In short, Musk tried to gain complete control of OpenAI, but he failed. He moved his AI effort to Tesla, but he then lost control after selling too many shares to acquire Twitter. So he moved his AI effort to a new private company xAI.

Tesla shareholders are now suing the billionaire for breach of fiduciary duty for starting xAI, which competes for talent with Tesla.

Many experts believe shareholders have a strong case, as Musk cited a “conflict of interest” with Tesla’s own AI effort when leaving OpenAI. The CEO even threatened Tesla shareholders not to build AI products at the company if he didn’t gain more control through a higher percentage of Tesla’s shares.

Shareholders are requesting that Musk transfer his ownership of xAI to Tesla.

However, the case will take a long time to go through the court system. Meanwhile, other Tesla shareholders are suggesting that Tesla use its own money to invest in xAI directly.

They submitted a proposal that is up to a vote at Tesla’s upcoming shareholders meeting on November 6th:

RESOLVED, that shareholders of Tesla, Inc. (the “Company”) request that the Board of Directors authorize an investment in xAI, in an amount and form deemed appropriate by the Board.

WHEREAS, an investment in xAI would provide Tesla with a stake in a major AI player, potentially yielding significant financial returns while fostering technological advancements that benefit Tesla’s customers and shareholders.

As you can see, the proposal leaves it to the board to decide the full amount to invest into Musk’s private company.

Interestingly, this is the only shareholder proposal on which the board hasn’t taken a position. It is asking shareholders to vote against all other proposals, even one that is pushing for an audit to avoid contributing to child labor.

The lack of a vote recommendation from the board, which is seen as being under Musk’s control, is widely interpreted as a recommendation to vote for it. However, Musk and the board must abstain due to the ongoing lawsuit regarding xAI.

Does it make sense for Tesla to invest in xAI?

The Good

Obviously, it’s an investment and you want to get a return on it. The main “good thing” to come out of this is if xAI somehow manages to beat all the other extremely well-funded and well-staffed competition into creating a real general AI.

Considering xAI is significantly behind the competition in most revenue-generating AI-backed products and it is reportedly valued at more than $200 billion, Tesla is arriving late to the company, and realistically, it would only achieve a significant return on investment through AGI.

The only other potential benefit would be technology sharing, but an investment doesn’t actually help that much there.

Most other automakers have already partnered with AI companies to integrate LLMs in their vehicles. Tesla has already done so with Grok before investing in xAI.

In short, any technology partnership can be done without an investment in the company, as they have already shown.

If anything, it would create another circular economy, which is all the rage in the AI world these days.

The Bad

It’s obviously a risky investment, and Tesla would be entering at an already substantial valuation of approximately $200 billion – or even more, depending on when the round closes.

In comparison, OpenAI is reportedly valued at $500 billion, and it is estimated to have 700-800 million weekly users.

Meanwhile, xAI’s is estimated to have ~30 million weekly users.

As stated in the “good”, xAI has little chance of catching up to the competition in terms of revenue-generating AI services unless it can bypass them all through AGI, which is a massive gamble.

Due to its heavy investment in computing power, xAI is believed to have a burn rate of roughly $10 billion per year.

AI companies are also amortizing their compute at different rates, and many analysts worry that some are overestimating the lifespan of those chips.

Most of the $14 billion xAI raised in its first 2 years was reportedly gone by early 2025, and the company is now rumored to be closing a new round of financing between $10-20 billion. With the current burn rate, xAI is going to have to repeat this level of funding every year for the foreseeable future.

SpaceX is rumored to be investing about $2 billion in xAI’s current financing round.

With Tesla’s own profits shrinking over the last three years, it is not in a position to sustain such a high burn rate with $2 billion in investments every year.

At its current earnings rate, most of its early earnings would go into xAI with a similar investment as SpaceX.

The Ugly

The most remarkable aspect of this situation is that the Tesla shareholders suing Musk and the board over the funding of xAI have a compelling case.

There’s a real chance that Tesla could end up owning xAI without even having to invest in it, as the chief executives of public companies are not allowed to create competing private companies and funnel resources between them, which is exactly what Musk did.

Prior to starting xAI, Musk himself said that Tesla was an “AI” company. Instead of doing the right thing and incorporating the xAI effort into Tesla, he decided to do it privately because he wasted a large percentage of his Tesla ownership on buying an inflated Twitter.

Speaking of Twitter, Tesla would literally be investing in an again-inflated Twitter.

Musk sold tens of billions of dollars worth of Tesla shares to buy Twitter at $44 billion valuation, which he himself admitted was inflated.

Private investors wrote off most of the valuation over the next 3 years. As of late 2024, it was reportedly worth only $9 billion, but then Musk, a master of self-dealing, had xAI buy it/merge with it, magically raising its valuation back to $44 billion.

This also contributes to inflating any investment in xAI.

Finally, and perhaps the most troubling aspect of this whole thing, Tesla, which has as its mission to accelerate the world’s transition to renewable energy, would be investing in a company that currently primarily produces AI slop that consumes a ton of energy for questionable uses, including an extremely controversial AI companion program.

In short, Elon Musk is double-dipping into Tesla to keep his obsession with controlling AI alive.