Some of the biggest IPOs in history are likely to transpire in the next few months. While that news is causing euphoria on Wall Street, Main Street investors have a few reasons to be a little more cautious.
SpaceX, OpenAI, and Anthropic are all reportedly planning to IPO this year, needing access to public investment dollars to fulfill their AI and space exploration dreams. SpaceX, in fact, has already filed for its IPO, likely to happen later in June.
Traditionally, experts advise average investors to stay away from IPOs until the dust settles and we have a better idea of how the stock/company is actually faring after the initial hype.
Given the amount of attention and interest these companies generate, though, it is likely that many retail investors will want a piece of these hot stocks.
But there are a few things to highlight that are troubling about not only the companies themselves but also the way regulations are being changed because of these buzzy IPOs.
Changing index fund rules
Index funds own stock in many companies, generally in proportion to their market values. Typically, it takes many months for a company to go from IPO to being included in an index fund.
Given the potential valuations of SpaceX and OpenAI (more on that below), some index providers have recently proposed changing—or already changed—their own rules in order to include these large companies more quickly post-IPO than in the past.
The NASDAQ, for example, reduced its requirement from at least three months to 15 days, Reuters reports. The S&P 500 may cut how long companies need to be public from 12 to six months and also waive the requirement that large companies be profitable before they can be included in its index. (Smaller firms, meanwhile, would still need to follow the old rules.)
That means these companies could be included in your retirement funds virtually right after they IPO. This is…interesting, we’ll say, because stocks from companies that have recently IPOed historically underperform the overall market, typically by 3% to 5% per year.
Of course, if you are investing for the long term, maybe this is less of a concern to you. (Here is a compelling case for why this might not be a huge worry for index fund investors, if you’re curious to go deeper.) Essentially, if you have a few decades until retirement (or even one decade), that could be enough time for the stock to mellow out, and any initial volatility may not have a huge impact on the rest of your portfolio.
Proponents argue that investors should have access to the biggest companies ASAP so they don’t miss out on long-term growth.
“Rather than worrying about the narrow impact of faster IPO inclusion on index fund performance, we think investors would be better served by focusing on the long-term expected returns offered by the markets in which they’re investing—in particular the U.S. and non-U.S. equity markets,” write Victor Haghani and James White of Elm Wealth.
Of course, you can make the same argument that if if you are investing for the long run, waiting a few more weeks or months—as we did under the old rules—for these companies to be included in the indexes, after the price has stabilized, shouldn’t be that big of a deal, either.
The eyebrow-raising valuation for SpaceX
But plenty of people are raising alarm bells about these monster IPOs. SpaceX is seeking an initial valuation of $1.75 trillion, making it the biggest IPO of all time. As tech publication The Information argues, though, the company is likely worth closer to $700 billion, “and that’s being generous.”
There is really no fundamental business reason for the Elon Musk-helmed SpaceX to be on track to be the largest IPO in history, contends The Information (and many investors agree). Yet that is what is being forecast. (For reference, Saudi Aramco currently holds the title of the largest IPO in history. The state-owned oil company makes…many, many times as much money as SpaceX.) In fact, a $1.75 trillion market cap would make it more valuable than Meta—which actually does bring in more revenue—and Musk’s other high-flying public company, Tesla.
This is not about being a Musk hater. There has been a years-long debate about the seemingly nonsensical valuation of Tesla, and how it possibly warrants one of the priciest stocks on Earth when the company itself is not doing that well financially. What both Tesla and SpaceX have, though, is Musk—and so the stock prices are based on what they might do someday, and on general investor sentiment that Musk is a super genius who will deliver beyond everyone’s wildest expectations any day now.
The problem is if everyday investors buy the hype and get in on that elevated price, it will hurt them if and when Musk disappoints and the stock price of SpaceX falls back down to Earth. And if index funds buy up SpaceX stock at the elevated IPO price, then all retirement investors could be left worse off.
There are a lot of fascinating details in the SpaceX prospectus, including that it doesn’t really make any money yet. “SpaceX…has a financial picture that is notably worse than any other megacap U.S. company. It lost $4.9 billion last year on revenue of $18.7 billion,” The Wall Street Journal reports. Again, nowhere in the documents the company has filed is an indication it’s worth remotely close to $1.75 billion.
The governance structure of the company is also unlike any other, the The New York Times reports. Without getting too in the weeds, the company is essentially structured to benefit one shareholder over all others: Elon Musk. That might be well and good for a private company, but it’s seriously concerning when it is being essentially shoehorned into index funds that millions of American retirements rely on.
Shorter lock-up periods
Another concern, according to The Financial Times: SpaceX may allow some of its existing shareholders to sell off their stakes earlier than is typically allowed after an IPO.
Generally, there is a lockup period after a company goes public in which existing shareholders—in the case of SpaceX, Elon Musk, other employees, and large institutional investors—can’t sell their stock, typically for a period of 180 days after the debut. This is done to ensure a smooth IPO process and protect retail investors waiting in the wings to pick up some shares.
But SpaceX is allowing current shareholders to offload stock at the potentially sky-high price as soon as 70 days post-IPO, CNBC reports. (Musk has agreed to a 366 day lock-up period.) If you’d like to learn more about why SpaceX might be doing this, Business Insider has a good rundown on the company’s “float” problem.
Both of these unusual changes—the forced earlier inclusion in index funds, the potential waiving of the lockup period—should give investors pause, or at least lead them to ask a few more questions if they’re interested in investing in SpaceX.
For those investors who still want to buy these buzzy stocks early, Mario DiDomenico, senior vice president, and Marvin Rivas, wealth management associate, at Siebert Financial offer some words of warning:
“Make sure you’re buying actual public shares—not an SPV or unofficial fund claiming to offer ‘exposure,’” they say. “Those structures are not real equity, and anyone promising backdoor access to SpaceX should be treated as a red flag.”
Most importantly, take a long-term approach to all of your investment decisions. IPOs of this magnitude often trade lower in the months after their debut, meaning patience is a virtue.
“Do the fundamental work: Understand the business, stress-test the valuation, and keep your allocation modest relative to your net worth,” they suggest. “Conviction is great—but a long-term perspective will serve you far better than chasing the opening-day hype.”
