SpaceX Is Worth $2.1 Trillion on Its First Day of Trading. Is That a Problem for Investors?
After all the buildup, the SpaceX (NASDAQ: SPCX) initial public offering (IPO) was perhaps a bit of a letdown. That’s not necessarily because of the stock’s performance, which was notable, but because the months of lead-up ended in an event that was completed in, basically, a day. It was sort of like waiting an hour…
After all the buildup, the SpaceX(NASDAQ: SPCX) initial public offering (IPO) was perhaps a bit of a letdown. That’s not necessarily because of the stock’s performance, which was notable, but because the months of lead-up ended in an event that was completed in, basically, a day. It was sort of like waiting an hour for a roller coaster ride that only lasts three minutes.
Now that SpaceX is public, however, investors need to consider what it means. And one of the biggest issues is the company’s massive size. With a $2.1 trillion market cap after just its first day of trading, it is already one of the world’s largest companies. Here are a few things to think about if you own it, are considering buying it, or are just investing more broadly.
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How did the SpaceX IPO go?
For those who remember the dot-com bubble, the SpaceX IPO wasn’t that impressive. Back at the turn of the century, it was common for IPOs to double in a day. SpaceX “only” saw a price increase of around 19%, with the IPO price set at $135 per share and the stock closing its first day at roughly $160.
From a functional perspective, the bankers who handled the IPO did a pretty good job pricing it. Still, by the end of the day, the company’s market cap ballooned to $2.1 trillion. There are only six companies that are larger than SpaceX, and it is a pretty tight race with Taiwan Semiconductor(NYSE: TSM) for the sixth spot, as the chipmaker’s market cap is $2.199 trillion.
The good news here is that the market absorbed the IPO in relative stride. That bodes well for the future, since there are more large IPOs on tap, including Anthropic and OpenAI.
The size of SpaceX has led to big index changes
That said, SpaceX’s size, combined with the company’s popularity, has led to interesting shifts in the world of indexes. While the S&P 500 index(SNPINDEX: ^GSPC) is holding to its inclusion rules, other indexes have made changes to quickly add SpaceX to their index lists. For example, the Nasdaq-100 will likely add SpaceX after around 15 days.
Being added to an index will lead index funds to buy the stock, creating additional demand for the shares. Inclusion in indexes will also create a base of investors who have no choice but to own the stock. The normal dynamics of a smaller IPO don’t apply here, and, for the most part, the market is in uncharted waters. However, it seems reasonable to expect the shares to hold up, if not rise some more, at least in the near term. From a longer-term perspective, it seems reasonable to expect Anthropic and OpenAI to receive early index inclusions as well.
What about SpaceX as a business?
SpaceX is already a massive company, but it is also spending heavily on research and development because “space” is still an emerging technology. While SpaceX is currently a leader in the space industry, there’s no guarantee it will remain there. And, perhaps equally important, remaining a leader will likely mean SpaceX remains a money-losing business for longer. And then there’s the massive capital being spent on Grok, SpaceX’s AI product. Once again, a huge investment is needed to compete in the AI sector. Red ink is likely to be the norm for quite a while.
While the company’s Starlink business is highly profitable, it is merely subsidizing its investments in space exploration and artificial intelligence. And even that isn’t enough, since the company clearly needed to raise additional capital by going public. Buying SpaceX today is a bet that Elon Musk’s vision will, someday, lead to a profitable business. That belief worked out well with Tesla(NASDAQ: TSLA), but there’s no guarantee of a repeat performance.
In fact, despite its massive size, SpaceX is really just a money-losing start-up. If you wouldn’t be comfortable owning a smaller money-losing start-up, you should probably think twice about buying SpaceX. A $2.1 trillion market cap doesn’t magically turn SpaceX into a “safe” investment.
SpaceX: Think before you take this leap of faith
Headline-grabbing events on Wall Street don’t always work out as well as hoped over the long term. Right now, the excitement is high, but if SpaceX continues to bleed red ink, investor enthusiasm could quickly wane. For risk-averse investors, the best way to own SpaceX might be through a diversified index fund. More aggressive growth investors may want to jump aboard, but you’ll probably want to think of the unprofitable company as a long-term holding.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool has a disclosure policy.
SpaceX Is Worth $2.1 Trillion on Its First Day of Trading. Is That a Problem for Investors? was originally published by The Motley Fool
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