The track record for big IPOs, the Fed’s inflation challenge and keeping a planning-first perspective.
The long-anticipated SpaceX IPO is here and has raised $75 billion. The company’s $1.77 trillion valuation ranks it among the world’s 10 largest companies, comparable to the likes of Broadcom and TSMC. Elon Musk is now a trillionaire.
As opposed to a more traditional 90- to 180-day IPO lockup for insiders, SpaceX has established a staggered release over the next six months that will allow most insiders (Elon Musk has agreed to a 366-day lockup) to sell shares early, which has the potential to increase tradeable float (the number of shares trading publicly) faster. As lockups expire and more shares become available, SpaceX will increasingly become a sizable market constituent.
Several index providers recently reevaluated their methodology in advance of the SpaceX IPO and others are anticipated to do so later this year. FTSE Russell and Nasdaq adjusted their rules to allow for the company’s early inclusion in those benchmarks, while the S&P 500 index held to its stance that inclusion can only occur after a year of trading. Some applaud the rule changes, arguing the index should include a transformational and mega-cap company like SpaceX immediately in the benchmark so it is available to the retail investment base. But others have said that it could leave retail investors “holding the bag” once the initial hype subsides and valuations normalize.
You might wonder: why is this a concern when there is so much hype around this company? While past performance may not be indicative of future results, the five largest U.S. IPOs by initial market-cap valuation—Alibaba, Meta, Uber, AT&T Wireless and Rivian—posted significant losses 12 months later, with an average decline of almost 40%.
Other highly anticipated IPOs in recent decades, including Snap and General Motors, experienced one-year losses exceeding one-quarter of their initial value.
Time will ultimately tell how SpaceX performs, and certainly most of the aforementioned companies did eventually recover after the early and meaningful price declines following their IPOs to become strong market constituents. However, history suggests that the robust returns generated for private-equity investors may not carry over to public equity markets, or at least not in the short term.
In addition, with Anthropic and OpenAI also in the mix and expected to go public later this year, as well as others whispered to be in the offing (including ByteDance, Databricks and Stripe), it is worth saying that the public-equity landscape will experience a significant reshuffling. Including these companies in benchmarks, with so much investor capital tied to passive index investing, will lead to forced selling of existing investments across both passive and risk-aware products. In other words, to make room for these new behemoths, something will have to give, so brace yourself for volatility in other key benchmark names as a result.
And if all of that wasn’t enough to chew on, consider this: Elon Musk is expected to control over 80% of SpaceX’s voting rights while acting simultaneously as CEO, CTO and board chair. This governance structure had Nordic pension plans saying avsked (farewell) to the opportunity due to the risks. But that didn’t stop others who piled into the stock at the open, helping to push shares over 20% higher than the IPO price of $135 per share.
Switching gears, there are other things soaring this week that we need to discuss: inflation statistics.
Both the Consumer Price Index and Producer Price Index clocked in well above expectations and prior months, rising 4.2% and 6.5% year-over-year, respectively.
These fresh multiyear highs underscore the pain befallen consumers resulting from disruptions in the global energy market. While the American consumer has proven thus far to be incredibly resilient despite challenging conditions, can we expect that resilience to be indefinite? Without Musk bucks, the average American cannot perpetually withstand elevated costs as inflation undermines real wage growth and broader-based purchasing power. Eventually, higher prices will further slow, and if sustained, break the consumer resulting in a meaningfully reduced growth profile for the domestic economy.
For the Federal Reserve, dangerously high levels of inflation suggest additional accommodation is off the table, at least for now. With inflation now double the Fed’s intended target, it would seem new Fed Chair Kevin Warsh may need to raise the specter of interest rate hikes at next week’s meeting. It will be interesting to see if the FOMC and its new Chair will be willing to tolerate above-target inflation and bring back the idea that this is a temporary or “transitory” impact from higher energy prices. That proved very troublesome for the Fed post-COVID, and may lead to market angst once the sky clears from all the SpaceX rocket fumes when we turn back to the reality of daily living.
As always, I urge you to review these developments in consultation with your RWA team to ensure you are considering their impact on your plan and portfolio. Try to keep the hype focused about your success, not drafting another’s, and balancing the euphoria with a healthy dose of prudence—but also curiosity. We are in new territory these days, with technology rapidly changing the landscape around us, and must be open to possibilities and poised to participate if and when the time is right.
Written by a human.