Musk’s xAI seeks $120B valuation, but there’s a catch

Elon Musk’s AI startup xAI is reportedly seeking a $120 billion valuation as part of a new funding round, a number critics say has more to do with hype than business fundamentals.

The New York Times first reported the potential valuation on May 8, pointing to comparisons with OpenAI’s $300 billion mark. Part of xAI’s price tag reflects its integration with X, the social media platform Musk acquired in 2022.

That’s still relatively steep for for a company bringing in just $100 million in recurring revenue, according to data from Sacra.

“The AI bubble is reaching heights of absurdity that are creating enormous misallocations of capital,” wrote markets commentator Markets & Mayhem.

“So much investor capital is being set ablaze right now it’s likely to be the stuff of history books.”

Has AI boom gotten ahead of itself?

There’s no question that AI is a disruptive technology, one that could reshape healthcare, education, and productivity itself.

But a growing chorus of investors and analysts say the current rush to fund AI startups is being fueled more by hype than actual market demand.

“AI is a massive, unsustainable bubble,” wrote macro investor Pedro Gutierrez, arguing that easy access to capital, not business fundamentals, is behind much of the sector’s recent growth.

That bearish argument is beginning to gain traction, especially as more investors question whether some of these valuations can be justified.

Even industry insiders are sounding the alarm. Bret Taylor, former chairman of OpenAI, told Business Insider he believes AI is “definitely in a bubble,” much like the dot-com boom two decades ago.

“We’ll look back and laugh at some of the excess,” Taylor said. “But I’m confident we’ll also see at least one trillion-dollar consumer brand come out of this.”

AI hype fading

There are already signs in the public markets that the AI hype is gradually fading.

AI-focused funds like the Global X Robotics & Artificial Intelligence ETF (BOTZ) and the ROBO Global Robotics and Automation Index ETF (ROBO) have dropped sharply from their recent highs.

Both funds have rebounded slightly in recent weeks, but analysts say the sector remains highly volatile and prone to big swings as investor expectations reset.

With private funding rounds now pricing in sky-high valuations and competition heating up, investors are being forced to distinguish between long-term AI winners and companies piggybacking along with little to show for it.

For now, investors appear to see Musk’s xAI as a company that fits the former bucket, but whether it can deliver on that $120 billion promise remains to be seen.