SpaceX is set to go public next week at an eye-watering valuation of $1.8 trillion, by far the largest IPO in history. While many investors are excited to be able to purchase shares in the company, the headlines are distracting from the fact that the IPO combined with its accompanying rule changes seem to be set up in a way that will give its current owners exit liquidity at the cost of retail and passive investors who will be left holding the bag.
SpaceX is undoubtedly a revolutionary and innovative company, but in its current state, its financials are far from that. While revenues have been growing, at $18.7 billion, it is sitting at the same level as General Mills, the maker of your breakfast cereal. In terms of profit, the company is deeply in the red with a nearly $5 billion loss last year. In order to achieve the $1.8 trillion valuation, Goldman Sachs’s projections have SpaceX’s AI division revenue increasing 100 times by 2030.
The massive valuation and “fast-tracking” onto indexes will further exacerbate the concentration issues that we are seeing in the current market. The U.S. already makes up 63.5% of the MSCI “World” Index and will likely only grow further as SpaceX and successive IPOs roll out this summer. While the increasingly distorted market is already problematic, it is exacerbated by the rule changes that the Nasdaq is implementing as a part of the deal. Effective May 1, the minimum float requirement for new listings was eliminated, allowing for new listings to join the index after just 15 trading days, instead of the previous three months. Additionally, the 10% free-float requirement that is used to calculate the index weight was waived specifically for mega-cap companies. These rules were put in place to protect passive investors from the volatility and lack of transparency associated with the early days of an IPO. Worryingly, other exchanges like the FTSE Russell and Dow Jones have already, or are considering implementing changes that go even farther.
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The significance of these moves is that passive funds will have to automatically buy the shares as prices get continually bid up. These funds don’t pick and choose; when a name is added they must buy it regardless of what it is trading for at the time. With just 4% of SpaceX shares expected to be free-floating, the problem becomes even worse as hundreds of passive funds compete to buy a tiny pool of available shares.
The rule change that makes it most clear that exit liquidity is a key motivator for the IPO is the fact that insiders will no longer have to wait the normal six months before selling shares. They will now be allowed to sell a portion after their first public earnings report, on June 30.
As markets become increasingly “gamified”, it is more important than ever to have a sound, long-term outlook and not chase unpredictable fluctuations that have nothing to do with business fundamentals and everything to do with passive index mechanics. While our strategy of prudent profit taking and active rebalancing may mean missing out on some short-term trends, it also significantly reduces the downside risk and gives us the flexibility to redeploy funds when opportunities present themselves.
Ultimately, while the SpaceX IPO may be framed as a once-in-a-generation opportunity, investors should approach it with caution and a clear understanding of the underlying mechanics at play. The combination of elevated valuation, forced index buying, and insiders wanting to exit creates a setup where enthusiasm can quickly give way to panic. For many passive investors, exposure will come not by choice but by default as SpaceX inadvertently becomes a large chunk of their portfolio without requiring any action on their part. What is being marketed as an exciting entry point into a pioneering company could instead become a costly lesson in how market structure can shift risk onto those least able to avoid it.
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