It’s not often that news about one particular stock reaches the broader American consciousness. But today we have a big story – the initial public offering (“IPO”) of SpaceX (SPCX), Elon Musk’s space launch / satellite communications / artificial intelligence company. The journalists at Investing.com have a good overview of the transaction. Because of the interest & excitement around this new listing, we’ve had a flurry of questions from clients. Here are a few of those, and some quick answers.
Is SpaceX being fairly valued, or is this a giant ripoff?
Well … it depends on how we decide how we should value it. Some have suggested that we should look at the ratio of the company’s value at this IPO price to its recent annual sales numbers, the “price-to-sales ratio”. On that measure, as the Wall Street Journal puts it, “SpaceX’s valuation multiple is in a league of its own”, at approximately 93.6 — remarkably high, given that the S&P 500’s aggregate ratio is around 3.5. If we look, though, at the ratio of this IPO price to the net value of the assets the company owns, the “price-to-book ratio”, then we’re looking at something much more reasonable. On that measure, SpaceX has a ratio somewhere between 22 and 37, depending on which version of the measure you use; for comparison, the big chipmaker Nvidia has a ratio of around 32. The analysts at Morningstar have pulled together a wide variety of valuation measures, and crunched the numbers: they think that the IPO is “significantly overvalued”, setting a “fair value estimate” at $63 per share, less than half of the IPO’s $135 opening price.
The wide range of estimates have fuelled some speculation about this entire transaction, with some arguing that Musk and the other insiders at SpaceX have “engineered the IPO as a massive wealth transfer from everyday investors” to them. While we have ample reason to be cautious of Musk’s motives, it’s also true that many if not most IPOs transfer significant wealth from the general public to the insiders who built the firm. Lots of big investment advisory firms have special teams who offer advice to people who are looking at the impacts their company’s IPO might have on their financial situation — here’s a website about that from Morgan Stanley, for example. And in this case, it looks like about 4,400 SpaceX employees, who have spent years waiting for this IPO, are reaping huge rewards.
What about the “fast-track” to inclusion in market indexes?
Most new IPOs have had to wait quite a while before they’re included in the major market indexes, and therefore also in the mutual funds and ETFs that track them. Interestingly, Musk and SpaceX were able to make deals to get the stock “fast-tracked” into some indexes — but not others. Some firms, like NASDAQ, FTSE Russell, and MSCI have shortened the window to between 5 and 15 trading days, so the indexes and funds will be buying SpaceX stock very soon. In contrast, Standard & Poor’s has decided not to waive its ordinary 12-month waiting period for inclusion in the S&P 500 index. This will mean that some investors in those big indexes will be exposed to the probable volatility of the new listing … but not very much. For example, William Blair Investment Management estimates that SpaceX will probably make up approximately 0.11% of the Russell 1000, an index of the 1000 largest US companies. On the other hand, some state regulators have asked for “more information” from the index companies regarding the decision, and have asked them to pause similar agreements with other upcoming IPOs, based on the risks involved.
Will there be SpaceX in my portfolio any time soon?
The mutual funds, ETFs, and separate account managers we use for our client portfolios are all very focused on “environmental, social, and governance criteria” (ESG) for their investment decisions. Over the past few weeks, I’ve had private conversations with representatives from a handful of those firms, and they’ve all said that they’re hesitant at best to include SpaceX in their portfolios any time soon. This is confirmed in some new reporting from Bloomberg yesterday, headlined “SpaceX Treated as ‘Simply Too Risky’ for Funds with Governance Mandates”. Musk’s long-standing tendency to maintain tight control over his companies, even as they go public, has long been an issue for those concerned about good corporate governance; commentators at Harvard last week argued in a public blog post that the problems with he power structures in the now-public SpaceX “should be viewed as troublesome even by his most fervent admirers”. And a few of the managers I have spoken with recently have also worried that SpaceX has too much military-related income for their guidelines, and that the environmental impact of its rocket launches are not adequately addressed, so it’s not likely to be included in their funds.
In conclusion …
The market responded enthusiastically to the first day of trading for SpaceX, taking its price from $135 at its open to a closing price of almost $161, a gain of about 19%. Worries that it’s overpriced may have been overwhelmed by the excitement of being able to own a small piece of this fascinating company. But the concerns around environmental, social, and corporate governance issues will probably keep it out of our clients’ portfolios for the foreseeable future.
