SpaceX stumbles

{"text":[[{"start":null,"text":""}],[{"start":4.6,"text":"Good morning. Global stocks fell yesterday, led by a sell-off of hyperscalers and chipmakers. The reaction in Korea was extreme — the Kospi index tumbled 10 per cent. SpaceX, which lost $400bn of its market value on Monday, found its footing at around $156 a share. The SpaceX sell-off came just around the launch of its $25bn bond offering. Perhaps a reminder of the company’s massive investment needs gave investors a dose of reality. Meanwhile, the market is adjusting to a Federal Reserve that is at once more hawkish and less chatty. The Nasdaq and the S&P 500 have now gone the best part of nowhere for the past seven weeks. Is this the air coming out of the AI boom, or the market positioning for a period of tighter policy? Both? Neither? Email us: unhedged@ft.com."}],[{"start":55.45,"text":"Programming note: We’ve corrected a portion in yesterday’s letter to make clear that a few rate increases, not cuts, needn’t scare equity investors. We apologise for the mistake. "}],[{"start":66.45,"text":"EarthX?"}],[{"start":67.7,"text":"In pretty much every way you can imagine, the SpaceX listing on June 12 was no ordinary initial public offering. Instead, it was held up as a bellwether of the stock market boom and investors’ appetite for valuations divorced from fundamentals. A lot is riding on its momentum, not least the expected mega-IPOs of OpenAI and Anthropic."}],[{"start":90,"text":"Elon Musk’s AI/satellites/rockets conglomerate was primed to pop in early trading. As Rob wrote last week, the unusually large allocation to retail investors, the limited float and imminent fast-track absorption into major indices all but ensured that demand would outstrip supply and squeeze the IPO price upwards. And it worked!"}],[{"start":110.15,"text":"But the good vibes have faded somewhat. In the past two days, SpaceX shares have dropped nearly 30 per cent from their post-IPO intraday peak of $225 on June 16. We’re still well above the IPO price of $135. Still, it’s rough for anyone who jumped in on day one."}],[{"start":null,"text":""}],[{"start":129.45000000000002,"text":"The valuation always seemed a tad questionable to us, but hey, investors are adults and donating hard-earned money to the noble cause of creating the world’s first trillionaire is not a crime. The risk is now that the jitters become a catalyst for a wider sell-off of anything related to AI. "}],[{"start":148.3,"text":"To get a sense of how unusual this all is, we turned in part to the work of “Mr IPO” — Professor Jay Ritter, director of the IPO Initiative at the University of Florida. He has spent more than four decades analysing the performance of thousands of new listings and his research points to several conclusions that are especially relevant here:"}],[{"start":168.95000000000002,"text":"IPO investors get a first-day pop at the offer price. That’s a function of deliberate underpricing, which rewards the enthusiasm of day-one investors. The SpaceX IPO price of $135 may seem nonsensical and overvalued to non-believers, but there is essentially no price discovery before a new listing. Musk and his bankers took an educated guess at what the market would bear and priced a little below it. Ritter’s research suggests that the SpaceX pop, while dramatic, was nothing out of the ordinary. Something like 18 per cent is typical."}],[{"start":201.5,"text":"IPOs often underperform over the next few years. In a classic 1991 paper, Ritter found that from the first-day closing price to the third anniversary, listings between 1975 and 1984 “substantially underperformed” comparable companies — a conclusion that has been repeated in numerous other studies since. Some of the more recent analysis is summed up in a handy note from Dimensional Fund Advisors. It argues that new listings in aggregate “have behaved like small growth, low profitability, high investment stocks. As such, they have underperformed the broad US market in their first year.” Again, there’s nothing new under the sun."}],[{"start":null,"text":""}],[{"start":244.5,"text":"Hot markets exacerbate both the pop and the downdraft. This is Ritter and his co-author Tim Loughran’s main finding from the dotcom bubble. Underpricing became more extreme and long-run performance was even worse for IPOs issued in high-volume, peak-of-the-cycle years. When hype is high, after-market buyers can end up paying too much."}],[{"start":267.25,"text":"The next big test for the SpaceX share price will be the expiration of the lock-up periods, which have been cleverly staggered. Lock-ups typically expire about 180 days after listing. But in SpaceX’s case, rather than one big lock-up expiry, early investors can sell small portions of their shareholdings starting 70 days after the IPO, and then much larger portions after the company reports its September quarter. Until then, lock-ups will continue to limit the supply of shares."}],[{"start":300.35,"text":"SpaceX may be a biggie. Its IPO was the largest on record. But it is largely sticking to the typical script for a baby stock."}],[{"start":309.15000000000003,"text":"One good read"}],[{"start":310.90000000000003,"text":"The WFH battles will continue until morale improves."}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":316.15000000000003,"text":"Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here."}],[{"start":null,"text":""}],[{"start":332.00000000000006,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1782294776_1501.mp3"}