How to time your IPO

How to time your IPO

SpaceX has some real businesses, but if I am completely lucid, I’d say there’s no business that would support its US$2 trillion valuation.

While the headlines are made by rockets and SpaceX’s reusable Falcon 9, which has radically changed the economics of sending cargo into orbit, slashing launch costs by 85 per cent to roughly US$2,700 per kilogram, it is Starlink that generated US$11 billion of last year’s US$18 billion in revenue. 

In fact, sending rockets into space doesn’t do a lot for the company’s finances. Indeed, SpaceX generates more revenue from renting out its NVIDIA chips to Anthropic than it does from rockets.

A reading of the S-1 Initial Public Offering (IPO) document reveals that the first ten pages are pictures of rockets. The S-1 also includes quotes like, “we do not want humans to have the same fate as dinosaurs,” and “we believe the next paradigm shift for humanity is the creation of a resilient, perpetually expanding, spacefaring civilisation, ultimately preparing us to Kardashev type 2 status.”

If one is a student of history, they may remember the shared workspace provider, WeWork, which went bust but was once worth US$47 billion. It said its mission was to “elevate the world’s consciousness.”

Add up all the SpaceX business lines and it makes less than US$20 billion in revenue, is growing relatively slowly and is losing money.

Well, it was losing money, until a week before the IPO, when Google announced it had signed a deal to pay SPACEX US$11 billion a year for compute capacity.

Why would it do that? And why is the timing so interesting?

Well, Google bought 10 per cent of SpaceX in Jan 2015. After dilution, Google now owns about five per cent of the company. SpaceX was valued at 94 times revenue, so this deal adds US$11 billion in revenue, multiplied by 94, which equals a trillion dollars. And since Google owns 5 per cent, it means Google spent US$11 billion to increase the value of its investment by US$50 billion.

Perhaps, more importantly, the deal also means the company is profitable on Generally Accepted Accounting Principles (GAAP) measures. Why is that important? While NASDAQ bent its rules to allow unprofitable companies in its index, S&P did not. The Google deal now means SpaceX is profitable, and S&P 500 index funds will be forced to buy SpaceX and continue to support the stock at any valuation. 

So, there are some interesting side deals, the timing of which helps to explain the US$2 trillion market value, but none of these do anything for intrinsic value.

And speaking of timing, it’s worth considering the timing of past mega IPOs, especially today, when nothing says froth like 94 times revenue. 

Throughout history, CEOs of very big companies have timed the IPO of their businesses perfectly, feeding the ducks when the ducks were quacking loudest, when hype around the company or theme was greatest and when a knowledgeable seller could extract the maximum possible price from a less knowledgeable buyer.

Here are a few well-timed IPOs.

The 1929 crash & the Great Depression

In December 1928, towards the end of the roaring twenties, Goldman Sachs launched an aggressive, highly leveraged closed-end investment trust. It drew massive public investment at the absolute height of speculative euphoria. Less than a year later, in October 1929, Wall Street crashed, and the vehicle was virtually wiped out.

The 2000 Tech Wreck

Listing at almost the exact peak of the Dot.Com bubble, AT&T Wireless raised US$10.6 billion, making it the largest U.S. IPO in history at the time. The tech-heavy NASDAQ peaked in March 2000 before beginning its historic 78 per cent slide.

The 2008 Global Financial Crisis (GFC)

In June 2007, the private equity giant, the Blackstone Group went public in a massive US$4.13 billion listing, marking the biggest IPO of that year. It hit the market just four months before the Dow Jones Industrial Average reached its final pre-recession peak in October 2007.

A month later, in July 2007, financial derivatives broker, MF Global, raised US$2.93 billion just before the credit markets froze. Weakened by the ensuing financial crisis, the firm famously collapsed into bankruptcy a few years later in 2011.

In March 2008, credit card provider Visa raised a record-breaking US$17.9 billion, listing six months after the market peaked but right before the absolute worst phase of the crash, which included the Lehman Brothers collapse. Unlike others, its transaction-fee business model allowed it to thrive despite the economic carnage.

The 2021 crypto and growth stock correction

Bitcoin peaked in November 2021 before collapsing 72 per cent. In April 2021, premier cryptocurrency exchange Coinbase Global went public amid extreme digital asset mania. It marked a local top for the crypto sector, and within a year, bitcoin and tech growth stocks had suffered aggressive sell-offs.

There are lots of reasons SpaceX’s valuation isn’t deserved. The timing of the IPO, however, may give investors another valid reason to pause and reflect.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.

Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances. 

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.