Are you thinking of buying SpaceX shares at the IPO?

Did you also get bombarded with ads about the upcoming IPO of SpaceX?

Over the weekend I got several messages from platforms like DeGiro, Trade Republic and Trading 212 about the hot new thing: buying shares at the Initial Public Offering (IPO) of SpaceX.

Normally I ignore most financial news, especially when it comes to stocks of individual companies. It’s distracting noise to me.

But this one caught my attention... and I immediately felt uneasy.

Why?

Because it reminded me of my first investment in an individual company: I bought 5 shares of Rivian right after its IPO hype peaked in November 2021, at about €172 per share, feeling proud of myself for jumping “early” on the bandwagon of “the next Tesla, but for trucks”.

And then proceeded to watch my investment lose value over the next months, until eventually I sold it at more than 80% loss. Now Rivian stock is about €16 per share.

If you feel enticed by the idea of owning SpaceX shares, I’m not saying don’t do it.

What I’m offering instead, with this newsletter, are 3 things for you to consider before you buy them at the IPO.

#1: Consider the historical performance of stocks after their IPO

When a private company decides to start selling its shares to the general public (including retail investors like you and I), they do an Initial Public Offering (IPO).

This year, there’s three massive IPOs catching headlines: SpaceX scheduled on 12 June, OpenAI and Anthropic (dates not yet announced).

Though it might be exciting times, we should remain calm, cool-headed investors, and ask ourselves: “will I get a good ROI if I purchase at the IPO?”

There has been enough evidence showing that most new public companies severely lag behind benchmarks like the S&P 500 or NASDAQ 3-5 years after their IPO. Over a three-year period, nearly two-thirds of IPOs historically trade below their IPO-day peak prices (source).

Why? Because:

1.       Investment banks intentionally price the stock at IPO below its actual market value to create hype and ensure a successful debut,

2.      Startups and high-growth companies often go public during periods of peak market enthusiasm. Once the hype fades, valuations normalize to reflect the company's actual fundamentals, and

3.      Many insiders, founders, and early venture capitalists are barred from selling their shares for a specific period after the IPO. But when this lock-up period expires, a sudden influx of shares floods the market, which can drive the stock price down.

While there are some examples of companies whose share prices are now much higher than at the IPO (e.g. Google), are you willing to take the 1-in-3 chance of making money?

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#2: Consider your level of knowledge and conviction of SpaceX

How much do you know about the products and services SpaceX provides?

Are they competitive? Is there enough demand? Will there be enough demand in the long-term future?

What about competition, now and in the future? Is there another up-and-coming space rocket company posing a threat?

What about the quality of SpaceX’ management team? The financial health of the company?

And regulation, is that and will that be supportive of the broader industry?

I personally have no clue about any of the above. But I do know that answering those questions is not even scratching the surface.

The proper way to invest in individual stock is to know the company and its industry as much as possible before you buy, meaning having a solid thesis around it.

In fact, a good investor looks for reasons NOT to buy, thus avoiding falling prey to confirmation bias.

Otherwise, you’re essentially gambling.

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#3: If you are investing in a broad, diversified fund, you will end up owning it eventually

SpaceX’s estimated market value is at $ 1.77 trillion, which right now would make it the top 8th company in the world.

By the way, Open AI and Anthropic’s market values are estimated at about $850 billion and $965 billion, respectively. This would put them comfortably in the top 20 company list.

If you invest in a broad diversified fund like the FTSE All World or the S&P 500, you will get exposure to these companies once they go public, because these index providers (i.e. the FTSE and S&P 500 companies) will automatically add these big companies to the index.

But it doesn't happen instantly or equally across all funds, as it depends on the rules of the index provider. For example:

• FTSE All-World, MSCI and NASDAQ provide fast-track entry for mega-big companies. If a company's market value is exceptionally large on its first day of trading, it bypasses the usual quarterly waiting period and is automatically added to the fund within a few business days.

• The S&P 500 is notoriously strict. There is no fast track for IPOs. To get into the S&P 500, a company must be public for a minimum period and, crucially, must prove four consecutive quarters of actual profit.

Index funds also don't look at a company’s total value, rather they look at the shares actually available for the public to trade (called free float, and excluding what founders like Elon Musk lock away).

This would mean that if SpaceX goes public with an available 'free float' of $50 billion (instead of all $1.77 trillion), it would make up roughly 0.05% of a total global stock index.

It sounds tiny, but that is the point of diversification: you get to participate in the upside of the next big thing without taking on too much risk, hedging against post-IPO hype deflation.

Meanwhile, Carlos and I will sit this one out. We are currently satisfied to just have watched a live SpaceX launch last month from Cape Caneveral (pic above as proof).