry Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.

D (34:11)

It.