Prediction: Elon Musk Will Merge Tesla With SpaceX Within 5 Years | The Motley Fool

Tesla's high valuation implies investors are eyeing opportunities that go far beyond electric vehicles.

Two of Elon Musk's companies, SpaceX and xAI, are merging. The combined entity will create, as Musk puts it, an "innovation engine" that combines many different growth opportunities together. In addition to artificial intelligence (AI), including xAI's Grok chatbot, the combined entity will also focus on rockets and space-based internet.

Electric vehicles (EVs) are not part of the equation just yet. For now, Tesla (TSLA 1.82%) isn't involved in a merger with these businesses, but that could change in the near future. Here's why I think it's inevitable, and why it may happen within the next five years.

For Musk, merging his major companies together would make it easier for him to focus his efforts on a single entity. This also makes sense from a logistical point of view, with his companies often working on similar, interrelated goals. An example is his recently unveiled Terafab project to build a massive chip factory that will require the efforts of Tesla, SpaceX, and xAI.

Merging SpaceX with xAI will enable Musk to consolidate the two companies' efforts and more easily unify their goals. The next logical step would be to also add Tesla into the fold, which is why I see it as a possibility in the near future, given their collaboration efforts. Analyst Dan Ives believes that a merger could take place as early as next year, with the announcement of Terafab effectively being the first step of that process.

A merger of Tesla, xAI, and SpaceX would create a larger and more diversified company for investors. And with a focus on robotaxis and space, that could make it a hotter growth stock to own.

However, with Tesla's stock already trading at well over 300 times its trailing earnings, it's already priced at an extremely high valuation. At that kind of a premium, it's effectively trading like a top AI stock rather than an EV stock that's facing mounting competition. While there might be some initial excitement on news of a merger, that doesn't mean it'll result in sustainable long-term gains. Since xAI and SpaceX are still private companies, many questions remain about their financials and how profitable a combined entity might be.

Even if you're expecting a major merger involving Tesla in the near future, there's no rush to buy the stock today. Between the question marks about what the combined company's financials might look like and Tesla's stock already trading at a grossly inflated valuation, there's too much risk to make it a compelling investment opportunity today. A wait-and-see approach looks to be the most appropriate one with the stock right now.