Elon Musk’s AI startup, xAI, is growing into a multi-billion-dollar behemoth at an astonishing rate, with a bit of help from his other businesses. Last week, The Wall Street Journal reported that SpaceX, another company founded by Musk, had invested $2 billion in the AI firm. And now, Tesla TSLA shareholders may be allowed to vote on whether the EV maker should also invest in xAI, based on Musk’s cryptic comments on X.
However, Tesla is already doing business with xAI. The carmaker sold nearly $200 million worth of its energy storage batteries to xAI last year and recently began integrating Grok, xAI's chatbot, into its vehicles.
For ETF investors, this growing entanglement could mean more than meets the eye.
Tesla ETFs: Passive Exposure To An Active Gamble?
ETFs that have Tesla as one of their leading holdings, such as trending innovation and AI-related funds like ARK Innovation ETF ARKK, Grayscale Bitcoin Adopters ETF BCOR and Invesco QQQ Trust QQQ, may now be unintentionally exposed to Musk’s AI empire, even though xAI is a privately held firm. With an expense ratio of 0.20%, QQQ is the cheapest of the three, compared with BCOR’s 0.59% and ARKK’s 0.75%.
These ETFs seem to be turning into proxy plays on Musk’s AI goals. They didn’t enroll for that, but Tesla’s increasing connections with xAI, both financial and technological, are making that connection difficult to overlook.
As of July, Tesla represented 18% of BCOR’s portfolio, 9.7% of ARKK’s portfolio and 2.7% of QQQ’s holdings. While Tesla’s fundamental business continues to be EVs and energy storage, its evolving emphasis on AI, software and ecosystem plays means ETF investors may be owning more than merely a car company.
Also Read: Tesla Investment In xAI Hinges On Elon Musk Having 25% Voting Power: ‘Level Is Key,’ Says Dan Ives
xAI Equation: Big Valuation, Bigger Risks
Established in the first half of 2023, xAI has had its value swell from $18 billion to a reported $200 billion in less than 18 months, according to Bloomberg, which reported last week that the firm is eyeing a $10 billion investment at a $200 billion valuation. Yet it’s also reported to be spending $1 billion every month, per Bloomberg.
Even though there is no direct public market access to xAI, Tesla’s increasing synergy with the startup indirectly influences Tesla’s operating and financial results, and consequently, the ETFs that hold it.
There’s precedent for alarm. Tesla itself was once a capital-consuming company, but the introduction of the Model 3 and Model Y transformed it into a cash machine. However, with Tesla’s EV sales under siege and the company holding $37 billion in cash, a potential xAI investment could represent either a strategic shift or a perilous distraction.
Retail Investors: Along For The Ride?
Most investors who own Tesla do so through ETFs, believing they’re investing in clean energy or next-generation transportation. However, with Tesla now on the verge of becoming an AI hardware vendor and even a potential investor in xAI, the boundaries between Musk’s public and private pursuits are becoming increasingly blurred.
Musk has directly stated that he doesn’t favor a merger of Tesla and xAI. Yet, even without a merger, cross-company business and common strategic objectives are bringing the two entities closer together. For ETF shareholders, the risk is straightforward: they could be exposed to the upside or downside of xAI without having a direct stake in it.
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