Tesla's Investment in SpaceX: The $1 Billion Accounting Choice
Tesla and Alphabet both profited from SpaceX. Their financial statements tell different stories.
Alphabet (Ticker: GOOG) and Tesla (Ticker: Tesla) both reported material unrealized gains from their SpaceX investments. That’s where the similarities end. Alphabet’s accounting story is relatively straightforward. Tesla’s is anything but.
Behind the paywall, I examine why the two companies reached different accounting outcomes, what Tesla’s unusual valuation discount reveals about its fair value measurement, and how both companies’ earnings could become increasingly sensitive to future movements in SpaceX’s share price.
Alphabet’s second quarter earnings reignited the debate about the economics of AI. Despite reporting record quarterly revenue of $119.8 billion and net income of $112.1 billion, investors focused less on the headline earnings and more on two seemingly contradictory numbers: negative free cash flow of $5.9 billion, driven by a record $44.9 billion of capital expenditures, and an extraordinary $98.0 billion of other income, primarily from unrealized gains on equity investments.
The quarter highlighted how the AI investment boom can affect financial statements in opposite ways. As hyperscalers accelerate spending on AI infrastructure, the resulting capital expenditures weigh on free cash flow. At the same time, soaring valuations of AI companies can boost reported earnings through unrealized gains on strategic equity investments, such as Alphabet’s investment in Anthropic, widening the gap between accounting profits and cash generation.
Importantly, these unrealized investment gains are non-cash and do not affect free cash flow. My friend and frequent collaborator, Francine McKenna, recently wrote an excellent analysis explaining how unrealized gains flow through the income statement but are excluded from operating cash flow — I highly recommend reading the piece.
According to Alphabet’s disclosure, the $98 billion gain in Q2 2026, recorded in Other Income and Expenses, was primarily attributed to Alphabet’s investment in SpaceX and an unnamed private company (likely Anthropic):
“OI&E of $98.0 billion for the three months ended June 30, 2026 included net gains on equity securities of $99.0 billion, primarily related to unrealized gains in our equity securities portfolio from SpaceX and a private company.”
Alphabet prominently reported the gain in Other Income and Expense and separately highlighted its effect on quarterly earnings, allowing investors to distinguish operating results from mark-to-market investment gains. Yet while Alphabet’s SpaceX gain dominated the post-earnings discussion, another company recorded a material investment gain from its SpaceX investment — and it received remarkably little attention.
That company was Tesla!
Accounting treatment – Alphabet’s investment in SpaceX
Before Q2 2026, Alphabet did not separately disclose the accounting treatment of its investment in SpaceX. However, the investment was likely accounted for under ASC 321’s measurement alternative and classified within Level 2 or Level 3 when remeasured based on observable transactions.
From Alphabet’s 10-K for the year ending December 31, 2025:
“Non-marketable equity securities accounted for under the measurement alternative are investments in privately held companies without readily determinable market values. The carrying value of these non-marketable equity securities is adjusted upward or downward to fair value upon observable transactions for identical or similar investments of the same issuer or impairment. Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy, and remeasurements due to impairment are classified within Level 3…
…As of March 31, 2026, the carrying value of our non-marketable equity securities accounted for under the measurement alternative was $101.3 billion, of which $73.6 billion was remeasured at fair value during the three months ended March 31, 2026 and was primarily classified within Level 2 of the fair value hierarchy at the time of measurement.”
Following the IPO, Alphabet classified its investment in SpaceX as marketable equity securities and remeasured the investment to fair value using a Level 1 measurement method, recognizing the resulting unrealized gain in earnings:
Source: Alphabet’s 10-Q for the period ended June 30, 2026.
Here’s where the plot thickens. I will discuss Tesla’s accounting after the paywall.
