I suppose that works. But it's still just a theory.
Which has been positively commented on by the guy who signed responsible for Concept Art and Additional Writing and Quest Design for Morrowind. For me, that qualifies as a developer confirmation. Besides, the information Xal gives corresponds with ingame information (Eight of Dwemer) found in books and does not stand in contrast to other information.
As far as theories go, when I talk of theory, I happen to think of the scientifical (or scholarly) meaning of a theory, which means that
"in science, the word theory refers to a comprehensive explanation of an important feature of nature that is supported by many facts gathered over time. Theories also allow scientists to make predictions about as yet unobserved phenomena." (http://en.wikipedia.org/wiki/Theory) In contrast to that, theory has also the meaning of "speculation", "conjecture" and "opinion", which may or may not be based on facts. So far, I haven't seen many facts to support other ideas of what happened to the Dwemer that can compete with the above (scientific) theory.