SpaceX-Tesla merger could create a Frankenstein's monster Wall Street can't value

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Some pairings feel inevitable. "Friends" had Ross and Rachel. "The Office" had Jim and Pam. Elon Musk has SpaceX and Tesla.

But a deal between Musk's two giant companies could end up looking more like Frankenstein's monster than a Hollywood love story. And investors might struggle to understand and value it.

The SpaceX-Tesla tie-up isn't a shoo-in, but both sides are officially considering it. That raises questions about what's gained from a merger.

Combining the companies turns Musk's two jobs into one. Their somewhat overlapping AI plans could create significant efficiencies in areas like compute and talent. Joe Ciolli, author of the First Trade newsletter, broke down the pros and cons for SpaceX and Tesla investors.

These companies have A LOT under their hoods, though. Here are just some of the businesses or long-term bets that SpaceX and Tesla are pursuing:

• Space-mission services (Falcon 9, Dragon, Starship)
• Internet service (Starlink broadband)
• Mobile carrier (Starlink Mobile)
• Electric vehicles (Model 3, Model Y, Cybertruck, Roadster)
• Government satellite systems (Starshield)
• Autonomous vehicles (Robotaxi)
• Humanoid robots (Optimus)
• Energy storage (Powerwall, Megapack)
• Frontier AI models (Grok)
• Social media (X)
• Payments app (X Money)
• AI infrastructure (Colossus)
• AI coding tools (Cursor)

And don't forget Musk's grandest ambition: colonizing Mars.

A conglomerate with such a diverse set of businesses can become a headache to value.

Let's start simple: How would you describe a SpaceX-Tesla entity?

A space company? An AI company? A robotics company? Saying it's "a little bit of everything" might not sit well with investors.

When a company plays in a bunch of industries, the market doesn't always give it the benefit of the doubt. There's a term for this phenomenon: conglomerate discount.

It means a company's stock is valued lower than the sum of its individual parts. Some investors fear the company will be too complex to manage, or too expensive to run. Others worry its combined financials will make it hard to understand its true health, or stronger parts of the business will subsidize weaker ones.

A widely cited 1995 paper on the topic found the discount to be between 13% and 15% among a sample of diversified companies from 1986 to 1991.

Some academics and economists have argued the conglomerate discount is a relic of the past. A 2024 McKinsey report said the discount wasn't necessarily automatic. Instead, heavily diversified companies often had weak performance or lacked financial transparency, which made it harder to assess their true value.

Either way, these types of companies require investors with a broad appetite. (Or a tough stomach.)

Imagine you're excited about Starlink's potential, but not as keen on humanoid robots. Expensive robotics projects could suck up the budget you were hoping would go to Starlink. Or the money generated by Starlink could subsidize the losses accrued in an underperforming division.

It's why giant, sprawling companies are often less appetizing than a pure-play stock.

Ultimately, a deal is often about selling a vision to investors. And there's arguably no one better at doing that than Elon Musk.

Now he just needs to prove SpaceX and Tesla were always meant to be together.