The SpaceX initial public offering (IPO) earlier this summer brought back memories of my early days in the financial industry when Alibaba went public and people went crazy over what media pundits were describing as the Amazon of China.
On the first day of trading (back on September 19, 2014), the Alibaba stock jumped 38% and that meant the company was valued at $25 billion. The underwriters of the deal made $300 million by helping out.
How’s the stock done since then? It’s up about 30% as of mid-August. That’s not great performance during what has been 12 good years for the market, despite a pandemic, several wars, and so on. And if you’re reading this, then you probably know that there have been many, many other investments/stocks that have done far better than that, and without having to worry much about them.
And now we’re barreling toward an IPO from Anthropic (the company that runs the Claude AI system) and another one from Jersey Mike’s, a sandwich chain.
Who wins on these IPOs? Well, Wall Street firms made about $500 million in the SpaceX IPO deal. My favorite story about how far these bankers will go to win these deals involves Goldman Sachs bankers showing up to meet with Lululemon before their IPO and they all were wearing tight-fitting Lululemon clothing.
It’s hardly ever the small investor who wins in these deals. It’s definitely the underwriters at big investment firms and the insiders who worked at the company in the early years -- when the idea of an IPO probably sounded a lot like IOU.
So does that mean that smaller investors always lose in these deals? Not exactly since these new stocks are added to indexes and ETFs and diversified things like that so that (hopefully) the new stock does well and adds to returns.
Chatter about the SpaceX IPO was rampant leading up to the listing.
My advice when people asked me for my thoughts about SpaceX tilted heavily toward caution since Elon Musk is a great salesman and, while he’s accomplished many things, I tend to get squeamish when something sounds too salesy or maybe too outlandish. If anything, I think buying a little of a “wild hare” stock each month isn’t a bad thing if it satisfies the urge to scratch an adventurous itch.
Put another way, here’s what Cory Johnson at Epistrophy Capital Research had to say about SpaceX to NPR.
“Maybe more than any IPO ever, the SpaceX IPO was about hopes and dreams and not the nuts and bolts of the business,” he said. “At a certain point, you have to decide whether you’re going to do business analysis or you’re going to break out the pompoms and root for companies. And I think that for Elon Musk, more than any CEO in recent memory, people pretend to do business analysis when what they’re doing is cheerleading.”
Tortsen Slok, the chief economist for Apollo (an American asset management firm that primarily invests in alternative assets such as the New York Yankees) posted not long ago about how IPOs have been a bad bet for investors going back to 2019. The main reasons that the roaring 20s have not been good for IPOs are the following:
“1) Peak valuations: The 2020–2021 wave came public at rich multiples amid zero rates, stimulus and speculative retail demand, leaving little room for gains.
2) A hostile rate regime: The Fed's hiking cycle from 2022 compressed valuations and hit the long-duration, unprofitable growth stocks that dominate IPO cohorts hardest.
3) Low quality, high bar: The boom pushed marginal companies public before they were ready while the market-adjusted benchmark was set against an index carried by a handful of mega-cap winners.”
And he doesn’t see IPOs as a good idea going forward either.
“Each of these forces could persist: valuations may re-inflate in the next IPO window, rates look set to stay structurally higher than the 2010s and index returns remain concentrated in a few mega-caps that keep the relative bar high,” Slok wrote in his post.
So let’s all keep our heads as these IPOs begin a resurgence and, if you really need to, buy a little just to combat FOMO and to have some fun. Because investing can be fun. Making money is also a good time, even if it’s not being screamed about on TV and in the headlines.
The information offered is provided to you for informational purposes only. Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index. Robert W. Baird & Co. Incorporated.