Key Points
- SpaceX is preparing what could become the largest IPO in history, giving millions of retail investors a chance to participate in the offering.
- Major financial institutions have been actively promoting the stock ahead of the IPO, seeking to build investor interest and support demand for shares.
- Investors should carefully weigh the risks before buying into an IPO that many analysts believe is significantly overvalued.
SpaceX (SPCX) is on the verge of the largest initial public offering (“IPO”) ever, with shares expected to begin trading on the Nasdaq starting this Friday, June 12. Individual investors have never had a better opportunity to participate in a high-profile IPO than they do now with SpaceX.
The offering is currently targeted at $1.75 trillion, with up to $86.2 billion in stock being sold. About 30% of that will be reserved for retail investors, giving the public the chance to invest more than $25 billion.
“Retail is going to be a critical part of this and a bigger part than any IPO in history,” said SpaceX’s Chief Financial Officer (“CFO”) Bret Johnsen. He said that retail investors “have been incredibly supportive of us and of [CEO Elon Musk] for a long time, and we want to make sure that we recognize that.”
But investors should honestly ask themselves why the big investors and dealmakers who run Wall Street would want to cut them in on the kind of “great deal” they usually reserve for insiders as they consider whether to buy SpaceX shares.
Big Banks, Fidelity Tout SpaceX Shares
To drive interest in SpaceX stock and help sell shares, big financial institutions have been out in force in recent days, touting the stock to high-net-worth investors and those less well-heeled.
Long-time JPMorgan Chase (JPM) CEO Jamie Dimon spoke to high-net-worth and retail investors from the bank’s Manhattan headquarters last week ahead of the IPO. The event was broadcast to more than 90 private bank offices and branches, as Dimon intended to use the bank’s more than 5,000 branches to generate further interest in SpaceX’s stock debut.
Bank of America (BAC) hosted a chat with Gwynne Shotwell, SpaceX’s president and chief operating officer, and Johnsen to generate interest from the bank’s financial advisors and wealthy clients.
Meanwhile, Fidelity Investments has reduced its minimum account size for clients to access the SpaceX IPO down to $2,000. While this amount won’t guarantee you get any shares, it does get you in the game. Fidelity says it will try to allocate some shares to everyone who expresses interest in the offering, though it expects demand to outpace the supply of shares.
What all this marshaling of bank forces should tell you is that SpaceX wants you to buy its stock so much that it’s cutting seemingly almost anyone in on the deal. That’s what should worry you.
Why SpaceX Is Widely Opening Its IPO to Retail Investors
It’s easy to be cynical about Wall Street, but there’s at least one good reason that retail investors are getting a bite of the IPO apple here.
A typical IPO offers just 5% to 10% of its offering to the public. With even the largest IPOs ever, that might mean companies are raising $15 billion to $30 billion in total from investors. The average IPO will be much smaller still. Big banks can meet that demand relatively easily by tapping larger investors such as their best clients and others who can bring a lot of money to the table. So, in a typical IPO, an individual investor might be lucky to buy a handful of shares.
In the SpaceX IPO, however, underwriters may need to place more than $86 billion in stock, and it’s tough for even the big money to cover an investment of that size. So, letting retail investors in the door can help the company sell its massive IPO at the price it wants.
And selling the IPO at the price they want is exactly the goal of SpaceX insiders. Like putting a thumb over a garden hose to spray it farther, SpaceX is offering a lower percentage of shares for sale to help attract the type of investors willing to pay nearly any price to be part of the Elon Musk show.
How Musk went about the process is unusual, too. SpaceX set the price before meetings with investors, during which a company can gauge demand and adjust accordingly. For example, the IPO of Cerebras Systems saw a massive jump in its price as demand soared.
But before the IPO roadshow, Musk and SpaceX set the price – $135 a share – unilaterally rather than through the usual supply-and-demand dynamics in an IPO. SpaceX told its underwriting banks that it would not adjust the price, meaning they need to get out and sell. And so, we’re seeing many of the retail brokerages tout the stock to anyone who will listen.
That makes individual investors especially important to this IPO, since they are being counted on to fill a funding gap.
That’s what Johnsen really means by “we want to make sure that we recognize” the support retail investors have given Musk, such as massively overvaluing Tesla (TSLA), where he is CEO. They’re willing to cut retail investors in for a slice of SpaceX at what fundamentally looks like an exorbitant price.
Musk has a long history of managing the SpaceX stock price higher through coordinated price-setting and talking up the stock for an eventual IPO.
How Much is the SpaceX IPO Worth?
The big question for all investors in any stock is always, what is it worth? A number of analysts have come out in recent weeks noting the incredibly high valuation on SpaceX at $1.75 trillion.
- Research service Morningstar pegged SpaceX’s fair value at $780 billion, implying 55% downside from the IPO price of $1.75 trillion.
- Aswath Damodaran, finance professor at NYU’s Stern School of Business, values the stock at $1.25-$1.35 trillion, suggesting a downside of 23%-28%.
- Danish pension fund AkademikerPension figures SpaceX is not worth more than $1 trillion, but has blacklisted the company for its “catastrophic governance structure.”
We’re hearing credible experts say that SpaceX is tremendously overvalued. Of course, you don’t need to believe them, but they’re not trying to get you to buy anything either.
There are reasons to believe that SpaceX may zoom higher in the weeks after the IPO. One of the largest is that the Nasdaq exchange will add the stock to its Nasdaq 100 index only a few weeks after the IPO, following a recent change to its index inclusion rules. This means that every fund tracking that index will need to purchase the stock in order to accurately track it, potentially causing a groundswell of buying in the stock’s early days.
But individual investors should carefully weigh the wise words of Groucho Marx, who said, “I don’t want to belong to any club that will accept me as a member.”
The fact that Wall Street’s rich and powerful want retail investors at the table may be enough of a “tell” to indicate that you may not want to be there – despite the fact that SpaceX is the most accessible IPO ever.
Regards,
James Royal, PhD
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