Did you get a piece of the SpaceX initial public offering?
It’s probably a bit late now because the IPO is tomorrow, with the stock allocated at a price of $135 per share to raise $75 billion with 4% of the company available to the public. The market cap is $1.77 trillion US, and Elon Musk has 42% of it. When you add up the equity stakes Musk has in his other companies, he’s about to be a trillionaire.
Right now, SpaceX is not profitable. It loses billions, because it costs a lot to send rockets into space, but that is something of a growing business, the AI investment under the SpaceX umbrella is also costly and burning money. The profitable part is Starlink, which you may know if you live out in the sticks. The satellite internet part of the business, which enabled many people in connection challenged areas to finally get a better internet connection.
Elon wants to go to Mars and establish a space colony. He also has plans to launch a heap of AI data centre satellites into space. Apparently, it’s cheaper up in the sky! Data centres need a heap of energy and cooling. Solar energy is free while space is cold. SpaceX is also planning to help NASA go to the moon with Artemis IV, and it’s already the biggest space transport company and rocket service.
It all sounds very exciting, but excitement doesn’t automatically make for a good investment, yet just because something isn’t making money also doesn’t mean its price won’t go up. It’s almost guaranteed this one is going up, simply because of the demand for the IPO. It was four times oversubscribed.
Should you buy into IPOs?
When we think of IPOs the success stories immediately come to mind. One of the great ones in Australia was the float of the Commonwealth Bank back in 1991 at $5.40 a share. It was eventually fully privatised in three stages, but given the current share price and what CBA pays out in dividends annually, anyone who took a lick across the three stages, and held on, has been handsomely rewarded.
Survivorship bias has many of us remembering the raging success stories, but for every Commonwealth Bank there’s a Boart Longyear. The drilling services company was the ASX’s second largest IPO at the time in 2007, raising $2.35 billion. It ran headfirst into the GFC, and with it’s large debt load struggled the whole time it was listed. It was recapitalised twice, with two massive share consolidations, diluting investors considerably and was eventually taken private for $544 million in 2024. IPO investors who held on probably recouped a fraction of a cent for every dollar put in.
Or we might consider Virgin Australia. It has been floated twice, having struggled for years after it’s first IPO, before going bust during covid. Investor return was zero. Turned around by private equity firm Bain Capital, it was floated on the ASX again in 2025, in better financial health. Initially it held above its IPO price of $2.90, hitting $3.23 on opening day, but the old airline curses of geopolitics and oil prices knocked the wind out of its sails in March with the beginning of the war in Iran. As of writing Virgin Australia is down 26% for the year.
Investors like to own companies for various reasons. For most of us who aren’t equity analysts, those reasons are speculative and can be emotive. A feeling, a hunch, a story we read, an affinity with the company. All these things are heightened with an IPO because of the accompanying hype.
As we always say with speculations, there’s nothing wrong with them: as long as they’re kept in perspective. If an investor already has a broadly diversified portfolio and are on their way to reaching their goals, has the spare money, and are prepared to accept any potential outcome, well there’s no problem. Whether the outcome is good or bad it should be treated the same. If it goes well, don’t lament you didn’t allocate your entire portfolio and if it goes bad, that’s why you didn’t allocate your entire portfolio.
You’re Going to Own It Anyway
Our starting point for good investing are index funds. They’re simple, low cost and broadly diversified, though over the years we’ve also used Dimensional’s funds which are similar to broad local and global index funds. They were designed by people who were involved in the creation of the first index funds, so they implemented some tweaks they thought could improve them.
When it comes to IPOs, both Dimensional and the index providers have (or had) some rules about when they could and should add IPOs (and large IPOs) to their indexes and funds. Notably, some index providers such as Nasdaq and FTSE Russell have bent or updated their rules with the SpaceX IPO just so they could include them in their indexes ASAP. While others like S&P have stuck to their rules. It seems rules aren’t worth much when there’s some (or a lot of) money on the line!
Dimensional has historically added IPOs to its investable companies after 6 to 12 months. Trying to be patient in how they evaluate things, as Dimensional CEO Gerrard O’Reilly notes.
“Flexibility has value, because ultimately you want the strategy to be able to rely on the price that’s being traded in the marketplace as an unbiased estimate of what the future has in store for that company, and then be able to combine it with audited financial statements so that you understand things well about revenue and income and book values, so you can make an informed decision about where it fits in a strategy, and what strategies it fits for.”
Dimensional’s research has also found most IPOs in the past few decades tend to underperform their broader benchmarks.
No matter what, we’re all going to own SpaceX eventually if we’re broadly diversified, as we should be. Is there anything wrong with this? Not really. It’s why we invest with broad based, highly diversified funds that hold most of the world’s listed companies. You may end up eventually owning a meagre piece of SpaceX making no money, but you also already hold the other tech monsters churning out billions in quarterly profits.
Who knows, Elon may nail it with his datacentres in space and charge us all for flights to Mars along with prime Mars real estate, and we’ll all get to share in the wealth.
Alternatively, it may go the other way. And at the risk of overusing a tired rocket analogy, being diversified is the best way to avoid that type of explosion.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
