Forget about the May inflation report! The most anticipated event of the week, if not the year, is scheduled for Friday, June 12. This will mark the start of Artificial Intelligence (AI) and the space economy conglomerate, SpaceX, which is raising $75 billion through its initial public offering (IPO).
I The Dow Jones Industrial Average(DJINDICES: ^DJI), S&P 500(SNPINDEX: ^GSPC), Nasdaq Composite(NASDAQINDEX: ^IXIC)again The Nasdaq-100 there was a buzz before this historic event. In addition to raising the rate of the largest capital increase of all, we have seen a number of changes in the rules by brokerages and committees that can oversee the filing of the index before the public debut of SpaceX.
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But changes are not always made to improve retail investors. A series of structural shifts on Wall Street, coupled with a SpaceX prospectus that managed to disappoint already low expectations, is poised to leave retail investors holding the bag.
The SpaceX IPO is a transfer of wealth from retail investors to company insiders
One of the ways Wall Street failed retail investors ahead of the SpaceX IPO was by changing the way a few major indexes were put.
In an apparent attempt to sue SpaceX to list its shares on the Nasdaq(NASDAQ: NDAQ) exchange, the Nasdaq-100 changed its approach to allow megacap IPOs to “Quickly Enter” the index. The changes, which went into effect on May 1, shorten the Nasdaq-100 entry timeline for non-financial companies to be among the index’s 40 largest. Instead of waiting the usual three months to enter the Nasdaq-100, SpaceX can get listed after 15 trading days.
In addition, the Nasdaq-100 adjusted the listing rules for newly listed public companies with low float.
But the Nasdaq-100 is not alone. The US Russell Equity Index chain shortened the timeline for the SpaceX listing to just five trading sessions after the IPO. Five!
S&P Dow Jones Indices, part of S&P Globalhad been considering changes to allow SpaceX to enter the benchmark S&P 500 more quickly, but ultimately decided against amending its inclusion rules.
We’ve also seen select brokers throw old account requirements out the window to gain interest in the SpaceX IPO. Fidelity has lowered the minimum account requirement for retail investors to participate in the upcoming IPO from $500,000 to just $2,000.
The changes implemented by Nasdaq and Russell would require index funds that track the performance of these indexes to buy large amounts of SpaceX stock after its issuance. This represents tens of billions of dollars in mandatory buyout activity that would eat up most of SpaceX’s original stock (ie, tradable shares).
While this aggressive buying spree could boost SpaceX shares in the days and weeks following its June 12 IPO, SpaceX’s tight closing time will leave retail investors holding the bag.
With the rapid influx forcing index funds, mutual funds, and 401(k)s to buy a significant portion of SpaceX’s float, insiders may be eager to sell their shares to retail investors. Instead of the new company’s standard 180-day lock-up period — the closing period when insiders can’t sell their shares — SpaceX is allowing some insiders (not including Elon Musk) to sell shares as early as two days after their first quarterly report (probably in August).
It doesn’t matter if insiders are selling passively or individual investors, selling investors is their exit.
Image source: Getty Images.
The SpaceX prospectus was worse than expected
In addition to Wall Street making retail investors unprofitable ahead of the SpaceX IPO, the company’s prospectus was worse than expected.
To put it bluntly, SpaceX is a capital-intensive, money-losing business. While AI and the space economy are both long-term, trillion-dollar opportunities that can be addressed, SpaceX doesn’t seem to be very close to recurring profits. That’s a problem for an unproven company aiming for a $1.8 trillion valuation.
The SpaceX prospectus also revealed the unexciting growth of early AI xAI — the brainchild of large-scale language modeling (LLM) Grok. Despite the company’s registration statement offering a worldwide addressable market of approximately $26.5 trillion for its AI operations, xAI sales grew by only 12.5% in the first quarter to $818 million. Although this disappointing sales growth occurred before the announcement of the computing partnership with Anthropic, the prospectus shows that xAI has been left in the dust by LLM titans Anthropic and OpenAI.
In addition, SpaceX brought in just $18.67 billion in sales last year. With an IPO value of $1.8 trillion, its shares will trade at a price-to-sales ratio (P/S) of 96!
To put this figure into context, no company that has been at the forefront of game-changing technology for over 30 years has been able to maintain a P/S ratio of over 30 for that long. SpaceX will begin to more than triple the rate that history has shown to be unsustainable.
Megacap IPOs since the late 1990s haven’t fared well after deductions, either. Some of the largest and most anticipated IPOs have fallen by double digits in the six months after going public.
So, not only do we have the potential for regulatory changes to facilitate the transfer of wealth from retail investors to SpaceX insiders, but all historical signs suggest that SpaceX stock will be out of the first gate. All signs point to retail investors getting the short end — don’t take the Wall Street bait.
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SpaceX IPO Will Leave Retail Investors Holding the Fund — Don’t Take the Hitch was originally published by The Motley Fool
