My Thoughts on SpaceX IPO

For the last couple of weeks, the SpaceX chatter has increased to a fever pitch. This IPO will be historic for multiple reasons. And, it will be the first of several as OpenAI and Anthropic are also coming soon. If you're looking for a detailed analysis and valuation of SpaceX, this discussion will fall short. Instead, I wanted to share some thoughts and opinions for your consideration.

Number Go Up

I remember the first time I saw the phrase "Number Go Up." It was in the middle of the mania that took place around crypto tokens and NFTs (non-fungible tokens). If you don't know what NFTs are, then you aren't missing out. Let's just imagine a world where people would pay millions for digitally created jpegs... I mean "art."

It seems tremendously silly at this point. However, there was a time when this was quite a serious endeavor. Millions of people, armed with instawealth created by crypto markets, threw obscene amounts of money at all sorts of schemes.

Why did they do this?

Well, simply put-- the rewards were almost instantaneous. Imagine buying something that you KNOW is going to multiple its value overnight. And then again... possibly again.

In this kind of environment, value isn't even discussed. Sure, we will come up with a story to tell ourselves. But, the heart of the matter is that the number on the screen keeps going up; so we keep buying.

I'm not saying that is the deal with SpaceX, but I'm getting that vibe. Here's a brief bullet point talking list from DataTrek Research:

Source: Datatreck Research

What I Like About SpaceX

I love innovative companies that show real potential to improve the potential for human flourishing. SpaceX falls into that category. The reusable rocket technology is exciting. Will this open up a "railroad system in space?" I have no idea. Personally, I didn't know we needed one.

Perhaps the most compelling thing (for me) is the Starlink technology. This satellite technology has the potential create a global communications network with high-speed broadband internet. What happens to the economy of the world if we can bring the internet to all corners? What if we can connect shipping and distribution networks across the globe? What economies of scale and efficiencies might we uncover? This is pretty cool.

SpaceX also has (likely) the greatest showman of this generation. Elon Musk has the ability to cast a vision that captures the imagination. He also owns arguably the largest comms platform on the planet in X dot com.

What I Don't Like About SpaceX

From an investing standpoint, IPOs almost always make me nervous. That's just me. Don't let me throw rain on your parade.

Let's remember that IPOs are often hyped for weeks before the shares become publicly available. There's a reason why SpaceX has dominated the discussion. The marketing and PR teams are working at full strength because this is their SuperBowl.

But... to use a phrase that's common with our younger generations... this IPO feels a little cringe to me. First, let's just discuss the glaring reality that this company is coming to market at $135/share; which would have it with a valuation of approximately 1.8 Trillion. That puts it in the top 10 largest companies by market cap. BUT.... this is a fixed price issuance, creating market cap on day 1. Guess what really happens on Day 1? Price discovery.

A company this size that hasn't had real price discovery in public markets should give everyone a pause (my opinion). What's really going on with their books? ​At least one prominent analyst thinks Space X is way overvalued​. Just researching the company online will reveal a wild variance of valuation metrics. To me this feels like no one really knows what this company should be worth.

Next, many of the indexes that investors often follow are totally changing the rules to include SpaceX. ​The Nasdaq 100, FTSE Russell, and Dow Jones Total US Market​ have all fast-tracked SpaceX to be included in their indexes. ​The MSCI indexes​ have also joined the early entry party. ​So far, the S&P 500 index is holding its ground and not fast-tracking the stock.​

Why does this matter?

Well... why have rules if we aren't going to follow them? I'm not a huge fan of over-regulation in markets, but much of these rules exist to provide a framework that protects investors and establishes trust. The willingness to just throw the rules aside like this is a red flag (to me).

Also...with investing markets, there's something referred to as a "passive bid" or "perpetual bid." This comes with companies that are listed on the major indexes because so many investors nowadays invest through index funds. This includes retail investors, 401(k) investors, and many different pension funds. Millions of investors are just dollar cost averaging their contributions into these indexes via their retirement accounts.

If you are just buying the index, you'll own whatever gets listed in that index---whether its junk or not.

Now, one could argue that this a feature and not a bug for index investors. After all, that's what you're doing--- buying the market for better or worse. You aren't trying to pick the winners or limit losers. You're actively accepting the market return.

Fair point.

Yet... the indexes have established this trust with investors by having rules for inclusion. Many of these indexes are now waiving those rules. I'm not ashamed to say that I don't like it.

Lastly--- Musk is going to retain significant control. He's learned from his past issues with board governance; and he's not going to revisit those headaches. ​Musk holds a total of 5.6 billion Class B shares of SpaceX stock, according to the company’s S-1​, making his combined total voting power 85.1% before the IPO.

Even with the IPO, Musk's shares are barely diluted--and his voting power is intact. The ultimate decision-making authority will likely rest with Musk for years to come. Some may like this... some may not.

For me, I think it raises a lot of questions. Time will give us answers.

What Now?

Well, if you are an insider who was lucky enough to acquire some ownership while SpaceX was private, I suspect you are feeling like it's Christmas morning. Its no secret that this IPO will mint a new cohort of millionaires--and possibly some billionaires.

But, what about the rest of us?

My guess is that IPO shares are going to be scarce to come by. I suspect the offering will be oversubscribed, as many retail investors are scrambling for access. In my myopic view, I feel that retail investors are being looked at as a source of exit liquidity for insiders...and I double down on this belief b/c of the hasty inclusion into indexes AND the ​availability of shares to retail investors​.

For our in-house portfolios, we are looking into the exposures that we'll have to the company itself. The S&P's decision to not fast-track SpaceX into the S&P 500 buys us some time for a deeper look. There still may be some sector funds that purchase shares, and some mutual funds managers may decide to take an active share of their fund holdings into SpaceX.

At the moment, we do not have any direct exposure in SpaceX, nor do we have plans to seek any direct exposure in the stock via the IPO. However, the IPO and the subsequent inclusion of SpaceX in many indexes, will have a market impact, with some 2nd order effects. I am unsure of how widespread that will be, but I expect volatility.

My gut tells me that diversified investors shouldn't worry. That's the entire reason we diversify-- to reduce or eliminate idiosyncratic risk that comes with any specific company. Diversification should do its job for us here.

One thing that is happening, however, is that many indexes are becoming more and more dominated by a smaller number of mega-companies. The S&P 500, for example, is market-cap weighted index. Thus, larger companies will make up a larger and larger piece of the pie.

​At present, the top 10 companies in the S&P 500 make up almost 40% of the index.​ As the index becomes more concentrated, investors should consider their true level of diversification. Naturally, a rising tide lifts all boats---but we also must consider risk management, not just growth potential.

We will continue to monitor the SpaceX story, as I'm sure it's going to make headlines the moment shares being to trade. If you have any questions or thoughts about the IPO, I'd love to read them. In the meantime, onward we go.

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