The biggest news from SpaceX's Q3 earnings was not the rocket and AI company's outstanding performance, which exceeded even elevated analyst expectations, but Elon Musk's revelation that SpaceX and Tesla are weighing a merger. On the earnings call, held the evening of Oct. 20, Musk announced that his two companies have each formed “special committees” composed of independent directors to explore a combination. Special committees are a standard governance device in transactions where a controlling shareholder sits on both sides of the table, vesting the review of a deal's terms in directors independent of him. The statement confirmed Wall Street's long-held view that the deal was highly likely—and given that Musk effectively controls both companies and embraces the concept, though as a “conflicted party” he cannot serve on the committees, the tie-up now looks all but inevitable. For now, the committees' review is the process to watch: the price, structure, and timing of any combination remain unresolved.

The prospect of a SpaceX-Tesla combination drew rave reviews from the research teams covering both companies. In most cases where an acquirer is set to pay what amounts to an enormous price-to-earnings multiple, its stock falls. Not this time. Investors applauded both enterprises: Tesla rose 3.4% the day following Musk's statement, and SpaceX gained 7.8%, adding $155 billion in market capitalization.

At first glance, the two companies' already tight kinship and numerous overlapping businesses suggest a merger makes sense. SpaceX buys Tesla Megapack batteries and Cybertrucks; Tesla invested $2 billion in xAI, which SpaceX acquired in February; and the two share ownership of the much-feted chip project Terafab. The deal would also complete Musk's long-harbored vision of running a single colossus as a kind of Berkshire Hathaway of AI-driven tech. The wizard freed to blend these two great elixirs of innovation? What's not to like?

But a close examination of the claims made for the deal—especially the assumptions about its supposed advantages in bolstering the finances of both companies—points to an extremely risky wager that would have to perform never-before-seen heroics to reward shareholders. It is the ultimate "buy the leap of faith, it's about the vision, not the numbers, never bet against Elon" scenario, set against sobering numbers. What follows are four frequently made arguments for what would prove the largest and, so far, probably the most universally praised merger in the annals of capitalism.

SpaceX-Tesla would be accretive to SpaceX shareholders

The idea is that while SpaceX's profits are only beginning to accelerate, adding Tesla's earnings—generated from bedrock EV and battery sales—would immediately lift the rocket maker's earnings per share. In merger arithmetic, a transaction is "accretive" when it raises the acquirer's earnings per share and "dilutive" when it lowers them. Technically, that is true: if the pair combined today, that is how the math would work. The problem is that the addition to SpaceX's GAAP earnings per share would be minuscule, and because SpaceX's bottom line is growing while Tesla's is dropping, a deal completed a year or two from now would prove extremely dilutive for the Starlink provider.

What stands out when examining what SpaceX would pay versus the earnings it would receive is how shockingly expensive the transaction would be. One big question is how much of a premium SpaceX would offer over Tesla's current price. As Rajat Gupta of J.P. Morgan points out in a report on the likely merger, premiums in most tech acquisitions run 30% to 35%. Assume 30%: Tesla's market cap currently at $1.52 trillion, and a 30% premium would put the transaction's cost at $1.98 trillion. SpaceX's valuation stands at $2.14 trillion, making this almost a merger of equals. SpaceX would need to issue the equivalent of 92% of its current shares outstanding to capture Tesla, sending its share count zooming from 13.1 billion to 25 billion.

SpaceX would be awarding nearly half of its future earnings to Tesla's shareholders. And what would it get in return? No one knows what the robots and self-driving cars will deliver, but the known figure is stark: Tesla booked just $3.28 billion in GAAP net profits—earnings measured under Generally Accepted Accounting Principles, the standard U.S. reporting framework—over the past four quarters. Since SpaceX posted a $1.5 billion loss over that period, a pro forma deal, as of today, would be "accretive" in the sense that buying Tesla would make the combined company slightly profitable. But SpaceX would simply move from earnings per share that are a minuscule negative to a tiny positive.

What matters is the amount SpaceX would pay for those earnings and the puny accretion. It would be getting $3.28 billion in profits in exchange for stock worth $1.98 trillion—that's $600 for every $1 in extra earnings.

To make matters worse, Tesla's profits have been tanking while SpaceX's bottom line is taking off. In Q3, SpaceX reversed the three prior quarters of deficits by registering $4.4 billion in GAAP net profits, enough to lower its four-quarter loss to $1.5 billion. In other words, profits are trending the right way, big time. Via a merger, SpaceX would go from owning 100% of those fast-rising earnings to just over 50%, while receiving what is, for now, a minimal contribution from Tesla. On the accretion argument, the deal looks like a bad outcome for SpaceX shareholders.

But overall, this would be a good deal for SpaceX, right?

Even if SpaceX never bought Tesla, its valuation so dwarfs its earnings that only by achieving stupendous growth in revenues and profits can it deliver shareholders even a decent return. In May, David Trainer of New Constructs provided a mathematical reckoning: at its current valuation of $2.14 trillion, SpaceX would need to be generating around $300 billion in profits on sales of roughly $1.6 trillion by 2035 to provide a competitive return. That is a tall order, to put it mildly—the profits number would be almost a quarter more than what Alphabet makes today, on over three times its revenues.

The rub: a Tesla acquisition simply gives SpaceX a far steeper hill to climb, one that becomes almost twice as steep sans much help from Tesla.

If SpaceX shoulders a 30% premium, the combined companies would start life at a market cap of $4.12 trillion—SpaceX's current $2.14 trillion plus the $1.98 trillion paid for Tesla. SpaceX 2.0 would edge Alphabet ($4.0 trillion) and Microsoft ($3.9 trillion) to rank as the third-most-valuable enterprise in America, behind only Nvidia ($5.3 trillion) and Apple ($5.0 trillion). By Fortune's estimate, using Trainer's methodology, SpaceX would then need $550 billion in profits and around $3 trillion in revenue to ring the bell by 2035. That $550 billion target is over twice what Alphabet amasses today.

Once again, if Tesla were bringing already big and fast-rising profits to the table, the task would not be nearly as difficult. But it's just the opposite. The EV maker is providing exceedingly slender profits that have already declined from $15 billion in 2023 and $5 billion in 2024 to a run rate a third below the figure of just two years ago.

Tesla would help SpaceX with what it needs most: lots of cash flow to pay for its big, pricey AI adventure

Much of the attention on SpaceX's financials focuses on its incredible cash burn, which is chiefly financing its ambitions in AI, or what the company now calls “Super Intelligence.” In the first nine months of this year, SpaceX pocketed $13.1 billion in cash from operations while lavishing $48.1 billion on capital expenditures, of which $40 billion went to AI projects—chiefly the buildup of terrestrial data campuses and what SpaceX sees as tomorrow's cash cow, AI data centers in space—producing negative free cash flow of $15 billion. Free cash flow is the cushion left after capital spending is subtracted from operating cash, and a negative figure has to be bridged with outside capital. What's more, CFO Bret Johnsen disclosed on the earnings call plans for $35 billion to $40 billion of investment in Q4 alone.

SpaceX is seeking to raise an extra $40 billion in debt to help fund the campaign, but even fans on Wall Street question how the company will attract the massive sums required going forward, an amount estimated by Morgan Stanley at $230 billion over the next three years. In its previous incarnation as an EV specialist, Tesla could have helped. Until this year, it typically provided large amounts of free cash flow. But now that Musk has repurposed Tesla as a robotics and self-driving franchise, it finds itself in a position similar to SpaceX's, though on a lesser scale.

In April, Musk shocked the markets by declaring that Tesla would spend an immense $25 billion on capex this year. The number indeed ramped rapidly, and Tesla registered negative free cash flow in Q2. But Q3 was a surprise: capex came in lower than expected, helping Tesla's cash from operations exceed investment in its manufacturing machine by $1.1 billion. Musk also unnerved Wall Street once again by cutting the capex target for the year from $25 billion to $20 billion.

Still, that goal implies $7 billion in capex for the final quarter of the year—a big number almost certain to at least match, if not exceed, cash from operations. On the call, Tesla CFO Vaibhav Taneja stated that infrastructure spending will jump in the years ahead to back expansion of the robotaxi fleet, build capacity for production of Optimus robots, and ramp AI compute capacity—all pointing to an extended period of negative free cash flow. The upshot: Tesla is no longer generating free cash flow, and given its own big plans for robots and robotaxis, it cannot help plug SpaceX's huge cash flow deficits.

So joining SpaceX and Tesla unites two players that are both super-hungry for cash. If one simply extrapolates the numbers, it is likely that SpaceX and Tesla combined could devote a staggering $50 billion to capex in Q4, and their businesses would not come close to covering that number. Adding Tesla will simply make a new SpaceX's huge need for cash far more acute.

A sale to SpaceX would be a great deal for Tesla shareholders, correct?

This argument gets a ringing endorsement. Tesla's shares now look vastly overvalued versus the basics. its current market cap of $1.52 trillion, Tesla is selling at a P/E of 633—shareholders are getting one-sixth of a penny in earnings for every dollar they own in Tesla stock. And Tesla's core, repeatable profits are actually lower than the reported numbers. In Q3, they drop considerably when you back out sales of regulatory credits, a category Musk himself says will disappear, and unrealized gains on its SpaceX stake.

So what explains the phenomenon of earnings that keep falling while the market cap remains in the stratosphere? As investor Steve Eisman of The Big Short fame explained in a recent story, it is the prospect of a full-price buyout from SpaceX that is supporting Tesla shares. Trainer: "A SpaceX deal is the only way to bail out Tesla shareholders."

So if SpaceX indeed buys Tesla, it is Tesla's owners who will prove the winners—and that is the outcome they are counting on. The losers will be SpaceX's shareholders, who would trade almost half their company for half-pint profits and big promises. The markers that will test that arithmetic are already on the calendar: whether Q4 spending lands within the disclosed ranges—$35 billion to $40 billion at SpaceX and roughly $7 billion implied at Tesla—and what the committees conclude on price and structure.

This story was originally featured on Fortune.com.