SpaceX IPO – Rocket ship or red flag?
In this week’s video insight, I take a closer look at the upcoming SpaceX IPO and some of the concerns being raised by critics. While many investors expect the listing to be a major success, I explore questions around the company’s unprecedented valuation, the folding of other Elon Musk ventures into SpaceX, rule changes that could accelerate its inclusion in major indices, and whether forced buying by index funds may help drive the share price higher. I also discuss the risk that early investors and insiders could benefit most, while everyday investors are left carrying the long-term risks.
Transcript:
The upcoming SpaceX IPO might look like a historic milestone for space exploration, and the bulls suggest that it will be hugely successful. Why? Well, it owns the largest satellite network ever. It owns the world’s fastest and cheapest toll road into space. It’s the Pentagon’s primary access to orbit, the world’s dominant launch provider, and the home of xAI, Grok, and now Twitter, or X. There’ll also be a very small percentage of stock available to trade, which will ensure investors or speculators make money.
But what are the counterpoints? Some critics suggest the SpaceX IPO represents the biggest wealth transfer in financial history.
So here’s seven SpaceX counter facts. Number one, the extreme precedent-defying valuation. SpaceX is targeting a $1.75 trillion valuation, which is over fifty times its projected revenue and ninety times trailing revenue. To put that in perspective, Facebook went public at roughly ten times revenue.
Two, bailing out underperforming ventures and the billionaires who invested in them. Some say this IPO is a mechanism to bail out investors in the financially troubled parts of Musk’s empire. In 2022, Elon Musk raised billions and bought Twitter for $44 billion US dollars. His backers included firms like Andreessen Horowitz, Sequoia Capital, and a subsidiary of ARK Ventures and 8VC, as well as individuals including Bill Ackman, Sean Combs, and a Saudi prince.
Twitter was then folded into xAI, which was then folded into SpaceX. It’s a cashless chain of mergers that transfers the financial baggage of Twitter’s loss in value into SpaceX’s balance sheet so early investors can cash out.
You see, the value has to hold because nobody has been paid. And it’s worth pointing out the only profitable venture is Starlink, and the company generates more revenue from renting out its NVIDIA chips to Anthropic than it does from its rocket systems.
Three, dumping shares on unprofessional investors. While typical IPOs allocate ninety percent of shares to institutions and ten percent to retail investors, SpaceX is giving thirty percent to ordinary investors. And critics say this is because institutional investors refuse to pay such an inflated price. Ever wondered why you’re being given access through CommSec in Australia?
Four, fast-track index rules. Under traditional rules, new stocks require a seasoning period of up to a year before they’re included in major indices like the Nasdaq.
This protects smaller passive investors from buying novel ideas without an established track record on the stock market. SpaceX would need a rule change if it wanted to be included in an index early.
Well, according to The Wall Street Journal, the Nasdaq has changed the rules, allowing a fast entry within fifteen days for SpaceX. Why? Because Musk could have gone to the New York Stock Exchange, who might have offered to change the rules too.
Five, you’ll own some SpaceX whether you like it or not. By entering the NASDAQ almost immediately, index funds are required to buy billions of dollars worth of SpaceX stock to mirror the index, regardless of whether it’s a good investment. This is a positive, of course, for those speculating on short-term support.
Six, the bag-holder dynamic. The combination of artificial scarcity, offering less than five percent of total shares to the public, and immediate index fund demand is designed to rapidly spike the stock price. But this allows early institutional and insider investors to cash out, potentially at a much higher than warranted price, leaving ordinary retirement savers holding the bag.
And finally, seven, NASDAQ’s rule change marks a peak. Over time, you see regulation tighten, then loosen, then tighten again. When times are good, regulations loosen so everyone can join the party, which then keeps going. Eventually, the party ends. And when it does, regulation tightens again in an attempt to ensure it never happens again.
SpaceX could mark an important milestone in stock market history.
A tiny supply of shares mixed with forced buying from retirees and new investors might put a rocket under the price, pun intended. But if it does, the smart money, the early investors, and the insiders look set to cash out. SpaceX has literally rewritten the rules to ensure that everyday investors will be holding the bag irrespective of the outcome. So you can stay up to date with my insights by following me on Facebook and Instagram. And who knows? You might still be able to follow us on X.
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.
