xAI Acquires X in a Deal That Secures the App’s Immediate Future

Okay, anybody who’s been closely watching the slow-speed financial crash of Twitter/X probably knew that Elon Musk was eventually going to find a way to funnel money from his xAI startup into the troubled app.

I didn’t, however, think that he would be this upfront about it.

Today, Elon Musk has announced X the platform has been acquired by xAI, in a deal that values X at $33 billion.

As per Musk:

“xAI has acquired X in an all-stock transaction. The combination values xAI at $80 billion and X at $33 billion ($45B less $12B debt). Since its founding two years ago, xAI has rapidly become one of the leading AI labs in the world, building models and data centers at unprecedented speed and scale. X is the digital town square, where more than 600M active users go to find the real-time source of ground truth, and in the last two years, has been transformed into one of the most efficient companies in the world, positioning it to deliver scalable future growth.”

So, there’s a bit to unpack here.

First, Elon says that X is now effectively valued at $45 billion, which is more than the $44 billion that he paid for it in 2022.

Which most market analysts would dispute.

Given Musk’s various unpopular changes at the app, and the resulting advertiser exodus, the actual value of X is seemingly a lot lower than this, with Fidelity valuing the company at just $9.4 billion in October last year.

Since the U.S. election in November, however, X has seen something of a turnaround, with various big advertisers reportedly reassessing their X ad spend in order to keep in Musk’s good books, due to his influence within the new Trump Administration. That still wouldn’t be enough to bring its valuation back up to $44 billion, or more. But I guess, when you’re arranging the sale of your own business to another one of your companies, you get to decide the narrative.

In terms of xAI, Elon’s AI startup has grown at a rapid rate, and now matches the compute power of OpenAI, giving it significant capacity to compete in the broader AI race.

xAI has raised over $12 billion in funding to power its development, and pegged its value at around $75 billion, though as Musk notes, that’s now been bumped up to $80 billion with this deal.

So why is xAI worth so much?

Well, AI is the tech trend of the moment, and as such, finding investors for major AI projects isn’t seemingly a major challenge. xAI is also considered to have a key market advantage, due to its expansive trove of real-time data, with the project being fueled by posts from X.

Which is why the assumption has been that Musk would eventually funnel some of that $12 billion directly to X, in order to solve the app’s financial woes.

Which are significant.

As a private company, X doesn’t publish its financial data anymore, so we don’t know exactly where it’s placed, but reports suggest that X was close to breaking even for 2024, based on data that X shared with potential investors back in January. In that presentation, the X team shared that it brought in $1.2 billion in adjusted income for last full year, which is significantly lower than X was earning before Musk took over at the app (X generated over $5b in income in 2021). But in combination with its drastic cost reductions (Musk sacked 80% of staff and eliminated many Twitter offices, among other cost-cutting measures), that took X to around the same overall income levels that it was seeing before the Musk purchase.

Though either way, X was either just short of, or just on a flat result. And with advertisers still staying away, and Musk saddling the app with a huge debt burden to find his purchase of the business, X has been looking like it would eventually be eyeing bankruptcy, either this year or next.

Till the U.S. election, which, as noted, saw some big brands reassessing their X ad spend.

And now, X will also share cash with xAI, which will ensure that it remains solvent, for the immediate future at least.

“xAI and X’s futures are intertwined. Today, we officially take the step to combine the data, models, compute, distribution and talent. This combination will unlock immense potential by blending xAI’s advanced AI capability and expertise with X’s massive reach.“

X CEO Linda Yaccarino has also shared her optimism, saying that “the future could not be brighter” in response to the deal.

But I don’t know, I don’t see xAI being a major money spinner as yet. And even if this deal does give X more financial stability for the time being, it also weighs the startup with the financial performance of the app, which means if X loses money from now on, xAI loses money as well, which could become an anchor for Elon’s AI project.

Which he only initiated out of spite, due to his bad blood with OpenAI, a company that he originally invested in, then spurned once they rejected his push to become CEO of the project. As a result, Musk launched xAI as his “non woke” answer to AI development.

And ever since, he’s been trying to cut down OpenAI at every opportunity, framing his own AI tools as a better, more truthful alternative, with more real-time insight based on X posts.

Though given the massive amount of misinformation on X, which is now a larger problem than ever because of Musk’s changes to its moderation approach, many of the responses provided by xAI tools are also skewed in the same direction.

That could be problematic, but then again, considering that Elon Musk’s DOGE government reform group is also looking to integrate an AI-based solution to improve bureaucratic efficiency, you can bet that xAI will have a significant advantage in offering such a solution, which could also mean that xAI ends up getting some major government contracts, keeping it in business for a long time.

So, to clarify, xAI is now funding X, and xAI is being funded by investors who believe that the project will eventually make a lot of money through its technological advances. And that money is likely going come from U.S. taxpayers, once xAI ends up becoming the key operating system for the government’s new AI-based systematic approach.

Yeah, there are a couple of significant conflicts within that, and also I highly doubt that xAI would be getting anywhere if it wasn’t Elon Musk at the helm. But belief in Musk’s power to get things done is helping to prop up his entire X Corp empire of questionable projects.

So will it work out?

Well, probably.

Again, once the DOGE group does announce its AI reformation plans, you can expect to see xAI secure a massive government contract, which will mean that it, and X, are then financially secure, independent of ad or usage concerns.

That could also free up Elon and Co. to loosen X’s moderation rules once again, as they’ll no longer be burdened by brand safety concerns. Though, at the same time, the more changes that X makes at this end, the more the responses pumped out by its Grok AI chatbot, and any other tools built on its LLM, will be impacted.

But, essentially, Trump’s victory in last year’s election has now saved X the platform, which was looking like it wouldn’t be around for much longer as a solo concern.

Also, Musk says that X now has 600 million monthly active users, up from the 570 million MAU that Musk reported back in July.

So overall, it’s a pretty good day for Musk and his supporters, while it also serves as a reminder of the impact of tapping into broader market trends.