Investors who believed SpaceX was immune to the laws of gravity have had a rough introduction to public markets.
Feverish hype drove the stock skyward immediately after the company’s initial public offering (IPO).
Within days, however, shares had plunged 35 per cent, bringing the stock below its first-day closing price and causing Elon Musk to lose – at least for now – his trillionare status.
With newly listed stocks, early trading is often driven more by market mechanics than fundamentals.
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Less than 5 per cent of SpaceX’s shares were sold in the IPO, creating an unusually small float. More than 20 per cent of those shares were allocated to retail investors – an unusually large allocation, with 5 to 10 per cent more typical for major IPOs.
Meanwhile, changes to index rules paved the way for rapid inclusion in some big benchmarks, forcing passive funds to buy shares.
With anticipated demand overwhelming a limited supply of stock, the price initially rose rapidly.
However, the real test will be whether that dynamic survives a steady increase in supply.
Most newly-listed companies impose a simple 180-day lock-up period before insiders can sell, but SpaceX has opted for a tiered approach. Some insiders can start selling after SpaceX’s first earnings report in August, with further portions of stock becoming eligible for sale at later intervals – specifically, 70, 90, 105, 120, 135, and 180 days after the IPO.
Elon Musk will not be one such seller – he will have to wait at least 366 days. Nevertheless, millions of shares will be hitting the market in coming months: an estimated 58 per cent of SpaceX’s shares will have been floated by 180 days, notes Creative Planning strategist Charlie Bilello, dwarfing the initial small float.
“Keep in mind: these are investors and employees with enormous unrealised gains (SpaceX was a $10 billion company 10 years ago)”, cautions Bilello, “and the temptation to lock in at least part of these lottery-sized winnings will be extremely high”.
Indeed. If the IPO’s first chapter was defined by scarcity, the next may be defined by abundance.
